Tail winds favored a strong GDP recovery of Argentina between 2003 and 2008. The meltdown of international trade and commodity prices since the 3rd quarter of 2008 was part of the explanation for GDP fall in Argentina. FIEL estimates that adjusted for seasonality, GDP contracted about 9.5% in the 9 month to June 2009. But the explanation of the recent decline also relies in the domestic policy, including the never-ending conflict with farmers and the nationalization of pension funds last October, a couple of decisions that foster a huge rise of capital outflows.
Negative external conditions are, however, beginning to recede: agricultural prices strongly rebounded since March and Brazilian recession could be over by the third quarter. And even when no one expects a change in (domestic) agricultural policy, the next year could show a strong rise in crops of soybean, from 32 million Tons to 48/52 MT, helping to sustain the trade surplus and fiscal revenues. Then, the question is, will Argentina show a strong recovery path in the next quarters, or will the Kirchner’s manage to kill the (expected) recovery?
There are several dimensions to consider. The most urgent has to do with the fiscal policy; a second dimension has to do with inflation and wage policy, and a third aspect is the business climate.
Adjust fiscal policy. On the fiscal front, the surplus was eroded since 2008, with primary expenditures running well above revenues at the Federal level and in Provinces. Excluding social security revenues that boosted revenues after the nationalization of pension funds, domestic and trade revenues are growing below 8% in nominal terms (5 months to May), compared to primary expenditures growing at 20-23%. The Provinces will post a deficit around 1% of GDP, assuming no additional wage-or-pension increases are granted in the rest of the year. The short term financial strategy has been to postpone payments, increasing the floating debt. At the Federal level expenditure in public works was delayed, but the political business cycle –election in late June- put a limit to this strategy, so that one can expect that the gap between expenditures and revenues will continue for some time. The Federal fiscal surplus will fall from 3.2% of the GDP in 2008 to something close to 1.5% in 2009. The consolidated surplus –that is, including the Federal Government and the Provinces- would be close to zero.
A change in the current trend is much needed and demands for a rise in revenues or a decline in the pace of growth of current expenditure. The problem with revenues is that tax pressure is at record levels: the Kirchner Administration sent the consolidated figure from an average of 23% in the previous decade to over 33% in 2009. Tax revolt may be around the corner, and farmers’ reaction to export taxes is just an example. On the expenditure side, the problem is how to moderate growth below 15%, with an inflation rate around 17% and half of expenditures (wages and pensions) indexed or over-indexed, both at the Federal and at the Provincial level. The answer could be a reduction of subsidies to the private sector, through a new increase in tariffs, with spillover effects on inflation and wages. Or the Central Bank could accelerate the pace of devaluation, assuming a low pass-through, in search of an increase in revenues and a fall in expenditure (wages) in real terms.
Stabilize the economy. Inflation at 17.4% yoy in May (FIEL CPI) is still an issue. In spite of menaces from the Secretary of Commerce, most prices are revised upwards every month: from 65 to 74%, according to the diffusion index calculated from FIEL CPI. However menaces have some effect on regulated prices (education, health, etc.), so that announcements of price increases have been postponed to July or August in many cases. Wage negotiations took note of high inflation, and many Unions agreed a 20% hike for the rest of the year; other Unions opted for a transitory hike around 13-15%, with the promise of a new wage discussion late in the year (September/November). Unit labor costs in real terms in manufacturing industry escalated well above their level previous to devaluation (ULC per hour worked, according to official data for Manufacturing, were in the first quarter of this year 30% over the average for 2001), both because of wage rises, lower inflation at the wholesale level, and recession. The combination of rising labor costs, wage pressures and recession is a sound cocktail to boost unemployment in the next quarters.
Restore the business climate. Economic agents have learned that fiscal uncertainty can’t be understated in Kirchner’s Administration. In fact, they know that fiscal stress is the best leading indicator for some new “innovation” related to taxes (on exports, payroll, sales, income or assets). A sound external scenario may help to mitigate the damage –new taxes or new expropriations- only for a short term. Uncertainty around the tax system, the exchange rate policy, generalized restrictions to imports (as decided in the last months to “protect” the trade surplus), and an expansionary wage policy are just a bunch of warnings that firms will have to watch. Investment, that is Fixed Capital formation, and formal employment, may face very difficult times ahead, if Kirchner’s policy is, as expected, more of the same.