Within the framework of the traditional breakfast cycle for members of the Libertad y Progreso Foundation, made with the support of the Naumann Foundation and RELIAL, Economist Aldo Abram pointed out that the government’s number one priority should be to defend the peso. “The big question we ask ourselves is, how can we recover confidence?” Trust does not recover without monetary stability: if people do not trust the currency, they do not consume as much, they do not put their savings in the bank, they do not invest. People trust the economy when there is stability in the currency, it is not a sufficient condition but it is necessary,” explained Abram, who together with Agustín Etchebarne and Manuel Solanet headed the talk under the title “This will also happen”.
“Another key point of this new scenario is the value of the interest rate. The rate is high because there is a phenomenal capital flight. But you can not reduce the interest rate by emission as you did before, because we can have a currency exchange run, and then a bank run and there God help us. I hope the government does not listen to those who suggest that we must dedicate ourselves to lowering the rate, because that, as it was done in the past, was to finance the flight of capital. It’s absurd,” said Abram.
For the economist, although the Government managed to bridge the IMF through the first quarter, there are others that do not have the same option. “If I were governor or mayor I would be convincing the National Government to lower the deficit and do the homework because if the credit is not recovered, they will not have enough to finance the public work,” Abram said.
According to Abram, while the weather played a bad trick on the government with the drought, the situation worsened with the flight of capital. “Then the credit got smaller, you have an underfunded economy, people do not have confidence and there is going to be a tendency to consume less, and beyond that we all expect good harvests at the end of the year and the next, that is not enough to compensate for the lack of confidence in the economy in a world where financing is not as easy as before,” said Abram. “The government has to do strong things now to win the trust of the people, and to be able to get to the elections well, next year it will be more difficult if no action is taken,” concluded the executive director of Libertad y Progreso.
A less friendly world
In turn, Agustín Etchebarne described a scenario that includes an overheated economy in the USA, with points in common with the crash of the 30 and 2000, and with fewer possibilities of financing for the country.
“Look at the dilemma that the Fed has. The rate increases but inflation increases, the real interest rate remains negative, with an overheated economy. The dilemma is the negative real rate. It is doing monetary and fiscal stimulus, so from the orthodoxy, it is said that it is generating a bubble. To try to avoid it, they are withdrawing bonds from the market, which puts more pressure on the international financing market. The 10-year rate is also rising. The S&P had its correction but returned to the maxima. Possibly it is the S&P and not the real estate market today the origin of the bubble,” explained Etchebarne.
“The problem today is the price of the stock market, which could be the third time that the stock market anticipates the occurrence of a crisis, it happened in 30 and in 2000. If we see the rest of the world, we see that Japan is a little better, the United Kingdom lowered its expectations, the Eurozone is ok with a growth commensurate with the level of spending and China is growing more than 6″ said Etchebarne.
In the future, within the international panorama, the economist sees short and long rates going up; the probability of a correction of the Fed’s rates due to the overvaluation of the markets and the 112 months of expansion of the North American economy; and the will of the world to help Argentina recover if it does its homework well, as was seen with the support of the IMF. “In the face of any upheaval in the world, the impact in Argentina will be great, as we said in March, Argentina is one of the weakest economies on the planet, so what happens outside hits more,” he said.
“On the other hand I see a much more interesting world for the next 10 years hand in hand with the advance of technology and robotics,” he concluded.
The heart of the matter, the deficit
Finally, Manuel Solanet explained that the government’s efforts to reduce the primary deficit, which are real, are liquefied by the growth of interest on the debt. “The Government has reduced the primary deficit, is it enough? No. The debt grows because we have a deficit that we cover with debt and the interest we have to pay for that debt grows, which neutralizes the efforts we are making to eliminate the deficit. the Public debt continues to rise,” said Solanet.
“Between the primary deficit and interest, the fiscal deficit, and the provinces, we have a deficit of 7 points of GDP. Argentina cannot live with that level because it sucks all the internal credit, which is little, and requires external credit to finance itself, which is debt that grows. At some point, a country like Argentina has the disadvantage of not getting more external credit. And that’s what happened to us as soon as an external problem appeared such as the increase in the US rate,” Solanet added.
“To those who say that we can’t lower our spending, we can show how we went from 25% to 44% from 2003. Of course, there are things that can’t be touched, but there are things that do, for example in bureaucracy, Provinces and municipalities have grown much more in public employment than the Nation, there you can ask for a reduction,” said the director of Public Policies of Libertad y Progreso. “Many people propose as a solution to raise taxes or lower evasion, but we already have a very high level of taxes, well above the levels of the region, at the level of the most developed countries, but with bad services,” Solanet said.
“We are facing a vicious circle: scarce investment, high tax pressure, inflation, high country risk, high labor cost and risk, a giant state, a comprehensive reform must be made moving from this circle to a virtuous one of trust, high investment, creation of companies, generation of private employment, fiscal balance, healthy currency, reduction of country risk and the level of taxes, making the labor reform, all this is key,” said Solanet.
Next, the economist showed how Libertad y Progreso proposes a reduction of 6 points of the deficit, in the following areas and proportions:
– Administrative rationalization of the National Government: 1.1%
– Provincial administrative rationalization: 1.9%
– Debugging of social plans: 1.0%
– Reduction of energy and transport subsidies: 1.1%
– Elimination of non-priority public works: 0.9%
Total Savings: 6.0% of GDP
“With this reduction in expenditure, the fiscal deficit would be eliminated and, therefore, it would no longer be necessary to place new net debt, it would only be necessary to take debt to pay the amortization of capital, in terms of percentage of GDP the proposed reduction is less than half of the increase in public spending in the period 2003-2015. The provincial savings, which were favored by the Tax Agreement of 2017, should be transferred to the Nation to complement its repayment flow these figures do not include the sale of buildings and other assets that would be vacant with administrative rationalization, it would be a one-time income,” Solanet said.
To see the complete proposal of reform that was presented by the directors of Libertad y Progreso, click here