ECON/POL/GralInt-Argentina's economy:Creeping toward normality

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Argentina's economy


Creeping toward normality


Apr 1st 2014, by H.C. | BUENOS AIRES






ACQUAINTANCES of President Cristina Fernández de Kirchner say obstinacy is her biggest flaw. Since the start of the year Argentina’s precarious economic situation has forced Ms Fernández to show some flexibility. In January came monetary adjustments: devaluation and interest-rate hikes. In February there was a new, more credible consumer-price index to replace the old one, sullied by seven years of government manipulation; a revised GDP estimate for 2013, of 3% growth, has since followed. An agreement with Repsol for the seizure of YPF, the state oil firm, was also notched up.

Now the economy ministry has begun to send signals that it is willing to make important fiscal changes as well. On March 27th Axel Kicillof and Julio de Vido, Argentina’s ministers of economy and planning respectively, announced that the government would slash natural-gas and water subsidies by a total of 20%.


Most utility prices have been virtually frozen for the past decade. The initial aim of the subsidies—boosting recovery following Argentina’s 2001 financial collapse—was achieved long ago. According to Econométrica, a consultancy, energy subsidies have since grown to represent 4% of Argentina’s GDP, which, in turn, has pushed the 2013 fiscal deficit to 3.8% of GDP, or about $15 billion.

These particular reductions will not have a big financial impact: according to the economy ministry, the most this adjustment will save is 13 billion pesos ($1.6 billion, at the official exchange rate), and the cash will be redirected elsewhere. But cutting subsidies has a powerful symbolic effect. “It is an important sign that the government is willing to continue forward with the proper economic adjustments,” says Mariano Lamothe of Abeceb.com, a consultancy.

All of which will help with another big item on the to-do list: regaining proper access to financial markets. On March 30th a pro-government paper, Página 12, reported that Goldman Sachs had offered to lend Argentina $1 billion for two years. The government says it has received financing proposals from a number of banks.

The problem for Argentina is that rolling back subsidies will have a nasty effect on inflation, which has already been given a kick by the devaluation in January and is widely expected to top 30% this year, up from around 28% in 2013. Consumers will see their gas bills increase by an average of 230% and their water costs rise by 165%.

Rising living costs will in turn make it harder for the government to rein in salary rises in negotiations with union leaders: two days after the subsidy cuts were announced, the Buenos Aires provincial government agreed an average 31% wage increase for striking teachers, having made an initial offer of 25.5% in three instalments. That threatens further to fuel inflation. Ms Fernández is gradually changing tack. But economic orthodoxy will require her to make even tougher decisions in the future.





Correction: This article initially said the Buenos Aires provincial government offered teachers a 22% wage rise, instead of 25.5% in three instalments.




Source: www.economist.com