Buenos Aires Times

opinion and analysis ECONOMIC QUESTIONS

What’s another year?

The US$64-million question here is more like a 64-billion-peso question – will savings on that scale indeed materialise and if so, will a lower fiscal deficit or Buenos Aires province Governor María Eugenia Vidal be the main beneficiary?

Sunday 24 December, 2017
President Mauricio Macri.
President Mauricio Macri. Foto:Pablo Temes - Cedoc.

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Christmas is coming and the goose is getting fat and Dr. Hale is slipping into festive mode up in New England. He writes:

“Never say never but this might just be my last email to you in 2017. Christmas is rapidly approaching and who knows how many relatives known and unknown will be descending on me or how many hours lie ahead of clearing snow off the front drive – no wonder they’ve had to change the phrase from ‘global warming’ to ‘climate change’ with some of the recent winters up here.

“So just in case I end up totally disconnecting from Argentina until the New Year, I’ll ask you everything now. And by everything I mean both the general (some thoughts on both 2017 as a whole and the year lying ahead) and the particular – the pension reform in the last week. I won’t load these questions any further (as I so often do) except to say that I recently saw Argentina listed among the world’s half-dozen countries with the worst inflation, topped only by Venezuela (already four-digit and spiralling into hyperinflation), South Sudan, Congo, Libya and Egypt (Zimbabwe has been out of this league for almost a decade since dollarising in 2008). And Argentina aspires both to chair the G20 and enter the OECD (Organisation for Economic Co-operation and Development) while keeping this kind of company – the challenges posed to both ‘permanent reform’ and ‘gradualism’ by inflation on this scale cannot be underestimated.”

My reply:

“You’re a week early in asking me to close the book on 2017. December can be a very tricky month – and not just the unforgettable meltdown of 2001 but the looting in 2013 was very nasty, not to mention the Indo-American Park in 2010 (which gave birth to the Security Ministry). I’ll never forget in my Herald days leaving a New Year editorial for 2002 beginning: ‘The only thing we know for certain as the year starts is that Adolfo Rodríguez Saá is president for now…’ only to have to catch the first flight back from the coast because a presidency commencing on Christmas Eve failed to complete 2001. Furthermore, Congress is still at work with the tax bill (which looks like ending up broadly neutral) following on the heels of pension reform scheduled for approval next week.

“Furthermore, 2017 has been a pretty mixed year hard to pigeonhole. Obviously any year can only have one valid growth figure, whether positive or negative, but 2017 had a bit of both.

A recessive 2016 with -2.3 percent negative growth persisted deep into 2017 – curiously enough, the first positive numbers came with the first data of the revamped INDEC statistics bureau in midyear (this might look suspicious but I at least believe it to be a coincidence).

Electoral feelgood was then followed by the ongoing reform drive of uncertain depth and impact. I could also throw in minor curiosities such as the Global 100-year bond but, I insist, any last word on 2017 risks being premature.

“Forecasting any year in Argentina always has its hazards (as the Adolfo Rodríguez Saá example cited above should demonstrate) and 2018 is no exception. But not because Argentina is especially unstable or volatile at the moment. All too often it’s the old story of ‘the best-laid plans of mice and men…’ and then along come the black swans but not this time – in this case the ‘best-laid plans’ are as clear as mud. While the Central Bank has set a 10-12 percent target for 2018 inflation, its interest rates continue in a 28-29 percent range while Treasury Minister Nicolás Dujovne has defined a wage cap increase of 16.6 percent (which was 15.7 percent in the 2018 draft budget) for the next round of collective bargaining. If inflation is your big anxiety, Dr Hale, where does all this leave targeting? Central Bank inflation targets are frequently criticised as unrealistically ambitious, which of course they are, but if they were raised a few points, inflation would only be that much higher – such is the nature of pricing in Argentina.

At the same time it should be understood that the fight against inflation becomes progressively more difficult – bringing it down to 10-12 percent from around double that range now will be harder than the progress so far and reducing it to single digits (the Mauricio Macri administration’s ultimate objective) harder still, especially with plenty of relative price correction (i.e. household utility bills and transport) still in the pipeline.

“As for pensions (assuming your interest is professional rather than the street show), PRO deputy Pablo Tonelli was roundly criticised for bluntly saying that pensioners stand to ‘lose money but not purchasing-power’ yet that is pretty much how it is panning out. Quite apart from the transitional gap, the mechanism so traumatically replaced at the start of this week was more generous in seven of the nine years it was applied, including this one when it upped pensions by 28 percent as against 23-24 percent which would have resulted from the new quarterly indexlinking– perhaps this fiscally negative generosity was even justified to compensate all pensions above the minimum being frozen in the preceding half-decade. As for the new system, the guarantee of staying ahead of inflation is not absolute because the 30 percent wage increase component could lag and because runaway prices will always outstrip the updating.

“But the chief flaw of the old formula was that it was pro-cyclical and hence volatile. Clearly the system is not sustainable – Argentina’s 6.2 million private-sector employees (around half the workforce with the public sector and the self-employed roughly a quarter each) are actually outnumbered by the 6.8 million retirement benefits (out of a total of over eight million pensions), even if Argentina has better demographics than most developed countries. And robots lurk in the near future.

“The US$64-million question here is more like a 64-billion-peso question – will savings on that scale indeed materialise and if so, will a lower fiscal deficit or Buenos Aires province Governor María Eugenia Vidal be the main beneficiary? Needless to say, it would be impossible to make such savings and up pensions, as claimed by some government voices – Tonelli was honest here.

“Finally, it only remains for me to wish you a Merry Christmas, Dr Hale, and also (if not in touch next week) a Happy New Year with these season’s greetings also extended to anybody sharing our correspondence (although I cannot for the life of me imagine how).”


(*) Michael Soltys, who first entered the Buenos Aires Herald in 1983, held various editorial posts at the newspaper from 1990 and was the lead writer of the publication’s editorials from 1987 until 2017.


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