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Montevideo, November 21st 2018 - 21:03 UTC

Argentina finances improving: half year primary deficit drops to 0.8% of GDP

Friday, July 20th 2018 - 07:21 UTC
Full article 11 comments

Argentina posted a primary fiscal deficit of 105.8 billion pesos (US$3.7 billion), or 0.8% of gross domestic product (GDP) in the first half of 2018, government data showed on Thursday, down 26.7% from the same period last year. Read full article

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  • Enrique Massot

    What this story, originally published by the Nasdaq Stock Market does not mention is that, in the current circumstances, lowering the fiscal deficit in Argentina comes fully at the expense of economic activity.

    As a result, MP's addition to the original headline of the phrase “Argentina finances improving” is wishful thinking if not pure fiction. Not even Clarin or La Nacion dare to write such headlines these days.

    Consider this paragraph from Reuters on the same topic, headlined “Argentina's primary deficit drops 0.7 per cent interannual in June, overshooting IMF target: minister.”

    “Argentine economy is in a full economic downturn, chastised by a notorious devaluation of the peso that nears 33 per cent so far in 2018 and inflation close to a yearly 30 per cent.”

    One of the sectors most heavily impacted will be public works, one of the cards in Macri's sleeve expected to help Cambiemos win the 2019 presidential election by creating a short-term bubble of economic activity.

    As they say, una golondrina no hace verano.

    Jul 20th, 2018 - 03:38 pm - Link - Report abuse -1
  • Jack Bauer

    @EM
    AFAIK,“ fiscal 'deficit' ” is basically defined as when total government expenditure exceeds total revenue....so “lowering” the fiscal deficit“ would presumably a step in the right direction...but you think it isn't, and state it ”comes at the expense of economic activity“... You also mention that ”One of the sectors most heavily impacted will be public works”...not too clear, so would you care to explain ? and also say what you mean by 'public works'...Tks.

    Jul 21st, 2018 - 07:40 pm - Link - Report abuse +1
  • Zaphod Beeblebrox

    JB,

    “AFAIK,“ fiscal 'deficit' ” is basically defined as when total government expenditure exceeds total revenue....so “lowering” the fiscal deficit“ would presumably a step in the right direction”

    Yes, you'd think so.

    “...but [Reekie thinks] it isn't, and state it ”comes at the expense of economic activity“... [Reekie also mentions] that ”One of the sectors most heavily impacted will be public works”...not too clear, so would you care to explain ? and also say what you mean by 'public works'”

    I don't know but I expect that “public works” (which I would define as maintenance and upgrading of the infrastructure-roads, railways, public buildings, power supplies etc. but Reekie may differ) is not the sort of activity that impacts GDP since it doesn't generate a direct profit. It just makes it easier for businesses to generate profits. I think what Reekie is trying to say that if the government slows its road-building plans then the economic activity of road builders is reduced. However, if I am correct that this sort of activity doesn't impact GDP I wonder if it even counts as “economic activity” although it would impact secondary economic activity from the provision of materials, equipment and services etc. Also, isn't most of this work done on a contract basis?

    I don't know, since I am not an economist. But I know that any “good news” from the Macri government gets spun into bad news by Reekie. E.g. He has recently clarified that devalued peso=bad. Overvalued peso=bad. Floating currency=bad. Intervention in currency by Macri=bad. I know that any change will result in economic winners and losers, but Reekie definitely seems like a glass is half empty type of guy. ;-)

    Jul 24th, 2018 - 05:43 pm - Link - Report abuse 0
  • DemonTree

    Lowering the fiscal deficit is good, but not so much if this is the result: http://en.mercopress.com/2018/07/25/argentina-s-stats-office-data-reveals-recession-is-round-the-corner

    Also, EM has been complaining for years that Macri had been borrowing to cover everyday expenses, rather than for infrastructure projects that might help the economy grow in the longer term. So I'm guessing he's unhappy they have been cancelled, not unhappy they were planned.

    Jul 25th, 2018 - 11:09 am - Link - Report abuse 0
  • Jack Bauer

    ZB, DT
    Fiscal deficit, as defined above, far from measures all the variables 'n is not necessarily bad. If the deficit is caused by ‘productive’ loans, which are (hopefully) expected to pay for themselves, then you’re on the right track. When loans are used to pay interest on debt, to pay salaries, cover deficits, that’s when things go south. The fiscal deficit can also be reduced by cutting expenditures, such as reducing nbr of public servants (usually inflated), absurd privileges - but not on investment (essential infrastructure, education & health), or by increasing revenue (more taxes, collecting bad debts etc). If debt keeps growing due to accumulation of yearly deficits – interest on debt becomes a killer…in Brazil, the federal debt is R$ 3.7 trillion, on which interest payments exceed 400 billion, or, more than twice the current annual deficit; when debt grows, without the corresponding increase in production of goods 'n services, you get a higher debt/GDP ratio…not good. If the ratio decreases, presumably productivity (reflected in the GDP) is improving. So if there is higher productivity, it means the economy is becoming more efficient.
    ZB, I think that even pure maintenance, while generating better conditions for higher productivity ‘n profits, does impact GDP, as new provisions, equipment need to be purchased, salary mass increases through additional services etc…So if Reekie, by ’public works’, means that the necessary maintenance may not be carried out on roads, railroads , power supply etc, he’s probably right…GDP will be affected, as economic activity /productivity is (theoretically) hampered by “lack of a decent infrastructure, causing higher costs” (in Brazil, the main reason for the so-called “cost of doing biz in Brazil”), and if the IMF loan to Argentina is not properly allocated, things will get worse. Agree, Reekie is not an optimist, but this time, he might be right.
    DT, The drought will indeed impact Argentina's agribusiness, negatively.

    Jul 25th, 2018 - 09:35 pm - Link - Report abuse 0
  • DemonTree

    @JB
    I would say you should only borrow if you will have more money to pay it off later. So either the loan should improve infrastructure, education etc and enable the economy to grow faster, or you borrow just enough to tide you over a recession when you expect the economy to improve soon.

    Unfortunately paying interest on debt, salaries, and covering deficits is exactly what Macri has been spending the loans on. He did cut spending, for example on the utilities subsidies, but he also cut taxes, so it didn't help the deficit. And his policies didn't help the economy grow enough, so the hole has just got deeper. He did have plans to invest in public works, such as this one: en.mercopress.com/2018/04/26/argentina-receives-32-bids-for-six-road-projects-totaling-us-8-billion but the IMF has demanded infrastructure spending be cut.

    The risk with cutting the deficit is that it can lead to a viscious cycle where the economy shrinks, which reduces tax revenue, which increases the deficit, so you cut spending/increase taxes, and the economy shrinks some more... The IMF is famous for enforcing policies that make downturns worse, and actually reduce the ability of countries to pay off their loans - Argentina knows this better than anyone, it was following IMF recommended policies before the default in 2001. This article is a good summary: http://triplecrisis.com/argentina-20-years-on-has-the-imf-really-changed-its-ways/

    And yes, the drought has already hurt Argentina's agri-business, causing a drastic reduction in the soya crop at just the time the Chinese market is looking to buy more. IMO Macri put too much emphasis on agriculture - which is always subject to fluctuations in price and yield - instead of more-reliable industry and services. An example of this is his cutting taxes on agri-exports, which the IMF ordered him to stop, and he is continuing anyway despite the other austerity measures.

    Jul 26th, 2018 - 02:32 pm - Link - Report abuse 0
  • Jack Bauer

    @DT
    Would be better if the govt only spent what it actually had...and resorting to loans for only productive projects... unfortunately, taking credit is an inevitable govt practise..but when they get into a rut they can't get out of, that's when 'sh*t' happens. Borrowing to get over a bad hump, altho necessary, is usually a bad sign. Who can guarantee the future will save your ass ?
    “The risk with cutting the deficit is that it can lead to a vicious cycle where the economy shrinks”...it the cuts are being made in productive investments, yes. Anyway, it's always a tricky balancing act between taking loans 'n foreseeing revenue to pay them off...boils down to doing your homework, not stealing and not being hit by “natural disaster” – even if “unpredictable” you need contingency plans. You cannot simply rely on them to not happen. This balancing act is a continuous exercise in recognizing tendencies or disaster before they happen 'n taking measures to prevent or to minimize the effects.

    Going back to a question of yours in a previous post, “Is the public sector so united, and do they really have so much power if they go on strike?”
    All you need is one professional category of public servants (or one from the private sector), that the general public depends on, to strike – and sh*t hits the fan…and they ARE united because they know they can’t be fired, and they know they have the power to extort higher salaries from the govt, in exchange for keeping basic public services working.…say the public transport employees go on strike…how do people get to work ? What if public health workers cross their arms ? Although in the private sector, banks can have the same effect...If a car manufacturer goes on strike, it won’t affect the general public. Private sector office workers don't strike, 'n if they did, it would affect no one...The truckers, although private sector, are essential to transport just about everything...like the railways in the US.

    Jul 26th, 2018 - 07:57 pm - Link - Report abuse 0
  • DemonTree

    Historically speaking, the UK mostly borrowed to fund wars, not infractructure. Wars aren't exactly productive, but there wasn't always much choice. Nowadays we have the same problems as anyone else; each leader is only in power for a limited time, and if they save money for contingencies, they usually don't get the benefit because by the time it's needed, someone else is running the country and takes the credit. Whereas if they spend as much as possible, everyone has more money and feels better off, making the leader more popular. By the time the bill comes due, they can be safely retired and it's someone else's problem.

    I was trying to work out how the UK national debt compares to the Brazilian one. It's currently ~ £1.8 tr and the interest is £50 bn per year, or 5% of the government's budget. That's $2.4 tr and $66 bn interest, compared to I think $1 tr for Brazil and $108 bn annual interest. So Brazil's debt is lower but the interest costs more, making it a bigger problem for the budget.

    RE the public sector, sounds like they have more power because they have more important/difficult to replace jobs. What about ordinary civil servants? Their work is important but I should think a strike would have much less obvious effects than the public transport employees.

    By the way, we have a drought in Britain as well, it rained on Friday (for only an hour) for the first time in a month and my lawn hasn't grown since May. It's affecting grazing for animals and there's no grass to cut for winter. The press are comparing it to 1976 when the price of potatoes quadrupled and the government had to subsidise food, but hopefully it won't be that bad. Anyway, agriculture is only a small part of the GDP here, it's more about food security, unlike Argentina where the drought caused a serious hit to the economy. Also, it was 34C when I left work today, and is still 24C now, which probably doesn't seem very impressive to you, but it's highly unusual here.

    Jul 26th, 2018 - 11:19 pm - Link - Report abuse 0
  • Jack Bauer

    @DT
    OK, wars are not exactly productive, but they might be in the long run - but that's another story.
    “and if they save money for contingencies, they usually don't get the benefit because by the time it's needed, someone else is running the country and takes the credit.”
    Sums up nicely the situation Lula inherited from FHC. And for how long now, is it going to take Brazil to pay for the PT’s cock-ups ?

    Currently, nat’l debt is running at R$ 3,7 trill ; interest payments R$ 400 bill, or 10.8%. Federal tax revenue in 2017 was R$ 5.1 trillion (in 2018, up by 5%). End 2016, (ratio) nat’l debt/ tax revenue was 72%. Beginning 2016, the IMF forecasted Brazil's public debt would reach nearly 92% of GDP, repeat “GDP” by 2021...which is pretty bleak ; in that situation, with a higher debt and decreasing GDP – and decreasing tax revenue- the govt’s capacity to pay its commitments becomes virtually impossible. Only solution is for the economy to boom, to increase tax revenue and to manage to reduce the debt and interest payments...No surprise not much is left for investment after paying for salaries, interest and corruption.

    In the UK, if nat’l debt is $ 1.8 trillion, and interest on the debt is only $ 50 billion, interest represents only 2,7% of the debt….being more competent (?), considered a better payer, less risk, perhaps the rates are quite a bit lower than Brazil’s.

    Govt jobs here – of the typical (lower) categories of civil servants that strike – are not difficult to replace …the private sector could replace them easily…but the fact they cannot be fired unless they commit some heinous crime, means they do not need to worry abt being responsible at their jobs in order to remain employed.
    The most common strikers here belong to public transport, health services, & police forces to a lesser extent (and truckers and banks in the private sector).

    Have been seeing what the heat wave is doing in Europe…looks nasty, specially in Greece.

    Jul 27th, 2018 - 02:32 pm - Link - Report abuse 0
  • DemonTree

    On balance, the colonial period wars (including against other European powers) were productive for Britain by gaining valuable territory and resources, the same as for other countries that were trying to build empires, and not just European ones. So I guess the government thought they were worth spending money on.

    WWI and WWII were different, but they didn't know it before the former, and tried hard to avoid the later. (Too hard, probably.)

    The UK pays lower interest on the national debt (which is at a similar level of GDP), because it's considered a lower risk for default than Brazil. I believe we did technically default once, it was during the great depression, on a WWI war loan from the US. Britain was paying it using reparations from Germany, agreed in the treaty of Versailles, and when Germany went broke and refused to pay, so did Britain. The US government knew that if they demanded payment, so would Britain, and Germany would likely revolt, so they didn't complain. Of course it all ended in disaster soon enough anyway.

    In general though, Britain is very reliable at paying debts, hence the low interest rate. A few years ago it got so low that the Chancellor took the opportunity to refinance bonds dating from as far back as 1720: https://www.nytimes.com/2014/12/28/world/that-debt-from-1720-britains-payment-is-coming.html?_r=0 . We've been paying interest on that debt for all this time; Britain's national debt is even older than Britain, since it started as English national debt before the acts of union.

    Re public sector workers, sounds like the most necessary ones go on strike the most, which makes sense; they have more leverage. But why are bank workers likely to strike? They're not normally thought of as underpaid.

    Jul 29th, 2018 - 04:10 pm - Link - Report abuse 0
  • Jack Bauer

    @DT
    When you fight a war on someone else’s turf, you don't put yr own infrastructure at risk...but it's costly, and is not always profitable..
    Reckon interest rates paid by LatAm countries are quite a bit higher than the UK’s...Brazil has a hard enough time paying the interest (on foreign/domestic debt), let alone the principal.

    True, despite the fact banks don't pay the worst salaries, the unions usually become active when the time of year comes around to discuss salary increases, and are not above physically threatening employees (who might try to get through the pickets) to strike when the unions are determined to get what they want, or to protest when people are made redundant after bank mergers or takeovers. With the end of the obligatory union contribution, the unions should lose some of their power.


    Continuing a previous post (under “US Congress furious after Trump…”) and to answer yr question :“If you lost big chunk of yr savings, ‘n had to work a few more years than planned to make up for it, would you be worse off or not?”
    First of all, what sort of ‘savings’ are you referring to ? private ones (low-risk investmt funds, including complementary retirement funds run by banks) or govt pension ? If the former, not much risk.
    If the latter, here it’s not as if you had a nominal checking a/c with the govt, in which the balance increases as the monthly contributions are discounted from yr paycheck... only the ‘right’ to a pension (proportional to age, the value of the contributions, and the nbr of contributions, when you choose to retire), paid fm the federal retirement fund (INSS – Nat’l Institute for Social Security), which administers the contributions fm both private ‘n public sectors.
    Second, 3 yrs after retiring, my last employer asked me back, to start a new project and get it up 'n running ; accomplished after 24 months, I then got the hell out for good. The last 2 yrs were no sacrifice money wise, so I wasn't complaining.

    Jul 29th, 2018 - 08:36 pm - Link - Report abuse 0

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