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  HOME | Argentina

Argentina Seeks To Bolster Finances Ahead Of Debt Talks

BUENOS AIRES – The economic emergency law just approved in Argentina is aimed at improving the public finances of Latin America’s third-largest economy, a key piece in the negotiations that the government wants to start with the holders of its sovereign debt.

The law, which took effect on Dec. 23, includes a wide range of measures that the administration of new President Alberto Fernandez promised would get the economy, which has been in recession since April 2018, back on track.

The legislation aims to bolster Argentina’s public finances, but without putting additional pressure on a society with a poverty rate of around 40 percent.

The focus, therefore, is on increasing incomes and helping those affected by the recession.

The emergency economic law, according to estimates by private consulting firm Elypsis, could lead to savings amounting to around 1 percent to 1.9 percent of the gross domestic product (GDP).

Elypsis said the law “seeks to shift more spending toward the sectors worst hit by the crisis without causing deterioration of the primary account, key to debt negotiations.”

Argentina, which wants to start negotiations on extending the repayment schedule for its debt with private creditors and the International Monetary Fund (IMF), must improve its fiscal position ahead of any talks, Elypsis said.

Creditors will want to see a plan that guarantees that the South American country will honor its financial obligations on a “consistent” basis, the consulting firm said.

The allows the new Fernandez administration to impose a variety of taxes, including levies on exports, as well as creating other taxes, such as the 30 percent levy on purchases of foreign currency and on foreign travel.

Under the legislation, the administration also has the power to suspend the tax cuts approved in 2017.

“The first measures from the new administration point, especially, toward increasing tax collection,” Marcelo Capello, chief economist at the Institute for Research on the Situation in Argentina and Latin America (IERAL) of the Fundacion Mediterranea, said.

Capello said his estimates showed that the changes in tax policy would have a positive impact on gross tax collections equivalent to 1.6 percent of GDP.

In addition to increasing tax revenues, the law gives the administration six months to adjust pension payments based on new standards to be set by the government.

If the changes to the pension system allow the government to spend 0.30 percent of GDP less on social security programs, compared to this year, then IERAL projections show that the public sector will go from posting a primary deficit of 0.70 percent of GDP in 2019 to having a surplus of 0.70 percent in 2020.

While some members of the new administration favor higher public spending, Capello said Economy Minister Martin Guzman would argue for a cut in social security spending or at least keeping it at the same level as in 2019.

This approach would allow Guzman to have “room to negotiate with a better chance (of success) with the IMF and private bondholders,” Capello said.

The possibility of better budget figures in Argentina has already had a positive impact on the financial markets, with both the bond and equity markets rebounding strongly in recent trading sessions.

Economist Gustavo Ber, for his part, said “investors are enthusiastic about the positive effects that the fiscal package would have on the debt renegotiation.”

After the turmoil in the financial markets in the past few months in Argentina, investors appear to be getting in a better mood.

The new administration has indicated that it wants to avoid a moratorium on debt payments in the expectation of “friendly” negotiations with creditors, aiming going forward for a situation in which even if a surplus is not achieved, the country will have a “zero deficit” to help reach a deal on Argentina’s obligations.


 

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