ARGENTINA: Sleight of hand
Argentina’s authorities have worked magic on the economy for years. But their tricks may prove limited as output slows and inflation continues to soar
Most weekends in Argentina, football stadiums shake as fans cheer on teams, heckle opponents and rant at referees. Boca Juniors, River Plate and other clubs churn out skilled players for the European leagues where wages run four times higher. For player agents, this means big business.
Sergio Levinsky, a sociologist who has written books on the sport, estimates that player transfers average $250,000, with the hottest players going for more than $1 million. So with 130 to 150 deals each year, the business turns over some $37.5 million.
The business came under the spotlight of the tax authority this year, despite years of scant attention. Ricardo Echegaray, the chief tax collector, led a probe that ended in the suspension of 146 of the 210 agents in August.
Echegaray said the agents reported incomes didnt correspond with the transfers they were handling or their frequent travels. He said agents had been selling players on paper to small clubs in Chile, Switzerland and Uruguay when really they were going elsewhere, a triangulation designed to evade a 24.5% transfer tax in Argentina by paying, for example, only 19% in Chile or 2% in Uruguay.
We want them to pay taxes in Argentina, he said. We have a budget target to meet.
The government is on a blitz to find tax cheats. They are getting the message out that they have the means to catch evaders and that they will, says Juan Alberto Pazzi, a tax specialist at the University of Belgrano in Buenos Aires. He estimates that evasion runs around 20% on the value-added tax and 40% on income taxes in a country with a tax burden of about 30%.
The government needs more money as public spending grows faster than tax collections. The economy will expand by between 0% and 3% this year, according to various forecasts from economists and banks, after 8% average annual growth between 2003 and 2011, save a 3% contraction in 2009. Next year 3% looks optimistic. The government may blame the sluggishness on a drought-cut crop a leading industry and the impact of a slowdown in Brazil on its car production and exports, but errant policies are at fault too.
The government is digging its own grave, says Federico MacDougall, an economist.
He says the government is expanding public spending and money supply to spur consumer spending but is failing to encourage investment to keep pace, and this is driving up annual inflation that has been in double digits since 2005 and is touching 25%.
This has made bargain hunting a necessity for people as the economic slowdown moderates job and wage growth, the latter running faster than inflation until this year. Those who can take dollars out of the country are doing so however possible. Few want to save in pesos as deposit rates lag inflation by 1015 percentage points.
The president, Cristina Fernández de Kirchner, isnt about to change her economic planning. I dont believe in adjustments, she said on September 6 in a latest allusion to her beliefs that austerity measures, like the government cutbacks in Europe, dont work. She prefers stimulating the economy with more spending on public programmes, including by providing opportunities for the poor to break into the mainstream economy.
This explains a fattening of the state since 2003, when the current economic policies took root. Public spending has risen to 45% of GDP nearly that of Europes Nordic countries from 30% before 2003, says Luciana Díaz Frers, an economist at the Center of Public Policy Implementation for Equity and Growth, a think-tank in Buenos Aires.
So will this bring the economic diversification and long-term growth the president promises?
Few want to oppose her on the fear of her reprimands. In July, Fernández admitted on national television that shed asked the tax agency to investigate a real estate broker, whom she named, after he had said that government policies had slashed home buying.
In September, she slammed Paolo Rocca after the chairman and chief executive of Tenaris, a Luxembourg-based steel tube manufacturer with large operations in Argentina, said the country had lost its way because of poor management, causing a surge in costs and a plunge in investment.
Argentina had gained a competitive edge at home and abroad after it devalued its currency by 65% against the dollar in 2002, making its goods cheaper in dollar terms. This helped build fiscal and trade surpluses and spur a rebound from a 200102 economic crisis, aided by a surge in the price of soybeans, its main export.
But with inflation left unchecked, that edge has started to narrow.
Private-sector salaries in dollar terms rose 19% in 2010 and another 19% in 2011, and this year will rise another 10%. This is costing the country a lot of its competitiveness, says Gastón Rossi, an economist at LCG, a consultancy in Buenos Aires.
There are other warning lights. Tax revenues are rising only a little faster than inflation. Capital flight more than doubled to $22 billion in 2011 on the year before. Hard-currency reserves have slipped to $45 billion, down 14% from a high of $52 billion at the start of 2011. The trade surplus has narrowed and the fiscal accounts have fallen into deficit.
The presidents response? She has restric-ted imports, the wiring of corporate dividends and profits abroad and the purchase of foreign currencies.
The trouble is that the moves are backfiring by reducing economic growth and accelerating inflation, which could edge closer to 30% in 2013 among the worlds fastest.
Capital flight may have declined, but Argentines are not hesitating to move into dollars over concerns of more currency depreciation and inflation. They are buying dollars on the black market at 40% more than on the official market, where few are available.
The import restrictions have hurt industry, with the automotive, metallurgy and steel sectors struggling to sustain production without essential goods from foreign suppliers.
They are using up their stocks, so growth will moderate, says Martín Redrado, a former central bank president now working as a member of the dispute settlement unit at the World Trade Organization. The economy is not generating employment.
This is striking at a core of the governments economic plan: job creation.
A solution could be to borrow funds on international markets, helping to reduce a reliance on printing pesos to meet most of its financing needs.
SHADOWS OF DEFAULT
That wont be easy. The country hasnt fully settled a $100 billion default from 2001 and owes about $9.5 billion to the Paris Club of creditor nations. This is exposing it to lawsuits from creditors and high borrowing rates on new debt issues, even while interest rates are low in global markets.
President Fernández, however, says she doesnt really want to sell debt. She has chided supporters of debt accumulation, saying theyre out to profit on the commissions of arranging sales and on trading bonds in secondary markets, where government debt is yielding more than 12%.
Another option is to devalue the curre-ncy, something she also opposes. A weaker currency, she says, would hurt industry and jobs with an influx of imports, and it could stoke inflation and dampen consumer-buying power.
This refusal to make changes to the economic plan, even as it appears to unravel, is rattling many Argentines.
A nationwide poll by Management & Fit showed that Fernándezs positive image dropped to 30% in August from 38% in July against a high of up to 70% early this year, based on other polls.
Consumer confidence is dropping in line. It fell to 43% in August from a high of 59% in September 2011, the Torcuato Di Tella University found. Her image is now hovering closer to a low of 20% during a four-month farm revolt in 2008 that pushed down consumer confidence to a low of 27% at the end of that year, and cost her congressional seats in the 2009 mid-term congressional election, despite fielding her husband and predecessor, Nestor Kirchner, as a candidate.
Even so, the president doesnt appear fazed.
Cristina Fernández has a powerful political machine and the money, for the political clout to defend her initiatives and exert leadership, says Riordan Roett, who chairs the Western Hemisphere Program at Johns Hopkins University in Washington, DC.
What is more, her style as an authoritative, resolute and sharp woman who gets the job done sits well with her constituents and a wider public, even if people dont always agree with her measures or dont like her, says Marcela Lopez, a sociologist.
As long as things dont get out of control, she will be seen as strong and capable, she says.
Her support base, mostly the poor, is not about to switch allegiance either, guaranteeing her 45% of the votes, says MacDougall, the economist. No politician from the weak and fragmented opposition parties has demonstrated that they can guarantee a continuation of the social programmes helping the poor even as inflation batters their spending power. Nor can the cash-strapped governors switch either, several of whom have presidential ambitions.
There are bright spots too. The soybean harvest is expected to increase 34% in 201213 from the previous season, while prices remain high. This will bring in close to $16 billion in hard currency, with much going to build reserves, says Esteban Medrano Fernández, an economist at MacroVision Consulting in Buenos Aires. Brazil is expected to rebound from a 201011 slowdown, bolstering demand for cars made in Argentina, he says.
Another thing going for the president is that she has pulled off a turnaround before in 2010, albeit helped by a wave of sympathy after the sudden death of her husband that year. This and a strong economic recovery helped her clinch re-election, with 54% of the votes in October 2011.
CERTAINTIES OF POWER
So will this be enough for her to retain control of both houses in the October 2013 mid-term congressional election?
Not all are certain.
Can the government live for a little longer? Probably, says Juan Lorenzo Maldonado, an economist at Roubini Global Economics in New York. Over the long term, no.
He says the government failed to take advantage of the boom years to build a sustainable economy, instead relying on excessive public spending and monetary expansion. This brought inflation, an over-valued currency and high salaries that weigh down industry, while the government sustains itself with international food prices through exports.
It would be helpful to make changes now rather than to straightjacket the economy and wait for an explosion, he says.
For Rossi, who was deputy economy minister under Fernández from December 2007 to April 2008, times are harder now. He says she pulled off the 2010 recovery doing something she doesnt want to do this time: devalue the peso. A 25% devaluation of the peso against the dollar in 2009 corrected a competitiveness problem so that the president could extend her economic plan a few more years. The economy expanded 9.2% in 2010 and 8.9% in 2011, according to government data.
There are other hurdles. The increase in soy revenue next year wont ease the currency trading restrictions, as the government will focus on rebuilding central bank reserves as a main source of financing for the state, including for paying the national debt, Rossi says.
As importantly, the private sector is likely to reduce consumption after traditionally funnelling profits from good harvests to real estate, farm machinery and 4WDs to safeguard savings against inflation and currency devaluation. If the government doesnt make changes to sustain economic expansion, the consumption binge behind the 200311 economic good times could moderate as salary growth slows to the rate of inflation, he says.
Before there was a festival of consumption. Buy a car, buy a washing machine, buy a plasma TV, says Rossi. Now there is a sentiment of caution.