Argentina is drafting plans to cut its budget deficit to convince nervous investors it can pay its debts and this Monday Finance minister Nicolas Dujovne is scheduled to announce measures, before traveling to Washington to meet with IMF's chief Christine Lagarde.
Dujovne is expected to detail how he plans to reduce Argentina's 2019 primary deficit - its borrowing needs before debt servicing - in an effort to stem the slide in the peso, which so far this year has lost over 59% of its value against the US dollar.
Argentina has already agreed to cut its primary deficit to 1.3% of GDP under a US$ 50 billion IMF program inked in June, prompting protests by unions. Now, Dujovne has pledged deeper deficit cuts before traveling to Washington to negotiate with the IMF.
One of the measures to be implemented according to Argentine media, is the return of export taxes plus a sharp reduction in the number of ministries. These were being discussed at crisis talks headed by president Mauricio Macri this weekend at the official residence in Olivos.
The Argentine government has not detailed its new primary deficit target or what measures it expects to take to stabilize the currency after a whopping 16% depreciation last week, but investors want decisive action.
“The market will likely be expecting a 2019 budget that makes a credible attempt to all but eliminate the primary deficit,” said Jeffrey Lamoreaux, senior analyst at Fitch Solutions in New York.
He said markets expected Macri, who took office in December 2015 after 12 years of left-wing administrations, to implement a combination of agricultural export taxes and reductions in subsidies and social spending. But “the risk for Macri is that he alienates one of the few segments still behind him,” Lamoreaux said.
The agricultural lobby has been a pillar of support for Macri as he sought to boost the competitiveness of Latin America’s third largest economy. The powerful farm sector backed his business-friendly coalition in both the 2015 presidential elections and the 2017 mid-term legislative elections.
A return of export taxes would mark a major reversal. Macri scrapped levies on corn and wheat shortly after taking office. He also began gradually lowering taxes on soy and soy products, which were at the heart of a dispute between former populist President Cristina Fernandez and the farm sector.
Nonetheless, two former economic officials in Macri’s government suggested export taxes could be an effective short-term option, despite being against such a policy.
“I never believed in that measure as a permanent option but this is a fire,” Carlos Melconian, who served as chief of state-run Banco Nacion during the first year of Macri’s term, said in a television interview, referring to the run on the peso and growing concern about Argentina’s ability to pay its debts.
Luciano Cohan, the former undersecretary for macroeconomic programming under Macri, wrote on Twitter that a 5% export tax on all goods, not just agricultural products, would raise between US$ 3.5 billion and US$ 4 billion in revenue next year.
However, farm groups criticized the possibility. Daniel Pelegrina, president of the Argentine Rural Society, called them the “easy way out” and argued that the peso’s depreciation cuts both ways for farmers, who have to pay higher costs for imported inputs.
Fifty-nine percent of Argentine soybean producers’ input costs are fixed in dollars, according to a June report by CREA, a think tank focused on agriculture. The figure rises to 61 percent for corn input costs.
An export tax would amount to a recognition that Macri’s initial plan to reduce the deficit through spending cuts alone was not enough. The administration has already accelerated cuts to meet a tougher primary deficit target of 2.7% of GDP this year, down from 3.2% previously.
Hundreds of layoffs at state-owned companies and government ministries have led to confrontations between protesters and police. Tens of thousands of university students and staff have marched demanding more government funding and higher salaries that have been eroded by inflation topping 30% annually.