Argentine fiscal deficit source of economic woes

BUENOS AIRES, Aug. 22 (Xinhua) — Argentina’s large fiscal deficit is “the main source of all the instability” affecting the country’s macroeconomic variables, according to economist Natalia Motyl.

“This fiscal deficit ended up causing distortions throughout the economy,” Motyl, an analyst at Argentina’s Freedom and Progress Foundation (Fundacion Libertad y Progreso), told Xinhua.

“Because it was not solved, through strong fiscal measures, it kept getting worse until it became a tendency impacting all the variables of microeconomic decision-making,” said Motyl.

For a long time, Argentina tried to finance this deficit by printing more money, which eroded the value of the national currency, she said.

Today, Argentines prefer to use their pesos to buy dollars in case the currency crashes, as it did last week while the two-part presidential elections are underway: the peso devalued more than 20 percent against the U.S. dollar in the market response to Argentina’s primary election results.

On Aug. 11, Argentine President Mauricio Macri’s Together for Change party received a little more than 30 percent of the vote, while the central-left opposition, the Justicialist party led by former cabinet chief Alberto Fernandez, garnered nearly 50 percent.

Argentina’s international country risk index also exceeded 1,900 basis points amid jitters from the financial community.

Worse still, tax hikes weakened Argentina’s productive structure, leading to an increase in raw materials exports but undermining value-added production, which raised the unemployment rate.

To finance the deficit, “our country absorbs domestic capital, which is small and has very high interest rates,” said Motyl.

But when Argentina turns to the international capital market, as it needs, the country stands in an extremely vulnerable position against any external shock, she said.

“It is an explosive model: if capital inflows are cut at any time, Argentina enters into a crisis, and that is what is happening now,” she added, referring to the election outcome and investor nervousness.

This week, Macri appointed a new finance minister to help steady Argentina’s troubled economy through the general elections on Oct. 27, though a certain amount of upheaval may be “inevitable” if there is a transition of power, said Motyl.

Will Argentina’s instability affect neighboring Brazil or other members of the South American trade bloc Mercosur, such as Paraguay and Uruguay?

“There could be a form of ‘contagion’, because Mercosur countries are very integrated and dependent on one another. We are not an isolated country,” Motyl said.

“That is why the International Monetary Fund (IMF) aides our country so much. They know that there is the risk of a domino effect. Right now Brazil is the country that faces the greatest risk, but Bolivia, Paraguay or Uruguay are also not safe,” she said.

Caught in a rapidly-growing monetary crisis, Argentina recently secured a loan of nearly 60 billion dollars from the IMF, its largest ever granted. The loan agreement also brought about unpopular austerity measures.