Saturday, April 4, 2020

OPINION AND ANALYSIS | 31-03-2018 10:44

Easter obligations

The more cautiously you cut state spending, the more you need to finance the publicsector borrowing requirement by incurring debt – a time-bomb which has usually proved to be the detonator in Argentina’s explosive economic history.

Just before the long weekend I received the following email from the New England economist Dr Hale:

“Happy Easter to you and anybody else who might be reading this (although I cannot imagine how, haha!). While I appreciate that Easter is the more spiritual of the two main dates in the Christian calendar, with Christmas so universally commercialised, this does not change my one-track mind totally devoted to the material elements of the so-called ‘gloomy science.’ But this time round I must admit that I’m mostly writing out of force of habit. For many years my fascination with Argentina has almost entirely sprung from the extreme volatility and eccentricity of its economic trends in contrast to the almost imperceptible changes of direction of the supertanker I inhabit, but in the last few months there has been an abrupt role reversal. Suddenly all the unpredictability seems to be coming from the White House – thus in the past week or so your stock market has been more in sync with the rest of the world than any time I can remember, with nothing going dramatically right or wrong down there to introduce any local factors.

“And that worldwide trend was, of course, negative in the wake of Donald Trump’s protectionism. In that context I must congratulate Argentina on being one of just four countries outside NAFTA partners and the European Union (along with Australia, Brazil and South Korea) to be exempted from the new metal tariffs, although this may prove to be no more than a mere stay of execution until May (or ending tomorrow, knowing Trump). Anyway I haven’t seen any other Argentine news which really interests me, so that the ball is now in your court to give me a reason why my fascination with Argentina should continue.”

My reply:

“The tariff exemption was indeed impressive within a pretty blanket shut-out of the world’s steel and aluminium. The exclusion of Asian production would have been total if it had not been for North Korean nuke bluster – thus not only the steel mills of Tangshan and Jamshedpur are excluded but also such key United States allies as Japan, within a decision allegedly made on strategic rather than economic grounds. As you say, this concession could evaporate from one day to the next – thus more or less while the list of favoured countries was being assembled, Trade Secretary Miguel Braun was being told by the US Trade Department that the exemptions would be decided on a case-by-case rather than a country-by-country basis. Although this exemption claimed more headlines, I would attach more importance to Argentina’s return to the Generalized System of Preferences (GSP), which could prove more important than the tariff exemption as well as covering a wider range of products.

“If you no longer find Argentine economic life exciting, this is in many ways the deliberate result of government policy, because what could be duller than gradualism? This policy is almost wholly geared to the gradual reduction of a single variable, the fiscal deficit (not much sign of similar progress with the trade deficit), and while this seems to be proceeding according to the plan of drying up red ink at the rate of an annual one percent of gross domestic product, the more cautiously you cut state spending, the more you need to finance the public-sector borrowing requirement by incurring debt – a time-bomb which has usually proved to be the detonator in Argentina’s explosive economic history. If in order to reduce the primary fiscal deficit by an annual one percent of GDP you run up US$52 billion more debt or nearly 10 percent of GDP (as has occurred in the first two years of the Mauricio Macri administration), this does not look very much like moving in the right direction.

“Last week this column quoted International Monetary Fund (IMF) Managing Director Christine Lagarde as saying that Argentine debt was less cause for alarm since it was mostly owed within the public sector with low levels of foreign debt (which is in fact around US$125 billion out of a total public debt of just over US$300 billion) and nor does Argentina compare unfavourably with others in the region, but the trend could be ominous. If the Kirchnerite decade left this country with the lowest levels of foreign debt (less a virtue than lacking the credibility to borrow), Argentina now equals or surpasses virtually all other Latin American countries except the largest (we stand at around two-thirds of the Brazilian percentage of debt within GDP). An electioneering spree next year (and the Macri administration is seriously committed to steeply increasing public works spending in order to update infrastructure while their hopes of achieving this on the cheap via public-private partnerships might well be too optimistic) and Argentina could be challenging to be Latin America’s leading debtor.

“Plenty of excitement could thus lie ahead in an increasingly turbulent world but I will admit that not too much has happened in this abbreviated week. One theme of recent columns persists in the form of Central Bank intervention on exchange markets to hold down the dollar with the daily sale of nine-digit sums, topping US$2 billion for the month ending today. It is assumed that these sales will continue until some dollars start coming in from the harvest – that is to say if there is a harvest with the summer drought because the forecasts for soy have already fallen below 40 million tons and maize below 32 million. Inflation has also yet to fade away. If the year’s shortest month produced what is likely to be the highest inflation of 2018 at 2.4 percent, March is not looking much better with over two percent more or less officially admitted – easy enough to blame it on the dollar and public service charges but core inflation (2.1 percent last month) looks like remaining above two percent. The Central Bank is now forecasting 19.9 percent with core inflation of 17.1 percent for this year. March usually registers above-average prices with the return to classes (if indeed there is a return with more teacher strikes looming after Easter) but inflation remains a cause for concern.

“Plenty of excitement in the past and plenty more likely in the future but for the present let’s just take it easy in this Easter week, shall we?”

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Michael Soltys

Michael Soltys

Michael Soltys, who first entered the Buenos Aires Herald in 1983, held various editorial posts at the newspaper from 1990 and was the lead writer of the publication’s editorials from 1987 until 2017.

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