The Government panicked when the dollar peaked at ARS 195, and it took a small but noticeable turn toward orthodoxy in the last 3 weeks, as we have reported in previous editions. From a quality point of view, the high profile land squattings have ceased, it embraced the cause of the extended facilities fund program with the International Monetary Fund, and the treasury returned temporary advances to the Central Bank as a gesture of good will, although later on it will need to resort to the distribution of dividends from the same source to finance the December deficit.
From a quantitative point of view, there were a couple of adjustment signs. Minister Guzmán said it was not the time for IFE4 (social handout) and the social security adjustment formula sent to Congress has a major adjustment implicit in 2021. The Government saved around ARS 190 billion between January and September this year by not using the previous government’s formula. And by 2021, we estimate that inflation will exceed revenues and wages and therefore, there will be a further fiscal saving since the new formula avoids inflation as an adjustment factor.
The spirit of the social security adjustment is in the 3% cap established by the second mobility formula, since by definition the state will apply the lesser of the two formulas. In view of the weight of pension spending in primary spending, it is almost impossible to make a considerable adjustment without affecting this item. In the last 12 months, social security payments represented 41% of primary spending. And that number underestimates the problem because the original formula was lowered and Covid’s extraordinary expenses arose. Last year, the average was almost 45%. The formula also affects beneficiaries of social plans: it is more influential than that.
The formula chosen to adjust pensions is controversial. No relevant country adjusts by revenues collection any longer. Most of them adjust with a combination of wages and inflation. There are many arguments to criticize the new formula. It is literally impossible for the people to follow. Revenues are much more volatile than the rest of the economy. Some components of revenues such as the PAIS tax are especially volatile as they depend on the nominal exchange rate. There are some other faults in design. For example, an increase in the tax on credits and debit revenues might create more social security expenses than what it collects, potentially jeopardizing sustainability. The same can happen with other taxes that are relatively small, but which impact the formula.
This almost essential adjustment clashes with this Government´s DNA. Guzmán, Alberto Fernández, and the fear of a major currency crisis had put the tax on large fortunes in the background, but it only took a few days of “calm” in the FX market for the bill to resurface once again and tomorrow it will be presented with all the paraphernalia and an “anti-business” tint that is not in keeping with the 21st century. In addition to this, the letter sent by the ruling party senators to the IMF, which, although addressed to a domestic audience, adds more racket. The budget soap opera added its own noise. The classic “happiness spreadsheets” were sneaked in, this is a group of works that have no funding and probably will not be executed, but they bring joy to the benefitted provinces. The worst part is a set of new taxes on computers and insurance that not only increase the Argentine cost, but also take away the transparency of the whole process.
This constituted a turn to a very sui generis orthodoxy. The week ended with the blue dollar breaking away from the strongly intervened blue chip swap and with the CB losing reserves. Inflation sent a clear sign that the demand for money is low and devaluation expectations high. The CB reacted quickly by raising all rates (repos, Leliqs, time deposits), but in doses that will hardly calm the market since rates are clearly negative in real terms. In addition, there are no changes in the active rates for credit cards yet, so the roadmap remains unclear. The demand for money so far has not taken note.
Econviews Weekly 17th November 2020