The Fiscal And Monetary Space We Did Not Know How To Get

Bachelor of Economics (UBA). Economic Analyst of Libertad y Progreso.

VISIÓN LIBERAL – Following the Covid-19 crisis, the situation in which the countries of the region find themselves is quite alarming and the impact will depend on the fiscal and monetary margin of maneuver that each of the governments has. This margin will determine the policies that governments can carry out in economic matters to cushion the crisis. Obviously, it is not the first economic crisis. In more than a century there have been around 14 global recessions. The last one was the financial crisis of 2008. In the world there have always been economic crises, the issue is how prepared can a country become to face them.

Unfortunately, economic fundamentals have deteriorated throughout the Latin American region and most of these countries are currently in a much more vulnerable position, and therefore less prepared, than compared to the 2008 crisis.

One of the worst-performing countries is Argentina. In fiscal matters, to evaluate the fiscal space that our country possesses, for example, as the current government points out, to apply an expansive fiscal policy during the second semester via increased public investment, we can study four indicators: the fiscal balance, the fiscal pressure , external debt and interest payments.

If the fiscal deficit or the tax pressure is very high, the government of a country has less fiscal space to carry out an expansive fiscal policy that cushions the impact of the crisis. In other words, in countries whose fiscal coffers are impaired, there are fewer resources to apply fiscal stimulus packages. In Argentina, the fiscal deficit has worsened in recent years. In 2007 we had a primary surplus, which had decreased by 0.3 percentage points compared to 2006. While the tax pressure in 2007 increased by 1.7 percentage points compared to the previous year. In 2019 the fiscal deficit had been reduced from 4.5% to 1.9%. However, it remains at high levels, without a drop in public spending.

However, an expansive fiscal policy can also be financed in the short term by taking on debt. If we look at the accumulated external debt in% of the Gross National Income, we see that in our country in 2007 it has remained above 43%, in 2012 it increased to 26.2%, in 2015 to 30.3% and is currently at above 56%. In interest as a percentage of GDP, our country reached 2% in 2007, the same level as in 2005, after falling to 1.5% in 2004. Spending for interest payments on foreign debt in 2019 went from 3, 7% to 4.3% of GDP. So there is a worsening in this variable in both years.

In other words, we are in a worse situation compared to the last crises to access international credit markets to finance a potential increase in public spending. This assuming that an agreement is reached with the bondholders.

If we compare Argentina’s fiscal position with respect to the Latin American country that has the most fiscal space, which is Peru, we see that it lowered the fiscal pressure in the last five years from 14.7% in 2015 to 13% in 2019. What’s more, the balance of external public debt fell from 12.4% in 2015 to 9.8% in 2019. Furthermore, the fiscal deficit is only 1.6% in relation to its GDP, managing to reduce it from 3% at the end of 2017. Today Peru can apply a fiscal stimulus plan of 12% of its GDP because it has a fiscal margin to do so.

In monetary matters, the situation is sufficiently difficult to resort to an expansive monetary policy via credit expansion, liquidity injection or monetary issue in the coming months. For this we can observe three indicators that will allow us to understand that we do not have much margin to resort to these instruments: position of international reserves, inflation and internal credit to the private sector.

If we take international reserves as a percentage of external debt, it increased from 2006 to 2007 by 11 percentage points to 38%. From 2015 to 2018, international reserves in% of external debt increased from 14.5% to 23.6%. However, despite this meager increase, they are still far below when compared to the rest of the region: in Peru this ratio is 90.5%, in Brazil 67.2%, in Paraguay 49, 5% and in Colombia 35.5%. So, the government, in the midst of a crisis like the current one, should take care of its level of reserves and that implies, on the one hand, generating security in the markets and, on the other, not squandering them on exchange rate policies.

On the other hand, if we analyze inflation it has accelerated in recent years: it went from 12.3% in 2005 to 25.7% in 2007; then it accelerated to 38% in 2014, to finally rise from 47.6% in 2018 to 53.8% in 2019. This gives very little room for maneuver to apply an ex monetary passive policy and inject liquidity into the market in the midst of the crisis since that would corrode the value of the local currency.

With respect to internal credit to the private sector, this in% of GDP has deteriorated in the last decade in our country. It decreased from 24.9% in early 2000 to 15.3% in 2002 and 13.1% in 2007. Then, it increased from 13.7% to 16% in 2017; However, due to the confidence crisis that started in 2018, it contracted from 11% in 2018 to 9% in 2019. We are increasingly seeing a trend towards de-bankruptcy that today causes domestic credit to be so meager in in the midst of a crisis that needs liquidity.

If we compare the monetary position of Argentina, which is Ecuador, we see that the difference between the two countries is abysmal. In terms of domestic credit in% of GDP we see that Ecuador has increased this ratio from 18.1% in 2002, then to 21.8% in 2006, to 22.9% in 2007 and, finally, to 42.8% of 2019. While in Argentina, this ratio does not exceed 16%. In terms of inflation, Ecuador accumulates inflation in the last 10 years of 26.3%, while Argentina is 1620.3% in the same 10 years. Our country has much less margin in monetary matters than Ecuador.

Well, as we see, Argentina does not have much margin to apply an expansive monetary or fiscal policy. Beyond the fact that the evolution of the countries of the region has been negative, the truth is that our country is one of the countries that is least prepared for the crisis. This is for not having carried out the reforms years before the crisis, leaving him now facing this crisis in a situation of extreme vulnerability.