Argentina: No sugar-coating the new plan - Rabobank

Analysts at Rabobank note that the Argentina’s President Macri has officially announced “very bad” new taxes on exports such as corn, wheat, and beef, while soybeans, soy meal, and soy oil are going to be subject to an 18% export tax plus 4 pesos per USD, which at today’s prices and exchange rates means an effective tax rate of 29%. 

Key Quotes

“Entire government ministries will also be removed as part of an austerity drive aimed at balancing the budget next year in order to prop up a collapsing currency.”

“There was certainly no sugar-coating the new plan, with Macri openly admitting that poverty was going to rise, one economic forecast it’s impossible to disagree with. Argentina already faces inflation of around 31% y-o-y (in Buenos Aires), which will soar as the weaker exchange rate feeds through; interest rates at an eye-watering 60%; and now a government committed to not only abolishing the fiscal deficit, but to abolishing parts of itself too.”

“Today will be the first opportunity to see what the financial markets make of this policy decision: will it be enough to calm the exponential trend in USD/ARS?”

“Yet as Argentina undertakes a Macri 101 policy to try to sort itself out, let’s consider that its current account deficit was -5.2% of GDP in Q1 but its fiscal deficit was only -0.3%. Given the current account deficit is the sum of the public and the private deficits that means it was the private sector that ran the troublesome -4.9% shortfall vs. just -0.3% for the public.”

“So why the need to cut state spending so sharply rather than reducing private sector borrowing? Biting public-sector austerity will of course force the private sector to slash spending and save more through deferred consumption and higher unemployment, but who was the real source of the underlying problem?”

“Indeed, while the specific details of Argentina’s problems may be unique, the question of who is responsible for a financial crisis, and hence how one should respond to it, is still widely misunderstood at the highest levels almost everywhere. For example, in Europe the 2008-09 crisis was, and is, being treated with public-sector austerity when we know that it was excess private-sector borrowing (and inappropriate internal exchange rates within the EUR) that was the underlying problem.”

“This misunderstanding then makes matters far worse. If the public sector acts as a net saver/suck on liquidity, growth can only recover with a combination of higher private-sector borrowing and/or higher net exports: the former means we rinse-and-repeat the crisis – et voila, the yield curve is still flattening like stink as rates rise; the latter means we pass the problem onto everybody else in the world – et voila, trade wars.”

“And public austerity has other negative externalities. Greece’s recent devastating fires have been blamed on cuts to its fire services; the collapsed bridge in Italy likewise; and yesterday Rio de Janeiro’s museum burned down, with fingers pointing at slashed budgets, the cultural equivalent of the Louvre, the British Museum, or the Met disappearing into a pile of ashes.”