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Argentina Politics January 2020

Argentina: New Peronist government hikes taxes and freezes prices in emergency bill

On 21 December, Congress approved an emergency economic reform package delivered by the new Peronist government led by Alberto Fernández. In an attempt to keep fiscal accounts in check and at the same time protecting the most vulnerable social groups, the bill elevates the tax burden on the tradable sector, imposes a tax on hard currency purchases, freezes utility tariffs and gives the government six months to revise the pension indexation formula, while also providing cash for retirees who receive a minimum pension. However, coupled with the expansion in base money registered in the last two months of 2019 and the three consecutive reductions in the lower interest rate floor delivered by the new president of the Central Bank, its ability to rein in public accounts and put the economy back on track has been questioned.

The government is faced with the need to renegotiate the country’s public debt of around USD 100 billion with bondholders and other creditors, including the IMF, whose deadline was set at 31 March by President Alberto Fernández. The emergency bill therefore is meant to show creditors the government’s desire to keep public accounts in check while at the same time laying the foundations of more sustainable growth. Therefore, the government resorted to the fiscal lever to raise funds, while at the same time it transferred resources to the lower income households. To this end, the government raised export levies by 3% on soybeans, wheat and corn; hiked taxes on personal wealth back to 2015 levels and on financial assets held abroad; and introduced a 30% tax on foreign currency purchases and on foreign travel aimed at discouraging demand for USD and sustain the value of the peso. At the same time, utility prices were frozen for 180 days and cash payments for lower pensions were granted, while the government was given the power to adjust pension benefits and the tariff scheme within H1.

Commenting on the first measures of the new government, economists at Goldman Sachs stated:

“Historical evidence demonstrates that incomes policies are at best a complement to, but certainly not a substitute for traditional fiscal and monetary austerity. […] The easing of monetary policy and the partial recovery of real incomes brought about by a social pact may provide an initial lift to private consumption, stimulating demand and activity […] in the near term. Unfortunately, without complementary austerity measures, this “adrenaline rush” would be unlikely to last very long as fundamental macro imbalances would remain unchecked. […] At some point, an impaired supply response would undermine the economy’s overall performance, resulting in stagnation and renewed social discontent.”

The new government faces a challenging economic and social environment, characterized by sky-high inflation and interest rates, investor mistrust, the renegotiation of the country’s bulky external debt and widespread discontent in a population frustrated by a rising unemployment rate and vanishing purchasing power. LatinFocus Consensus Forecast analysts see GDP falling 1.8% in 2020, which is unchanged from last month’s projection, but expect it to rebound in 2021 and expand by 1.8%.

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