The return to market
Third time’s charm
Fiscal defcit: What to include and what not to include?
Worker’s Income Tax: to discuss seriously
Different defenses of the model
The placement of Bonar 24 for US$1,416 million confirmed that the credit market was not closed for the Government and, along with YPF´s return to the market (paying the same yield as in February but with an amount three times higher) and the easy flow with which the swap with China is activating (already accumulating US$4.8 billion of the US$11 billion initially agreed upon) more than confirms the financial program we were working with for the current year. This program is consistent with our GDP growth forecast of 1.5% in 2015, a $9.8 dollar rate (or slightly lower) as of November 30th, an inflation rate in the region of 24% (also as of November) and international reserves at the end of the term and after payment of the Boden 15 would stand around US$28 billion or more depending on how many additional segments of the swap with China are activated.
Somehow, this ensures that the necessary foreign currency will be available to finance the increased demand generated by the dollar functioning as semi-anchor while fiscal and revenue policy double their dynamics. In this sense, while the government continues to grant rights via new social programs (doubling of the payroll of plan Progresar and the incorporation of 450,000 new retirees with the reopening of the pension moratorium passed by Congress a year ago) with increases in the amounts above the inflation rate (40% and 38% yoy respectively versus 24%) at the moment is delaying reaching an agreement in joint wage negotiations in the middle of the discussion regarding the Income Tax. A dispute that in fact only affects 10% of formal employees, but that reaches them with increasing tax rates that take up a quarter of the wage increases this year; an absurd beyond the irrationality implicit in the requests of trade unions which state that work is not profit, without even seeing the importance of this tax in the tax system of developed countries. In any case, and assuming that the government will find a mechanism to solve this inconsistency and prioritize agreements in joint wage negotiations, in the coming months we will see reflected in full the direct impact of wage increases in the region of 30% in two or three installments with inflation that stands around 1.5% per month.
Some of this has already been reflected in April´s consumption growth data, and probably will be reflected more strongly as from May/June when the full impact of the increase in incomes is combined with the availability of dollars to finance imports. However, as we have been stating, this strategy -very effective in the short term- does not work as a mechanism to sustain growth in the long term, with a starting point of fiscal and current account imbalances which at the end of the mandate will stand around 5% (net of intra public sector interest) and 2.1% of GDP (3.1% with the DJAI being normalized), respectively. Resorting to indebtedness, as the Government finally started doing with the Central Bank in the past year and with the market in the last week, and as most of the neighboring economies have done to finance current account imbalances of 3/5% of GDP can resolve this dilemma for some years, but, as already demonstrated in the past, it does not last forever, although there are exceptions (USA, Australia).
Argentina can and should insist on organizing a process of sustained economic growth starting from the current high levels, without resorting to excessive increase in debt as a mechanism for long-term financing, but rather as a mechanism for short-term financing of investment in infrastructure and in foreign exchange generating sectors which are the ones that ultimately will provide an inflow of dollars to supply the energy, industrial and services networks. In other words, making progress towards development requires finding an overcoming solution of the of stop and go model, and of the neoliberal “remedy” of the 90s, or of the Dictatorship when the government resorted to debt and to the indiscriminate opening in an economy where the nominal anchor was the exchange rate, as a mechanism to overcome the barriers to growth, with the costs in terms of not fundable over indebtedness, destruction of industrial capacity, and social marginalization.
In this sense, it is not possible to put the carriage before the horse referring to making a sharp adjustment to first release all controls and let the economy adjust by itself to new relative prices, but neither is it possible to propose to improve the “industrial network” by increasing protection more and raising domestic prices from their already very high levels in a context where the dollar has strengthened and our export prices have fallen. Today Argentina is pressed against a possible fall in the prices of its main export products and devaluations experienced by neighboring countries.
Being consistent means seeking for a balance between competitiveness, active fiscal policy and interest rates that allow financing this process in a sustained manner via an increase in medium-term investment financed by domestic savings, which requires generating mechanisms to channel these savings in investment. The country´s agenda should aim to consistently solve the three problems that the economy has currently as a starting point: 1) competitiveness problems (distortion of relative prices), using fiscal policy to diminish the misdirected subsidies and harmful deductions, and increasing and paying on time the export refunds and VAT to exporters. 2) the fiscal dominance implicit in having pushed the fiscal imbalance too far without credit and with funding from the Central Bank, using the availability of credit in the world at low rates while working to gradually reduce it implementing a fiscal rule public expenditure growth below the increase in tax revenues and 3) reduce the high rates of interest which public and private debts are bearing in a world of near-zero rates. This requires working in parallel to strengthen a nominal anchor for the economy (the interest rate for savings in pesos) which aims to make the local currency function as a store of value, which is a necessary condition to boost a local credit market to finance investment, and essentially in order to avoid tying the economy´s performance to the volatility of international markets.
The subordination of the macro policies to the objectives of production, quality employment and consumption and not the other way around, depends on the degree of freedom of politics and fundamentally on the starting point. Today there is scope for gradually adjusting the correction in order to avoid costs in terms of employment, but it is worth recalling that the starting point is the external sector restriction.
