|
special issue: federations and the economic crisis
Argentina responds to crisis with unorthodox measures
REUTERS/Enrique Marcarian
Argentine farmers held nationwide rallies in June 2008 demonstrating their determination to extend their strike unless the government lowers export taxes on soybeans.
By Ismael Bermúdez
The international financial crisis hit Argentina after what can be described as a ‘false spring’ in 2008.
At first, the country’s government and most analysts thought Argentina would be insulated from the crisis, or ‘decoupled’ from it, and even seemed to be benefiting. This perception arose as funds gushed into commodities markets early in 2008 because of the banking and sub-prime mortgage problems that were rocking the financial markets.
This influx of capital drove up international prices for soybeans, wheat and corn, which account for most of Argentina’s exports. By June 2008, soybean prices had doubled to US$554 a ton since the start of 2007 and sunflower oil tripled in price to $2,300 a ton in the same period.
Then the recession hit and agricultural exports declined along with global commodity prices. Sources of financing dried up, industrial activity slowed and capital took flight. Overall, Argentina’s economy is expected to contract between one and three per cent in 2009 – or even more.
In April 2008, the government moved to increase its export duties on agricultural produce, triggering a three-month protest by farmers which ended when the country’s vice-president cast the deciding vote against the proposed legislation.
One year later, the government lost its legislative majority in the June 2009 mid-term congressional elections.
The Argentine government had justified its planned export duties as an effort to claw back windfall profits caused by soaring international prices. The resulting higher tax revenue would be used to pay down the government’s debt. The government believed this would end Argentina’s financial isolation from capital markets and soften public mistrust of the government’s economic policy.
Farmers protest and capital flees
However, the farmers thought otherwise, and some economists argued that the export duties would make Argentina’s produce uncompetitive on the world market and actually discourage production.
The conflict with the farming sector had intensified the dumping of Argentine pesos and buying of U.S. dollars – and the flight of capital.
In October 2008, the bubble of international prices finally burst and, with capital still fleeing Argentina, the government announced the nation-alization of the private pension system.
The accumulated assets of private pension plans – with a market value of $25 billion or eight per cent of Argentina’s gross domestic product – were used to help fund the federal government’s pay-as-you-go social security system.
Against a backdrop of deepening global economic crisis, this move caused a severe flight of capital in the fourth quarter of 2008 when almost
$6.65 billion left the country. The flight of capital has continued this year. Even the Central Bank was caught without enough cash in its vaults and had to borrow abroad to maintain its mandatory currency reserves.
The government justified the Central Bank’s foreign borrowing, saying it needed to defend assets of future retirees from losses the private pension funds were going to incur. But many analysts say it was the other way around: the money from the private pension firm takeovers saved the Central Bank. Had it not been for this money from the private pension firms – which prevented an increase in the public debt – there would have been a much greater flight of capital.
Central government takes action
The government also designated some funds from the previous state social security system to finance programs for stimulating local economic activity. At the same time, the central bank continued its unofficial policy of “managed depreciation” of the peso, following the lead of Brazil, Chile and Mexico, countries that buy most of Argentina’s exports.
Argentina’s fiscal situation is not as bad as it could have been, thanks to these new sources of revenue. Although the Treasury’s first-quarter financial position showed the government in the red by $610 million, when you factor in the social security surplus the result becomes a positive $257 million.
The worldwide economic crisis and the recession within hit Argentina’s
provinces even harder than the federal government because:
• The provinces are dependent on federal funds: Eighty per cent of provincial budgets come directly from taxes or transfer payments from the federal government and these were lower due to smaller tax revenues.
• Commodity prices dropped: International commodity prices dropped significantly, which hurt the provinces most dependent on production for export.
• Conflict, drought and taxes increased: Because of the conflict between export producers and the government,plus the effect of the export tax and a local drought, incomes were reduced even further in the provinces of Buenos Aires, Cordova and Santa Fe.
To compensate for this decline in revenue, many of the provinces increased their income tax rates, even after the federal government decided to distribute 30 per cent of export tax revenue to them. The provinces could end up with a fiscal deficit of nearly $2.8 billion this year. The federal government would have to cover this deficit and might have to resort to using social security funds and bonds to finance it. Seventy per cent of the deficit belongs to the province of Buenos Aires, which has 37 per cent of Argentina’s population and produces more than one-third of its GDP.
Even with all the measures taken by Argentina, economic activity has been on a downward path since the economy started to contract in October 2008. Admittedly, the downturn would have been worse had these measures not been taken. 
Argentine government takes action
To combat the economic crisis and its own major drought affecting crops and livestock, Argentina’s government implemented a number of measures:
• Declaring a tax amnesty: An extended tax amnesty and capital repatriation plan were introduced, effective until August 31, 2009, to obtain additional revenue and lure capital back from abroad.
• Cutting export taxes: Export duties were reduced on wheat, corn, fruit and vegetables.
• Swapping loans for bonds: Secured loans – debt issued by the national government in 2001 – were exchanged for new bonds maturing in 2014 to obtain debt service relief.
• Sharing the agricultural export tax: 30 per cent of the tax collected on soybeans, about US$ 1.5 billion this year, was distributed among the provinces to offset the fiscal deficits that most jurisdictions will post this year. Even so, the consolidated red ink of the provinces will probably amount to US$ 2.8 billion.
• Creating new public works: The government launched a public works plan worth US$ 33.2 billion, of which US$ 21.2 billion will be financed with structured debt while the remainder is being negotiated.
• Incentives to buy capital goods: The incentives program to acquire capital goods, which cuts tariffs and grants a 14-per-cent refund to local manufacturers, was extended one year.
• Allowing U.S. dollars as currency reserves: Minimum reserve requirements in dollars were raised resulting in lower cash reserve requirements for the national currency.
• Cutting interest rates: Interest rates on loans for small- and medium-size companies were reduced, initially for a total of US$ 55 million.
• Borrowing abroad: A loan was drawn from the Bank of International Settlements for US$ 4.6 billion for Central Bank reserves.
• Partnering with China: A currency exchange pact was signed with the Chinese Central Bank for up to 70 billion Yuan or US$ 10.2 billion.
• Boosting the central bank’s reserves: An allocation of 2 billion convertible Special Drawing Rights (SDRs) was made to increase Central Bank reserves, a step that was taken following a Group of 20 meeting.
Success is disputed
The magnitude of Argentina’s downturn is a disputed issue given the suspicion of critics that the data made public by the National Statistics Institute (known as INDEC for its initials in Spanish) since January 2007 has not been completely accurate.
For the fourth quarter of 2008, INDEC reported a 0.3 per cent drop in overall economic activity compared with the third quarter. INDEC also announced a two-per-cent improvement over January and February 2009 , with a growth of 5.9 per cent over the last 12 months. Thus, if it weren’t for the central government, Argentina’s economy would be in worse shape. According to private analysts, though, the drop in the fourth quarter of 2008 amounted to two per cent – not 0.3 per cent – and the first quarter of 2009 saw a drop of three per cent rather than an increase, indicating that the onset of the recession in Argentina occurred in October 2008.
|
