FIEL Chief Economists: Argentina's Economic Outlook

Speakers:

• Daniel Artana, Chief Economist, FIEL (View presentation: Fiscal and Macroeconomic Outlook)
• Juan Luis Bour, Chief Economist, FIEL (View presentation: GDP, Productivity, and Inflation)
• Santiago Urbiztondo, Chief Economis, FIEL (View presentation: Subsidies to Public Utilities)

Summary

On April 7, three chief economists from Fundación de Investigaciones Económicas Latinoamericanas (FIEL), a leading think tank based in Buenos Aires, joined the Americas Society for the tenth consecutive year to discuss the most recent economic and financial developments in Argentina. Panelists discussed the current state of the Argentine economy, focusing on inflation, government spending, subsidies, and challenges in fiscal policy. Panelists also examined economic prospects for the economy in the context of this 2011 electoral year.

The Real Economy in 2011: Growth and Inflation

According to Juan Luis Bour, current economic indicators in Argentina point to a strong GDP recovery after a short recession in 2009. Still, he noted, although the country has experienced a rapid economic recovery with 9.6 percent growth in 2010, job creation lags; during the last quarter of 2010 employment grew only 1.2 percent. Moreover, Bour pointed out that public employment grows at a faster pace than private, and labor costs are increasing 15 percent per year. He also highlighted a strong decline in productivity, with a gap relative to the United States currently higher than it was 15 years ago in Argentina.

Bour added that inflation continues to be problematic, given that numbers reported by Instituto Nacional de Estadística y Censos (INDEC, the government’s statistics institute) are unreliable. As measured by FIEL, inflation reached its peak in October 2010 at a rate of 24 percent. the last quarter of 2010 inflation has decreased to 20 to 21 percent thanks a perception of nominal rate stability, to anchors (exchange rate, tariffs of public utilities, and interest rates), and short terms expectations. However, Bour projects that inflation will increase by the end of the year largely due to expansionary policy in the context of a lack of anti-inflation policies, import restrictions, and the uncertainty of what the next administration will do.

Subsidies to Public Utilities

In general, economic policies in Argentina since 2003 have meant a return to government intervention in the economy. Santiago Urbiztondo stated that the policy for public utilities and infrastructure services has been characterized by price controls, discretionary adjustment of tariffs and subsidies, price discrimination, and termination of concessions. Urbiztondo discussed how, from 2004 to now, subsidies to infrastructure firms have reached a peak magnitude, particularly in the energy and transportation sectors. Specifically, the energy sector gets 2 percent of GDP in direct subsidies, half of which corresponds to wholesale electricity. The last decade has shown an abusive use of subsidies in infrastructure services that fall short in terms of reaching appropriate audiences and that are overly geographically centralized in Buenos Aires. As a result, the infrastructure sector suffered, price controls to end users caused investment incentives to deteriorate, and—in spite of growing subsidies from the Treasury Department and the expansion in public investment—the capital stock deteriorated. Overall the country has experienced a severe decline in the volume of oil and natural gas reserves, as well as of its capacity to generate electricity. Urbiztondo also explained that unless major price adjustments are allowed both for suppliers and consumers, the magnitude of the subsidies will continue on an increasing and unsustainable path with higher costs. He suggested that Argentina should gradually increase its prices in energy and transportation and reduce subsidies.

The Fiscal Situation

In real terms, and as adjusted by FIEL’s inflation estimate, Argentina’s revenues grew considerably from 2003 to 2010 thanks to increasing export prices and to a higher tax rate. The improvement in the terms of trade was a key factor to explain the high growth rates observed. According to Daniel Artana, between 2003 and 2010 the Argentine government increased public expenditure excessively. Government expenditures increased, about 50 percent of the increase is explained by higher social expenditure and about 40 percent by higher public investment in infrastructure and assistance for the development of target economic sectors. Artana explained that the fiscal position did not deteriorate much. However, the solid fiscal position and fiscal surplus no longer exist. He pointed out the need to gradually improve the fiscal position and tighten policies.

Conclusion

Looking forward, a credible stabilization plan to reduce inflation partnered with gradual fiscal tightening will be necessary. All panelists agreed that Argentina must demonstrate its ability to manage public expenditures in a reasonable way. In addition, they maintained that, although the external conditions are likely to continue benefiting Argentina in the future, there is less room to maneuver. The upcoming administration will need to take further action.