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August 29, 2014
Thursday, April 24, 2014

Red ink and red lines

Nobody pays much attention to Treasury Secretary Juan Carlos Pezoa (whom the late Néstor Kirchner consulted daily) but fiscal balance is an absolutely key indicator and perhaps the real test of the government’s new-found orthodoxy.
By Michael Soltys / Senior Editor / Economic Outlook
Ceiling set for wage increases but not the deficit

If what passes as Kirchnerism or “the model” was in reality a string of short-term and almost improvised policy decisions which stretched out over a “won decade” and more, the reverse unfortunately does not apply — long-range strategy will not bring rewards in the short term.

Indeed there is not even a guarantee of things moving in the right direction — the tight money policies in the wake of January’s devaluation have been accompanied by much deeper puddles of red ink than in the summer of 2013 (partly because of a more responsible fiscal attitude, paradoxically enough, because floating debts rolled over from last year are being paid now).

In theory finally biting the bullet and sacrificing consumer-led growth (or indeed any kind of growth) should be at least improving the fiscal picture, if nothing else — a combination of soy dollar inflow and utility rate subsidy cutbacks as from the next billing (aided by the distractions of the World Cup now only 50 days away) should relieve pressures on Central Bank reserves and the Treasury until the spring. But over seven billion dollars of inflow so far this year have only seen the reserves edge up from 27 to 27.8 billion dollars — last week less than five percent of export greenbacks could be converted into reserves because devaluation has inflated the fuel import bill and because of debt service (even ahead of the current drive to incur new debt). Experts fear that the subsidy cutbacks will have an equally minimal impact because most of the savings will go towards paying off a decade of arrears owed to the highly insolvent distribution companies — this time the citizen’s pain (in the form of upcoming utility bills) will not be the state’s gain.

Yet whether it was realized or not at the time, there is no turning back from devaluation — while examples of involuntary revaluation are not lacking (especially in the last few years), there is no known case of a country decreeing itself into prosperity with a fantastic (in every sense) exchange rate. Devaluation is a confession of living beyond means — consumer-led growth could be maintained by keeping real wages ahead of inflation (and the dollar behind) until the country’s competitiveness was hopelessly compromised but now the real basis is being exposed as a dollar previously held down below its true value.

The Cristina Fernández de Kirchner administration is frequently mocked for its abrupt conversion to orthodoxy this year under a supposedly Marxist economy minister (Axel Kicillof) while pretending the opposite. But it has yet to produce anything which seriously tackles the fiscal deficit and hence inflation — “Price Watch” programmes might be one imitation of an anti-inflation plan (and recessive policies a far more brutally effective one) and just as the fallout from devaluation is starting to ebb, utility rates are set to rise sharply.

The “Price Watch” programme is proving to be a strange case of drastic state intervention bringing to the attention of a reluctant big business the virtues of the most basic laws of the market such as supply and demand — by offering involuntary bargains, the producers of frozen brands expand their market share. This scheme definitely favours the big retailers because only they have the economies of scale to hold down the prices of one brand while edging up others. Yet the benefits for participants in terms of undercutting competitors and expanding market share are very much in the here and now — in a very short term rapidly mounting costs threaten to eat up the minimal profit margins permitted by Kicillof’s economic team with the losses snowballing as the year goes on.

Instead of the deficit or inflation, a Peronist and populist government has chosen to make the wage front the main battleground — capping the collective bargaining wage increase at under 30 percent when there was already double-digit inflation in the first quarter and when the the pay rises negotiated for 2013 lasted until around November in most cases.

Yet even here the orthodoxy could be more apparent than real, despite an undeniable fall in real wages. That “red line” of a 30 percent ceiling turns into a paler shade of pink with the glut of “one-off” lump sums thrown in — everybody involved is happy in some way (the workers for the bonus, their employers for being spared more contributions and the government for less pressure to raise a low income tax floor) but the quality of employment is indisputably lowered. The illusion is that inflation will somehow be tricked into moderation by the fake 30 percent guideline but it does not quite work that way. Yet government acquiescence in pay increases outside the basic wage (which the Supreme Court has ruled unconstitutional in three separate rulings) also contradicts the drive to formalize employment launched by CFK 10 days ago just after the April 10 general strike (a subliminal reminder to its participants that they should not take their job security for granted?).

What these two contradictory moves have in common is apprehension as to trouble ahead. Lump-sum bonuses may not be as extreme as the luncheon vouchers for supermarket consumption only spawned by the 2001-2 economic meltdown amid its “funny money” of provincial bonds but they move in the same direction of trying to dodge admission that previous wage levels are no longer sustainable. And the drive to formalize unregistered labour and flush the underground economy out into the open might seem to make job creation an even more uphill prospect but CFK had some success in commandeering continued full employment amid all the woes of the 2008-9 global financial crisis.

Yet implicit in the drive to register jobs is the fear that they will need all the protection they can find.

While this column was being written, the Lower House was finalizing one of the biggest moves towards orthodoxy this year — the compensation of Spain’s Repsol for the 2012 expropriation of its YPF majority share package. Amid all the debate over whether five billion dollars is the right price and if that is in fact the sum which will finally be paid, perhaps the shrewdest remark so far (without including yesterday’s debate) came from a Kirchnerite for once, the Chubut senator Marcelo Guinle, who said it was a mistake to confuse price and value — regardless of whether the five-billion price tag is too much or too little, the value of Vaca Muerta shale is infinitely greater.

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