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Cablegate: Argentina: Fiscal Situation Steadily Deteriorating but No

Published: Thu 4 Feb 2010 10:37 PM
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TAGS: ECON EFIN EINV ETRD PGOV PREL AR
SUBJECT: Argentina: Fiscal Situation Steadily Deteriorating But No
Major Problems Until 2011
REF: BUENOS AIRES 118
Summary and Comment
------------------------------
1. (SBU) The long-term Argentine fiscal situation is
deteriorating. The fiscal gap is manageable in 2010, but will be
difficult to overcome in 2011 without a restoration of the
government's ability to borrow on the international financial
markets. The GOA has, so far, managed to bridge the gap during the
last few years via the use of internal sources of financing from
public Argentine institutions and one-off payments from
institutions such as the Central Bank (BCRA) and the Social
Security Agency (ANSES). While these payments will be made in
2010, when the fiscal gap is estimated to be in the USD 3-5 billion
range, they cannot be depended on to continue indefinitely. In
2011, however, the gap is forecast by some to balloon to as high as
USD 14 billion.
2. (SBU) With this in mind, the government's quest for
supplemental sources of funds led it to establish the (as yet
unrealized) Bicentennial Fund and is also likely behind its efforts
to solve the problem of the holdouts from the 2005 debt
restructuring, which should increase its ability to borrow on the
international markets. In addition, the government just announced
the appointment of a Kirchner-aligned economist as the President of
the BCRA, who is likely to accommodate the government's
expansionary fiscal program. These steps make it somewhat less
likely that the government will resort to extraordinary actions
reminiscent of the decision in 2008 to nationalize privately-held
pension funds. This additional monetary and fiscal expansion
brings with it the specter of inflation, which is already
accelerating and expected to reach 20 percent in 2010. End
Summary and Comment.
Surplus Decreased 47% from 2008 to 2009
--------------------------------------------- ---------
3. (SBU) According to the Argentine Ministry of Economy, the
primary fiscal surplus decreased 47% y-o-y from ARP 32 billion in
2008 to ARP 17.3 billion in 2009. The 2009 surplus -- equivalent
to 1.5% of GDP -- is well below 2008's 3.1% level. While these
figures do indicate that Argentina's fiscal situation is worsening,
they understate the overall deterioration in the GOA's fiscal
stance. The official figures for 2009 include: extraordinary
income of about ARP 9.5 billion related to the IMF's Special
Drawing Rights (SDR) allocation to the Argentine Central Bank
(BCRA) -- an amount determined by an IMF member country's
shareholder stake; accounting earnings of ARP 8.3 billion from the
accrual of interest and dividends on funds held at the Social
Security Agency (ANSES), assets which had previously been managed
by private pension funds prior to their nationalization in late
2008; and the distribution of ARP 4.5 billion in unrealized BCRA
profits, mostly due to the peso's depreciation.
2009 "Surplus" is Actually a Deficit
---------------------------------------------
4. (SBU) Deducting these three extraordinary items from the
positive side of the fiscal ledger, the 2009 government-reported
ARP 17.3 billion (1.5%) surplus turns into an actual deficit of ARP
4.5 billion, or 0.4% of GDP. Consultant and former Economy
Ministry Director General Javier Alvaredo told Dep EconCouns
recently that, according to his calculations, the true primary
fiscal deficit for 2009 was 1.6% of GDP. Regardless of which
figure is more accurate, the trend is clear. There has been a
steady deterioration on the fiscal front in recent years. After
reaching almost 4% of GDP in 2004, the true primary fiscal surplus
halved to about 2% in 2007 and 2008 and went into free-fall in
2009, turning into a deficit.
Expenditures Keep Growing
-----------------------------------
5. (SBU) Regarding the rate of growth of tax collection and
expenditures, the picture is unpromising, casting doubts on the
GOA's ability or willingness to control spending. In 2007, 2008,
and 2009, tax collection, according to government figures,
increased 33%, 35%, and 13%, respectively, compared to a growth in
primary expenditures of 44%, 35% and 30%, respectively. In 2010,
the government does not appear to be on track to moderate spending
growth, leading private analysts to forecast a further
deterioration in its fiscal position. Private estimates of the
primary fiscal balance for the year range from a deficit of 1% of
GDP to a surplus of 0.5%, depending on the assumptions used. A
Banco Galicia report forecasts expenditure growth of 27% versus
growth in tax collections of 24%, leading to a primary fiscal
surplus of ARP 13 billion (or about 1% of GDP). Macrovision
Consulting estimates that primary spending will increase 26% and
tax collections 23%, leading to a balanced primary fiscal result.
Alvaredo came in with a much more negative forecast for 2010,
saying that a 34% primary spending increase (an average of the last
three years, according to his own calculations), will generate a
primary fiscal deficit of 2.5% of GDP. He also posited a scenario
in which primary expenditures would only increase by 25%, which
would improve the primary fiscal deficit to 1% of GDP.
2010 Manageable
----------------------
6. (SBU) In spite of the range of forecasts for the fiscal
accounts, analysts generally believe that the GOA's financial
program is manageable through the end of 2010. If the debt
restructuring for the holdouts is carried out sometime during the
first quarter of 2010, that transaction is expected to bring about
USD 1 billion in new cash to the GOA. Furthermore, the GOA is
still thought to retain a few pockets of liquidity that it could
tap to meet its financing needs. The largest, as in past years,
are the BCRA's expected 2010 profits of about ARP 20 billion and
ANSES' expected 2010 interest earnings of around ARP 8 billion.
The appointment of Kirchner loyalist Mercedes Marco del Pont as the
new President of the BCRA increases the likelihood that the BCRA
will act in accord with the government's fiscal plans.
Substantial Deterioration in 2011
----------------------------------------
7. (SBU) Banco Galicia Chief Economist Nicolas Dujovne says that
the 2010 fiscal gap will total about USD 3.5 billion. He arrives
at this figure after taking into account USD 1 billion in cash
raised in the debt exchange, USD 1.6 billion in continuing support
from international financial institutions that still operate in
Argentina, and the support of ANSES and BCRA mentioned above.
Dujovne explained that it will be easy to manage this gap, even
without the potential additional assets provided by the
Bicentennial Fund, which is still pending Congressional approval
that could come as early as March when Congress reconvenes.
Assuming that the Bicentennial Fund is authorized and the
government makes full use of those newly-available funds, Dujovne
says that expenditures could grow as much as 37% without expanding
the financial gap beyond USD 3.5 billion. Beyond 2010, the picture
gets much worse, as he forecasts a 2011 financing gap of almost USD
14 billion, even taking into account continued extraordinary income
from ANSES (he does not foresee any from the BCRA), which is
certainly not assured. As Dujovne puts it, "Two Bicentennial Funds
will be necessary if public expenditures are maintained at the same
pace as in 2009 (+30%)."
No "Credit Event" Expected in 2010
---------------------------------------------
8. (SBU) Standard and Poor's Argentine Country Director Sebastian
Briozzo told Dep EconCouns that the fiscal situation is continuing
its slow and steady deterioration. He said that the government's
long-term strategy of tapping internal sources of financing by
rolling over debt with public entities is running out of fuel.
However, he maintained that whatever the fiscal gap ends up being
in 2010, it ought to be easily manageable for a country with an
economy the size of Argentina's. The GOA's plan to set up the
Bicentennial Fund was meant to enable the government to pursue a
more aggressive and expansive fiscal policy. It would allow
considerable room for maneuver in terms of increasing discretional
public spending, likely to be used to bolster support for the
government among provincial governors who face a grim fiscal
situation now.
9. (SBU) Briozzo forecast a reasonable economic performance in
2010, with no "credit event" expected. While he did not completely
rule out extraordinary measures similar to the 2008 nationalization
of the pension funds, Briozzo expressed a certain optimism
regarding the short-term, especially if the debt restructuring
proposal proceeds and the country begins to borrow on the
international markets. He added, however, that the situation in
2011 looked considerably grimmer, and could only be alleviated by
access to international borrowing. Otherwise, he noted, the
government might be forced to take another extraordinary step
similar to the pension nationalization.
"Disastrous Consequences for Inflation"
--------------------------------------------- ----
10. (SBU) Javier Alvaredo also characterized the creation of the
Bicentennial Fund as a political act designed to facilitate
additional discretionary spending. He pointed out that the fine
print in the decree that established it leaves open the theoretical
possibility of almost tripling it at some point to about USD 18
billion. Even prior to the appointment of the new BCRA President,
he viewed the Bank and its Board of Directors as weak and overly
responsive to the Kirchners. As such, he said it stands ready to
monetize GOA fiscal needs, with "disastrous consequences for
inflation."
MARTINEZ
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