VZCZCXYZ0467
RR RUEHWEB
DE RUEHBU #0828/01 1692150
ZNR UUUUU ZZH
R 172150Z JUN 08
FM AMEMBASSY BUENOS AIRES
TO RUEHC/SECSTATE WASHDC 1352
INFO RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEHRC/DEPT OF AGRICULTURE USD FAS WASHINGTON DC
RUEHC/DEPT OF LABOR WASHINGTON DC
RHMFIUU/HQ USSOUTHCOM MIAMI FL
RUCNMER/MERCOSUR COLLECTIVE
UNCLAS BUENOS AIRES 000828
SIPDIS
SENSITIVE
E.O. 12958: N/A
TAGS: ECON EAGR ETRD EINV PGOV AR
SUBJECT: Argentina: Economic Impact of Farming Crisis
Ref: Buenos Aires 803 and Previous
This cable contains sensitive information - not for internet
distribution.
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Summary
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1. (SBU) Argentine consumer confidence has declined markedly due to
economic disruptions linked to the 100-day long agricultural sector
strike. A just released measure of popular sentiment on the general
economic situation, employment, family income and purchasing power
was down for the fifth straight month to its lowest index level
since October 2004. While lags in GoA economic statistic reporting
make it difficult to quantify the impact of the agricultural sector
strike on the economy, respected local economists estimate that
Argentina has already lost roughly 1% of GDP growth in 2008,
equivalent to US$ 3+ billion in production. They note signs of
economic deceleration that include declining rates of investment,
broadly declining consumer purchasing power, and the lowest level of
new employment generation in three years. Such deterioration in
economic activity and concern over the inability to resolve the
agricultural strike, exacerbated concerns over inflation, appears to
be leading to a slight loss in confidence in the domestic currency
and deposit withdrawals from banks, and falling prices for Argentine
financial assets. More immediately, Embassy energy sector contacts
confirm widespread shortages of refined petroleum products in the
Greater Buenos Aires metropolitan area and northern and western
Argentina. Such shortages have been exacerbated by hydrocarbon
sector labor disputes that have disrupted production and refining
operations, and made much more serious by transportation blockages
recently led by independent truckers upset by the prolonged
agricultural strike. All this said, even the most downbeat among
local analysts continue to predict Argentina's 2008 GDP growth in
the 5+% range, down substantially from the 8.9% GDP growth recorded
in 2007 but still respectable. End Summary
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Ag Strike Impact: Deteriorating Consumer Confidence
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2. (U) According to the Argentine Catholic University's (UCA)
monthly economic expectations report, fully half of Argentines
consider the nation's economic situation as "bad." A full 35%
believe that the economy will worsen in coming six months vs. 22%
who believe it will improve, the first time since 2004 that negative
economic expectations have topped positive expectations. UCA's
leading indicator, the General Index of Economic Expectations, which
measures popular sentiment of the general economic situation,
employment, family income and purchasing power, dropped 6.7% in May
2008 from prior month levels, its fifth straight month of decline
and the lowest index level since October 2004. Mostly strikingly,
50% of those surveyed by UCA believe that this is a bad time to go
forward with expensive goods purchases, a troubling sign of an
economy whose growth over the past six years has been led by
consistently strong consumer demand.
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Broader Impact of Strike on GDP Growth Uncertain
--------------------------------------------- ---
3. (SBU) That the agricultural strike is having a significant impact
on Argentina's economy is accepted by all embassy contacts at local
economic think tanks, with most pointing to lower overall levels of
domestic investment (and lower consumer spending) as an immediate
consequence. However, these analysts differ in their estimation of
the strike's quantitative impact on broad GDP growth that, in turn,
is influenced by a broad range of factors, including the impact of
growing consumer uncertainty and inflation on real domestic
consumption.
4. (SBU) Respected former Finance Secretary and now economic
consultant Miguel Bein estimates that the now 100-day long
agricultural sector crisis has already cost Argentina roughly 1% of
GDP, some $3 billion of a projected $300 billion 2008 GDP. He
continues to project 2008 GDP growth in the 7.5% range, on the
assumption that agricultural exports currently withheld from the
market will eventually make their way to overseas buyers later this
calendar year. oted economic consultant Miguel Angel Broda
likewise projects the strike's cost to date at 1% of GDP, lowering
his previous projection of 6.8% GDP growth in 2008 to the 5.8%
level.
5. (SBU) Local consulting firm Ecolatina takes a significantly
harsher view of the economic impact of current uncertainties and
projects 2008 GDP growth down sharply to 5.5%. They note current
signs of economic deceleration, including the lowest level of new
employment generation in three years, declining rates of growth of
benchmark supermarket sales, and slowing increases in electricity
consumption. Ecolatina also notes broadly declining purchasing
power, with the value of total nominal wages up only 5.1% in the
first quarter of 2008, less than half y-o-y rate of increase due to
a combination of increased inflation and lower levels of employment
creation.
6. (SBU) Longer term, local analysts are projecting 2009 GDP growth
in the 3.5 - 5.5% range. Variations among analysts are largely a
function of differing estimates on how quickly domestic consumption
will slow due to inflation, the impact of likely energy shortages on
industrial production, and the potential of a strengthening US
dollar (given indications that the US Fed will raise interest rates
to address domestic inflation issues) to diminish the
competitiveness of Argentine industrial production given the
Argentine Central Bank's de facto linkage of nominal peso exchange
rates to U.S. dollar values.
7. (SBU) The Central Bank's (BCRA) response to volatility in the
local financial sector -- attributed to the agricultural sector
conflict and spiking inflation in February and March -- is also
serving as a brake on growth. In order to reverse the run on the
peso that started in March, the BCRA has forcefully intervened in
currency markets by selling dollars, with sales of $1.7 billion in
May alone (BCRA reserves have dropped from over $50.5 billion before
the crisis to $48.3 billion on June 6). The intervention largely
succeeded in stabilizing and even strengthening the peso, with the
retail peso/dollar exchange rate ending May at about 3.1 ARP/USD,
compared to the 3.2 ARP/USD level of April 30 and the high of 3.25
ARP/USD on May 9. The BCRA's intervention also resulted in a sharp
increase in domestic interest rates, with the Badlar rate (the
reference rate for one-month time deposits of over ARP 1 million) up
from about 9% in early May to 17.9% on May 29 (the highest level
since February 2003). Higher interest rates have led to sharply
reduced bank lending, especially to industry, and the stronger
nominal exchange rate is cutting into the competitiveness of
Argentine industry.
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Continuing Declines in Private Sector Deposits
--------------------------------------------- -
8. (SBU) Private sector deposits dropped ARP 5.8 billion (almost
$1.8 billion) or 4% of total private sector deposits during May,
resulting in the worst month for the financial sector since October
2001. Furthermore, an Embassy banking sector contact estimates that
total capital outflow (capital flight) in May was $3.5 billion,
compared to the $2.5 billion outflow in April. During the month,
savings accounts had the worst performance, falling by 8% m-o-m (ARP
3 billion), followed by current accounts falling by 4% (ARP 1.7
billion). The first three weeks of May saw a rapid and constant
drainage of private sector deposits. This partially reversed during
the last week of May and first week of June helped by rising
interest rates and BCRA measures to ease liquidity constraints.
According to banking sector contacts, retail investors continue
withdrawing their money from banks and/or converting peso deposits
into dollar deposits. However, institutional investors are
attracted by the high returns and are increasing deposits in pesos.
9. (SBU) At the same time, the great uncertainty created by the
agricultural sector strike and inflation concerns have encouraged
institutional investors to lower exposure to other Argentine
financial assets. The Argentine stock market has fallen about 6.3%
so far in June. Likewise, Argentine bond prices have plunged.
Argentina's high sovereign risk premium over equivalent maturity
U.S. Treasuries is near all-time highs (as measured by JP Morgan's
EMBI Plus Index) and also by Argentina's Credit Default Swaps
spread, which are also near their all time high. Reacting to events
over this last weekend, GoA bond prices fell an additional 2-4%
(depending on the instrument) from June 13 to close of business June
17.
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Energy Shortages Begin to Bite
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10.(SBU) While electricity supplies remain normal (thanks in part
due to improved water levels at hydroelectric generation plant
sites) Embassy energy sector contacts report widespread shortages of
refined petroleum products in the Greater Buenos Aires metropolitan
area and the northern and western regions of Argentina. These
shortages are exacerbated by significantly increased demand (due to
GoA-influenced below market prices), hydrocarbon sector labor
disputes that have disrupted production and refining operations, and
of particular impact in the northern and western provinces
transportation blockages caused of late by independent truckers
upset that the agricultural strike has cut their incomes. Following
a very cold week in Argentina, some rationing of natural gas to
industrial clients in the Greater Buenos Aries area has been
reported as well.
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Comment
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11. (SBU) With GoA economic statistics reported with a lag, it
remains dfficult to quantify the absolute impact on the economy of
disruptions to national commerce, industrial production related to
the now 100-day long agricultural strike. Revenue losses from
foregone export tariffs appear largely temporal: It seems safe to
assume that significant export tax revenues - at whatever export
tariffs levels are eventually negotiated between the GoA and farmers
- will eventually flow into GoA coffers.
12. (SBU) More troubling than temporal export tax revenue lags are
declines in consumer confidence detailed here that will inevitably
impact consumer spending, a principal driver of Argentina's rapid
economic growth over the past six years. Deterioration in the
political landscape and in economic activity, exacerbated by
inflation concerns, appear to be leading to a loss in confidence in
the domestic currency and deposit withdrawals from banks. Yet even
the most downbeat among local analysts continue to predict
Argentina's 2008 GDP growth in the 5+% range, down substantially
from the 8.9% recorded in 2007 but still respectable. How nervous
consumers adapt to slower growth and how they respond to growing
uncertainties about the GoA's ability/willingness to take needed
steps to deal with political turmoil and to control inflation will
determine much about Argentina's near-term economic prospects.
WAYNE