They weaken the foundations of Argentina's Economy: How The Model Survive?

Weaken the foundations of Argentina's economy: How the model survive? Buenos Aires, Argentina9 February 2009 that determined the final crisis of convertibility in Argentina back in early 2002 led to a new economic model that has maintained a very good rate of economic growth in Argentina. Two pillars of the current economic model are the strong fiscal and external surpluses are at risk both because of the impact of international financial crisis and internal problems of Argentina's economy. The weakening of these two pillars of the current Argentine economic model generates a high risk to the economy, increasing the fragility of the goods to potential new negative shocks that may affect it. The need for Argentina has a twin surplus, fiscal and external, lies among other things, the need to meet the debt service in a context where there for the country's ability to access financial markets international. Fiscal, tax revenue is slowing more than expected. In January, revenues increased by only 11% on year, totaling $ 24,109 million (not recorded an annual increase that low since April 2006).

Not only is this disturbing fact but more so considering that it contains additional revenue product of re-nationalization of the pension system that produced a 70% annual increase in income from social security. Without the re-nationalization of the system, the annual change in tax revenue had risen to 4.5% in an economy with at least 20% of inflation, implying a fall in real terms of 16.4%. Tax revenue was affected both by the fall in international commodity prices and the slowdown in economic activity and inflation in Argentina. The outlook for this year on revenues do not seem too positive. Is that from the external sector is expected slower growth in revenue both lower export taxes (for fall in international prices and lower export quantities as for example, soybean production would show a drop in the 2008 campaign / 09 17%) and import duties. With regard to other determinants of evolution in the collection, the expectation of a zero growth in economic activity (and some predict that the Argentine GDP to contract) and a lower rate of annual inflation (that may not be greater than 15%) anticipate a poor performance in terms of fiscal resources.

While social security revenue product of the re-nationalization of the pension system partly cushion the fall in the dynamics of revenue from other sources, you can expect another negative effect on it through a lower rate of compliance of taxpayers. Is that the situation being experienced by the economy's getting embarrassing to many sectors of the same family and which will increase the delay in payment of taxes and even encourage a greater underreporting of them. This negative outlook in terms of revenue will force the government to increase efficiency in public spending to keep the surplus that will enable it to meet the obligations of public debt. In this sense have already begun cutting back on subsidies and is expected to also be so with public works. The need to maintain fiscal discipline clashes with the economic stimulus plan announced weeks ago by the Argentine government for which there are many resources to carry it out. Moreover, the issue of wages impose a limitation on the government cut public spending and that there are pressures of sharp increases in the salaries of public sector employees.

On the trade side, the result of the trade balance in 2008 has a double meaning: the first is the one that shows that it recorded an increase of 19% over the previous year registering a surplus of U.S. $ 13,176 million. The second reading shows that it recorded a sharp decline on the year end and in the month of December, the exports registered a year fall of 24%, while imports fell in that month by 11% year on year, marking a warning light for the commercial result of this year when the strong global economic slowdown will negatively impact sales via lower external demand both in terms of prices and quantities. For this year, since the market is projected trade surplus of U.S. $ 6,000 million, although the same could be even further deteriorate under the external environment and agricultural losses by drought were higher than estimated at present. A reduction in the fiscal surplus, capital outflows from the country by the market projected for this year amount to U.S. $ 10,000 million represent complications for the government to get the dollars needed to meet the payment obligations the debt.

In 2008 capital flight amounted to U.S. $ 23,096 million (in 2007 was U.S. $ 8,880 million). Is that in the absence of external finance, speculations suggest that the government should resort to Central Bank reserves to meet foreign currency obligations which represent 40% of the obligations that the country has this year. The government must close the financing program which has alleviated by the return to public pensions and the exchange of Secured Loans (PG), but still needs to pay U.S. $ 6,000 million to meet foreign currency obligations. This recourse to the BCRA's international reserves at a time when international financial markets are turbulent represents a high risk to economic stability in Argentina. Is that while the BCRA has a good level of international reserves to discourage any possibility of speculative attack (as of January 23 amounted to U.S. $ 47,026 million), reducing them to the level required by the government could increase the fear of market resulting in increased demand for dollars in a way to bring the level of reserves at a level of risk for exchange rate stability.

Faced with this possibility the BCRA would have two opposing paths, each with a different risk. The first way would be to generate an appreciation in the nominal exchange rate so as to discourage the demand for dollars. This option would require resigning from the Central Bank reserves to initially appreciate the exchange rate kept hoping that it controlled the demand for dollars, thus reducing the net loss reserves. The second path that could take the BCRA would stop depreciating the nominal exchange rate so that it reaches a level that reduces the monetary authority's efforts to keep it at that value. This alternative, however, could increase the incentive of market pressure on the exchange rate so as to increase the depreciation of the peso necessitating a greater effort by the BCRA to sustain the new level exchange. In short, the weakness of the fiscal and external pillars of Argentina's economy will produce a significant increase in the fragility of it. Argentina's economy in general and the Central Bank in particular, face a context of greater volatility risks involve not less on stability.

The government has few resources to sustain economic stability except for the start twisting the direction of economic policy towards the strengthening of macroeconomic variables and forceful sending clear signals to the market will move towards a more serious and predictable. This would help to build trust, a well more than necessary for these times.