Argentina - Argentina spending more than it produces; “default situation” can’t be discarded

Argentina currently consumes more than it produces and only with strong growth can it avoid another default situation since liabilities continue to increase, warns economist Diana Mondino.

Diana Mondino, economist and risk analyst argues Argentina is not investing enough in production

“Argentina has already consumed its assets in energy, agriculture, pension funds, central bank and expenditure continues to expand” points out Mondino adding that government spending has ballooned in the last decade but particularly in the last two years, “well above the production and growth capacity of the economy”.

Social Security, Anses, already consumes almost a third of GDP, leaving aside law and order, education, health, which means the fiscal load must be particularly burdensome to meet those expenditures, 40% tax pressure, one of the highest in the world, except for Scandinavian countries.

“And in spite of the taxing pressure the government had to appeal to some of the ‘jewels of the crown’, such as energy, agriculture, pension funds, Central bank reserves, and yes what we managed was a consumers’ boom”.

Mondino added that Argentina no longer enjoys a genuine fiscal surplus since the budget includes such cosmetics as the Central bank and other government companies’ profits.

“Stats are very limited; we know the outlays but not the level of debts, delayed payments, subsidies, or how much government enterprises owe. What we know is that there is an effort to rearrange expenditure even with non discretional items. During the last quarter of 2011, social security expenditure was up 40%; government salaries, 26%, but only 2% in capital expenditure and 1.3% in transfers to the provinces”.

Mondino went on to explain that the run on the dollar is because in Argentina people take refuge in the US currency when there is inflation and “if inflation disappears there won’t be any need for controls”.

“But if companies need dollars and don’t have access to them they won’t be able to grow, to invest or pay debts. The same with the outflow of capital which has been considerable in the last six years: it’s a clear signal of mistrust, of alert and lack of confidence in the future. The only way to revert the situation is making the Peso attractive, through confidence or high interest rates. Confidence is positive for the economy but high interest rates are condemning”, warns the economist.

What can be expected in 2012?

“There are still positive instruments that can be employed, to begin with thinking in the long term, forgetting about every day’s balance sheet or the media headlines.

Inflation can be wiped out just simply by stopping the printing machine, 40% last year. Exports could improve if wheat and beef could be exported freely. The fiscal situation can be bettered with a sound orderly budget clearly indicating what is paid and for what.

Public utility rates can be increased with funds reaching the companies to improve services and re-directing government expenditure to investment. In other words there are many ways to promote growth with no need of pinching Argentine pockets, but it all depends on what politics dictates”, concluded Mondino who is Director of Institutional Affairs from the CEMA University in Buenos Aires and Finance professor. (CEMA stands for Macroeconomic Studies Centre of Argentina).