Cablegate: Argentina Economic and Financial Weekly for the Week Ending

Published: Tue 15 Aug 2006 06:50 PM
DE RUEHBU #1835/01 2271850
R 151850Z AUG 06
E.O. 12958: N/A
SUBJECT: Argentina Economic and Financial Weekly for the week ending
August 11, 2006
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Weekly Highlights
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- Argentina President Nestor Kirchner reacted negatively to possible
GSP exclusion.
- Argentina and Venezuela "Southern Bond" could be issued in
- Argentina and Brazil plan to stop using the dollar as commercial
exchange currency advances.
- GOA beef export ban has caused USD 147 million in export losses.
- The IMF publishes the article IV review of Argentina.
- Economic Minister Felisa Miceli said that inflation will be
significantly lower than in 2005.
- Commentary of the Week: "There is a subtle change in monetary and
exchange rate policy"
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Argentina President Nestor Kirchner reacted negatively to possible
GSP exclusion.
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1. On August 8, Argentine President Nestor Kirchner reacted
negatively to the announcement that Argentina could lose benefits
from the Generalized System of Preferences (GSP) program. The GSP
grants duty-free treatment to US imports of goods from developing
countries, including Argentina. According to US Trade
Representative Susan Schwab, the administration wants to determine
whether certain countries should be excluded from the GSP program
and asked for public comments on whether the benefits should be
limited or withdrawn from certain countries, based on statutory
criteria. Kirchner said that Argentina is an independent country
that is not going to be pressured by "not too serious actions,"
comparing them to "old theories proper of the Roman Empire." He
appears to have - as did many journalists - interpreted the GSP
review as retaliation against countries that didn't support the US
to reach an agreement in the Doha Round of global trade talks and to
form a Free Trade Area of the Americas, and specifically against
Argentina for its closer ties to Venezuela and actions at the Mar
del Plata Summit in November, 2005. The Secretary of Foreign Trade,
the Argentine Ambassador to the US, and the head of the Argentina
Exporters Chamber all said that this review should not be
interpreted as retaliation.
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Argentina and Venezuela "Southern Bond" could be issued in
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2. On August 9, Venezuela's Congressional Finance Committee
approved a joint bond sale between Argentina and Venezuela. The
so-called "Southern Bond" could be issued during the first two weeks
of September for USD 1 billion and, according to the market
response, a second tranche of USD 1 billion would be issued later.
The "Southern Bond" will be a combined asset, half of it will be the
Argentine Boden 2012, and the rest, a Venezuelan fixed rate bond.
The first issuance will be offered in the Venezuelan market, to be
sold to locals and possibly external secondary markets.
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Argentina and Brazil plan to stop using the dollar as commercial
exchange currency advances.
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3. On August 7, during the Mercosur central bank presidents summit
in Uruguay, Martin Redrado (President of the BCRA) and Henrique
Meirelles (President of Brazil Central Bank) agreed to start working
on a project to begin using their local currencies in bilateral
commercial transactions (Argentina-Brazil bilateral trade is
currently worth about USD 16.5 billion a year). As of now, each
country purchases dollars to buy exports from the other partner,
while in the future both countries will operate in Argentine pesos
and in Brazilian reales. According to Argentine officials, the use
of this procedure will not be obligatory and a joint commission will
gather to start working on the project on August 14.
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GOA beef export ban has caused USD 147 million in export losses.
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4. According to the National Food and Animal Health Inspection
Service (SENASA), Argentine beef exports were USD 480 during first
half of 2006, against USD 627 in the same period in 2005 (-23
percent y-o-y). By volume, beef sales decreased 37 percent y-o-y.
[On March 8, 2006, the GOA imposed a ban beef exports for 180 days
and raised export taxes on boned cuts and heat-processed beef from 5
percent to 15 percent in an attempt to keep inflation under control.
On May 29 the GOA eased the ban through an export quota system.]
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The IMF publishes article IV review of Argentina.
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5. On August 9, the IMF published its article IV review of
Argentina. The IMF praised Argentina's fiscal tightening after the
economic crisis, the state of the banking system and the recovery
process. However, the IMF criticized the fiscal erosion during
2006, growing labor informality, price controls and the lack of
measures to encourage investment. According to the IMF, price
controls in Argentina are affecting the business environment and
creating capacity problems in some sectors. Some of the IMF's
recommendations were: for the GOA to curb the growth of primary
spending, increase real interest rates to make them positive and
allow for a greater upward flexibility (i.e., let the peso
appreciate) of the exchange rate. The complete review can be found
at 0693.htm.
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The Chamber of Deputies approves an amendment to the Consumer's
Defense Law and increases the power of the Secretary of Internal
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6. On August 9, the Chamber of Deputies approved an amendment to
the Consumer's Defense Law that will increase the powers of the
Secretary of Internal Commerce Guillermo Moreno. Under the
amendment, Moreno will be able to impose fines of up to ARP 5
million on companies that do not comply with consumer affairs
regulations. Opposition deputies from the PRO party and businessmen
criticized the amendment, arguing that the same secretary will be in
charge of arranging price agreements with companies as well as
applying fines to those same companies. The bill now goes to the
Senate, where it is expected to be passed.
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Economic Minister Felisa Miceli said that inflation will be
significantly lower than in 2005.
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7. On August 9, Economic Minister Felisa Miceli stated in a speech
to the private sector that inflation this year is likely to be
significantly lower than in 2005. Miceli also said that the GOA is
committed to maintain the fiscal primary surplus of at least 3.3
percent of GDP in 2006 and to follow a similar strategy in 2007, and
to keep a "competitive" exchange rate. During the same event, the
Planning Minister Julio de Vido stated that the GOA is not going to
change its utilities' tariff policy and that power supply during the
upcoming years is assured.
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The GOA wants to keep rising rent prices down.
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8. After meeting with members of the real estate sector to talk
about rising rent prices, the Secretary of Internal Trade Guillermo
Moreno will try to reduce the cost of mortgage loans. Moreno talked
to BCRA President Martin Redrado to seek an overall reduction in
monthly mortgage payments and will meet with private bank directors
shortly to ask them to increase the supply of mortgage loans (i.e.,
lower mortgage rates). According to the National Bureau of
Statistics (INDEC), rents have increased 7.2 percent in 2006, while
the CPI increased 4.9 percent.
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Consumer Confidence Index down 3.3 percent m-o-m.
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9. The consumer confidence index -- measured by Torcuato Di Tella
University -- decreased 3.3 percent m-o-m in August. All three
index components decreased: consumer sentiment toward the
macroeconomic environment (-3.1 percent m-o-m), consumer willingness
to purchase durable goods and real estate (-7.4 percent) and
improvement in personal situation (-0.2 percent m-o-m). The index
has still risen 7.3 percent y-o-y. The index is based on surveys of
individuals and consumer willingness to purchase durable goods,
houses and cars.
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The GOA agrees to increase transportation fares.
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10. The GOA will gradually increase transportations fares. For
medium and long distance buses, the GOA authorized an immediate 10
percent fare increase and another, close to 15 percent, on September
7. For domestic airfares the increase scheme is 10 percent now and
an additional 10 percent on September 7. Finally, the rise for
taxis will be implemented in two steps reaching a 23 percent
increase by September.
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Argentina Supreme Court unlikely to readdress the "pesification"
decree while vacancies remain.
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11. According to Argentina Supreme Court justice Carmen Argibay,
until new judges are named to the Supreme Court or the Congress
reduces the number of seats on the bench, it will be difficult to
reach the absolute majority needed to reach a statement on the
"pesification" issue. The Argentine Supreme Court currently has
nine seats; at present the Supreme Court has seven judges, and
positions are divided on this issue. On October 26, 2004, the
Supreme Court ruled against a court injunction, validating the 2002
decree which converted dollar deposits into pesos, but that ruling
was not taken as binding by the lower courts.
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Labor union leaders propose a 19 percent increase in the minimum
retirement pensions.
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12. Labor union leaders proposed to the GOA a 19 percent increase
in the minimum retirement pensions, from ARP 470 to ARP 560. Union
members are organizing a demonstration for August 23 to support this
request. According to union leader Hugo Moyano, President Nestor
Kirchner in a private meeting committed himself to improve minimum
retirement pensions before the end of 2006.
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Argentine Supreme Court ruled against selective pension increases.
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13. On August 8, the Argentine Supreme Court ruled against
selective pension increases established by the GOA, claiming that
this action infringes the National Constitution, particularly for
the case of pensions above ARP 1,000 per month. According to the
Court member Ricardo Lorenzetti, the issue of pension mobility
should be solved in the short term, by including it in the 2007
Budget. Private consultants estimate that if the GOA applies
pension mobility, the cost of this measure will be approximately ARP
5.2 billion annually, or 0.8 percent of GDP. Argentine President
Nestor Kirchner asked to include this issue in the Congress 2007
Budget debates.
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The GOA announces a 180-day glass export ban.
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14. On August 7, the GOA announced a 180-day glass export ban, the
aim of this measure is to increase local supply and avoid further
increases in domestic glass prices. The GOA justified its decision
by noting that there has been a "significant increase" in the
domestic price of glass and an 85 percent y-o-y increase in glass
exports during the January-May period.
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The BCRA consensus survey reduces its 2006 inflation forecast.
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15. The BCRA consensus survey reduced its 2006 inflation forecast
from 11.5 percent to 10.9 percent, as expectations for prices eased
after July CPI figures turned out to be lower than expected (+0.6
percent m-o-m). The BCRA consensus survey includes the forecasts of
17 banks, 19 economic consultants, 8 foundations and research
centers, and 11 universities.
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Italian court rules against Banca Nazionale del Lavoro for selling
Argentine bonds.
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16. The Tribunal of Cuneo, in north Italy, ruled against the Banca
Nazionale del Lavoro bank for "irresponsible selling" of Argentine
bonds to some of their clients. The Italian banks will have to pay
EUR 154,250 plus interest to more than 450,000 bank clients. The
Argentine public bonds under consideration are those which the GOA
defaulted on during its 2002 economic crisis.
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June wage index increased 1.23 percent m-o-m -- below market
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17. The National Bureau of Statistics (INDEC) announced that the
wage index increased 1.23 percent m-o-m in June, below market
expectations of 1.40 percent, and increased 17.74 percent y-o-y.
This index defines wages as a price, without considering hours
worked or special payments for productivity gains. This index
surveys the formal and informal private sector and the public
sector, which rose 1.44 percent, 1.05 percent and 0.79 percent,
respectively. The consensus survey forecasts a 16.9 percent
increase in the wage index for 2006. INDEC also announced that the
basic food basket -- used to measure indigence -- decreased 0.21
percent m-o-m and the total basic basket -- used to measure poverty
-- increased 0.25 percent m-o-m in July.
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BCRA rolls over its maturities and decreases rates for Nobacs.
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18. The BCRA received ARP 1.9 billion in bids at its August 8 Lebac
and Nobac auction, compared to ARP 1.1 billion in Lebacs that came
due during the week. It accepted ARP 577 million in Lebac bids and
ARP 533 million in Nobac bids. The yield on the 168-day Lebac
remained at 8.50 percent and, on the longest term instrument, the
364-day Lebac, the yield was 11.90 percent. Lebacs with a maturity
of 252-day were withdrawn because of the BCRA's decision to not
accept the yield proposed by the market, and Lebacs for maturities
of more than 364 days were withdrawn due to lack of interest. The
spread on the one-year Nobac decreased from 2.03 percent to 1.57
percent and the two-year Nobac from 3.72 percent to 3.43 percent.
The Badlar rate (the base rate for Nobacs) is currently at 9.6
percent. Accepting almost all Lebac bids and rejecting more than
half of Nobac bids seems to be a new BCRA policy, beginning last
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The peso is unchanged against the USD this week, closing at 3.09
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19. The peso remained flat versus the USD this week, closing at
3.09 ARP/USD. The BCRA is not reporting daily transactions in the
dollar market. The peso exchange rate has depreciated 1.3 percent
since the beginning of the calendar year. The BCRA's reserves stood
at USD 27.1 billion as of August 9, and have increased USD 8.5
billion, or 46 percent, since the GOA prepaid its entire IMF debt on
January 2.
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Commentary of the Week: "There is a subtle change in monetary and
exchange rate policy", by Miguel Kiguel, from an article published
in El Cronista Comercial on July 24.
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20. The exchange rate in Argentina has remained stable in recent
months, while interest rates have been increasing very gradually and
the Central Bank continues carrying out its monetary program and its
objective of accumulating reserves. Is something changing with
respect to monetary policy? What can be expected in the coming
21. At first it would seem the Central Bank has changed its
exchange policy. To the surprise of many, the Central Bank of
Argentina has not allowed the exchange rate to surpass ARP
3.10/dollar during the period of financial turbulence, and on at
least five occasions it sold dollars on the market to avoid a
depreciation of the peso.
22. This change appears to be a side effect of price controls,
given that in the current context an increase in the exchange rate
could motivate businesses to request price readjustments in areas
subject to agreements. If this interpretation is correct, we would
expect an adjustment in exchange rate policy from now on, where not
only is the impact of the peso's depreciation on the level of
competitiveness evaluated, but also its effect on prices.
23. This change could also complicate the Central Bank's ability to
accumulate reserves though currency market intervention. This means
that a greater part of foreign currency purchases would have to be
paid through a fiscal surplus or government debt. A possible
alternative, which I imagine no one is considering, would be to
limit controls on the inflows of capital.
24. It would also appear that the Central Bank is adjusting its
monetary policy, although it continues carrying out to the letter
the M2 policy targets set for this year. But to be able to continue
meeting its goals for all of 2006, it will be necessary to slow down
the growth of monetary aggregates in the second half of the year,
coinciding with the period in which demand for money increases for
seasonal reasons.
25. In fact, the Central Bank is slowly increasing interest rates
of reverse repos since the beginning of the year, and one-year Lebac
rates are already at a rate of 12 percent annually. Short-term
interest rates in the inter-bank market also reflect the new
financial situation, given that they are fluctuating around 8
percent and wholesale fixed-term rates are already at 9 percent,
almost twice what they were at the beginning of 2005.
26. The new measures taken by the Central Bank - where reserve
requirements for sight accounts rose by two percentage points and
fell for CD deposits of more than six months, and where the
inclusion of cash in banks to meet the reserve requirements is
limited -- will have a significant contractionary effect. This will
surely affect the growth of monetary aggregates, especially
transaction aggregates, with the objective of ensuring the monetary
program is met.
27. It is also true that the new measures are expected to raise
interest rates because they will reduce liquidity in the banking
system. What is becoming clearer is that the monetary goals,
although they were fairly loose for 2006, are beginning to function
as a limiting element in the handling of monetary policy and unlike
in previous years, could bring about tensions between different
monetary objectives
28. Without a doubt, fixing the monetary target on M2 instead of on
the monetary base has been a significant step in the right
direction. In fact, meeting the monetary base goal in 2005 was, in
a way, less complex, given that it didn't require depending on
market instruments like interest rates as much as this year, and
that it could be managed through changes in reserve requirements and
with the greater use of reverse repos and Lebacs.
29. Everything indicates that we are beginning to see a subtle but
significant change in monetary and exchange rate policy, which
appear to head in the right direction. We also anticipate that the
Central Bank will fulfill its monetary program for 2006, although it
will mean a smaller excess of liquidity in the banking system and
new increases in short-term interest rates. On the other hand, the
exchange policy certainly will not change in any significant way in
the coming months.
30. The Central Bank's next challenge will be the 2007 monetary
program, which will likely fix new M2 goals. Although this time, if
it continues to maintain its gradual policy, it will be with a
ceiling under 20 percent. (Note: We reproduce selected articles by
local experts for the benefit of our readers. The opinions
expressed are those of the authors, not of the Embassy. End Note.)
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