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Political uncertainty accelerates the need for a tune-up to the plan
Clarin
July 03, 2008

There is evidence that the government's economic plan needs a tune-up.

And the conflict with the farm sector wasn't something that pushed back the time for making decisions.

Argentina is facing a rise in interest rates that, among other ways, is expressed in the weakness of its bonds.

One bond (Boden 15) would offer close to 9% in yields last October, now it promises 14% per year in dollars, and yet, investors have reservations over buying it.

The promise of profits is higher but it seems that lack of confidence is higher still.

In other words, the yield on this public bond is what puts a high "floor" on the cost of credit throughout the economy.

That the State pays this interest rate is a reflection of various factors among those that could be listed as such:

Apart from what has been seen in the past five years, there are doubts now about the future of the fiscal fortress at the Treasury.

Public spending continues growing 40% a year (measured in pesos it has doubled in just two years) while the increase in revenues, now more tied to farm export taxes, raises doubts.

While soy hit US$580 (breaking records) and with an export tax of 48%, as it currently does, should bring a lot of money to the State, the uncertainty about where it will fall in the public accounts after paying subsidies and compensations opens a waiting period.

The dispute between the government and the farm sector over how to divide additional yields that grains will bring due to strong international price hikes puts an issue, until now absent, on the table: the payment of public debt.

On March 11, when then-Minister Lousteau launched sliding-scale export taxes, many thought the goal was to pull together funds that without arriving at an agreement with the Paris Club Argentina could use to deal with its financial obligations.

This year it will have to pull together close to US$2 billion. And next year another US$5 bilion, difficult figures if international markets remain closed, or if the cost of paying is very high.

Returning to the 14% per year in dollars that Argentine bonds pay, today Brazilian bonds are offering a 6% yield, Uruguayan ones 6%, and in Peru more than 6%.

In economic terms, many things can be done, less avoiding the paying of some cost. And Argentina has an ever lengthening list.

Until now there was the possibility that the economic situation is changing and that in July and August there would be record exports, dollar inflows and revenues. But that possibility also existed for May and June and it vanished.

The weight of the political situation, apart from the last four years when she was lady and queen, is strongly hitting the economy.

Although in June $1.5 billion returned to the financial system, the amount didn't overcome the 2 billion that left from bank accounts in May.

It's also a sign of improvement that the Central Bank practically didn't have to sell dollars over the last ten days. But it still hasn't gone back to buying them due to the face that, like never before, the government made it clear that it hadn't foreseen allowing the dollar to rise at a moment of financial turmoil.

A rise in this currency would have harmed expectations and worsened inflation.

At this height, still within the government, although in whispers, they recognize that the disparites of prices is a main factor contributing to the cool down of economic activity.

Inflation is cutting into purchasing power of the people's wallets and, in the agitated context of the last three months, has had more impact than the rise in interest rates.

It's a difficult sensation to measure, as the absence of dollar purchasing by the Central Bank also avoided an upset for the peso in the markets.

But, in the end, the slowdown in the economy is responding to the lack of a horizon to which policy is pointing, as it's already clear that a good harvest is not sufficient for growth.

In two years, the main export producers in Argentina have more than doubled their prices.

Much is said that the country was facing a huge opportunity, one that would be difficult and painful to lose out on, but the politician seems to be right in a way that the economy cannot comprehend.