Export Taxes and Subsidies
Green shoots in the Argentine autumn
Trade headwind … Financial tailwind
The impact on local
tax Tax competitiveness: via deductions and subsidies
The overall strength of the dollar in the last year increases the cost of Argentina’s FX strategy in the election year, in a context where the Real accumulates -in real terms- a competitiveness gain of 18% and the Euro one of 24%, both as of late 2013. While the scheme of reserves management combined with management of devaluation expectations via BCRA intervention in the futures market, and interest rates from neutral to positive against inflation limit exchange rate pressures and maximize short-term moderation in the moderation of inflation and improvement in, it also affects the competitiveness of the export sector in a context where the fall in international prices does not help either. This dynamic was reflected -for us expectedly- in the appearance of green shoots in activity and as early as April and May and the prospect that they should bloom for the winter, when the agreements reached in joint wage negotiations start to impact on the purchasing power of wages (including bonuses and retroactive payments), while exports fall -agricultural exports due to price and industrial due to volume-. And it also reflected in a decline in inflation which continues at a rate of around 23% annualized, well below the 51.7% seen in the first quarter of 2014 .
Now, beyond the capacity of politics to reverse the short term, the shift in the global scenario occurred at an accelerated pace. And even though this is far from being one of the headwind, since liquidity and credit are still plentiful and cheap towards emerging countries, and the flexibility of today’s economy is much larger than that of the past, it is also true that we seem to have left behind the scenario of trade tailwind that had characterized recent years, when the weakness of the dollar and the strength of commodity prices allowed financing the expansion of the economy almost without resorting to international credit. Today, the country’s main advantage is its low exposure to public and private debt, And the ability to leverage on credit and investment to support an orderly transition that allows a gradual recovery of the distortion of relative prices in the economy, dampening the impact on the high levels of activity and employment at the starting point. The recovery of relative prices is necessary to restore competitiveness to the export sectors which will ultimately allow the country to repay its debts and the investments to fund the transition.To appeal only to credit and not to have investment, it has not been demonstrated that it does not work, while it is also not advisable nor feasible to pretend to correct by shock the relative prices to maintain the current fiscal status quo in regard to the taxes levied on exports directly (deductions) or indirectly (postponement of payments for VAT refunds or rebates).To incur in debt and attract investment in “foreign currencies” to finance an improvement in the competitiveness of the sectors that generate “foreign currencies” via abatement in the tax burden to the extent that its repayment capacity is implicit, although faces the need to narrow the fiscal dominance in a context where the Treasury’s primary deficit excluding accrued earnings from the BCRA this year is expected to reach 4% of GDP. Or put another way, it does not seem possible, considering the starting point of the current imbalances, to sustain a drop in interest rates and an increase in the fiscal deficit, even in a world where interest rates are going to rise gently. That said, and given the inflexibility to drop of some portion of the expenditure,
It is worth remembering that the scheme of export deductions and subsidies on utility tariffs implemented at the end of the Convertibility regime to limit the transfer to prices of the sharp devaluation was very effective in the early yearsin a context of stratospheric exchange rate and where half of the installed capacity in the industry and a quarter of the workforce were idle. Obviously, the strong growth triggered by the policy in the early years caused a gradual shrinking of these surpluses and thus of the possibility of sustaining this scheme in the long-term. Even in 2005 when the exchange rate depreciation had shrunk somewhat but the prices were starting to rise, the scheme was fully justified. At that time, deductions more than tripled the amount of subsidies (2% of GDP vs. 0.6% respectively), a situation which continued for some years, in part due to higher tax rates on oil and agro in late 2007 which led revenue from deductions to nearly 3% of GDP, while subsidies increased to 2.5% of GDP. This attempt to further increase the tax burden on exports found its limit with the Resolution 125 in early 2008 that led to the crisis with the farm sector. Seven years later, this tax scheme has ended up distorted. Last year, collection from deductions barely reached 2% of GDP, and without deductions on fuels which were successfully removed in 2013 to restore profitability to YPF and advance in the recovery of energy sovereignty, whilethe necessary and unnecessary subsidies reached 4.1% of GDP . Meanwhile, as mentioned above, the combination of a more appreciated Weight with the fall in commodity prices ended up destroying the profitability in most of the sectors covered by this scheme. implicit, although it faces the need to narrow the fiscal dominance in a context where the Treasury’s primary deficit excluding accrued earnings from the BCRA this year is expected to reach 4% of GDP. Or put another way, it does not seem possible, considering the starting point of the current imbalances, to sustain a drop in interest rates and an increase in the fiscal deficit, even in a world where interest rates are going to rise gently. That said, and given the inflexibility to the drop of some portion of the expenditure, the misdirected subsidies are the segment of the expenditure that can be revised.
To disarm such a scheme at once is politically unfeasible, given the costs in terms of an inflation jump,but at some point it will be necessary to continue the truncated task the current government has started with sincerity in fuel prices in 2013 and 2014 after the recovery of YPF (currently above imported costs), the tripling of gas and residential water tariffs in 2014 and The adjustment in the price of rail transport and public transport in 2014. However, the delay in the electricity tariff is around 6 times (when considering only the cost of the generation compensated by CAMMESA and excluding transport and distribution), bus tariffs at around 3 times according to a recent report by the Ministry of Transportand the gas tariff paid by demand barely reaches 40% of the price of 7.5 dollars per million BTU, which the Government ensures to the new supply (also excluding transport and distribution). The advantage is that the incidence of these public services in the CPI is very low, 2.8% according to the National CPI compared to 8.6% seen in 2013. The alternatives are always gradual, and they include the option of subsidizing the demand rather than than the supply, which the government began to deal with through the recognition of the price of the Gas Cylinder, always considering that the alternative of “doing nothing”, in a context of high nominality, implies a decision to increase the real subsidy That families perceive, whose incomes are adjusted every year. ion of a more appreciated Weight with the fall in commodity prices ended up destroying the profitability in most of the sectors covered by this scheme. implicit, although it faces the need to narrow the fiscal dominance in a context where the Treasury’s primary deficit excluding accrued earnings from the BCRA this year is expected to reach 4% of GDP. Or put another way, it does not seem possible, considering the starting point of the current imbalances, to sustain a drop in interest rates and an increase in the fiscal deficit, even in a world where interest rates are going to rise gently. That said, and given the inflexibility to the drop of some portion of the expenditure, the misdirected subsidies are the segment of the expenditure that can be revised.
