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Drought threatens Argentina's tax revenue

A drought-affected wheat field. Argentina's government will feel the pinch in lost tax revenues from a drought that has battered its crops.


It is not just farmers in Argentina who are watching the skies, hoping the rains that have finally started to fall will continue. A bitter drought that has ravaged corn and battered soy crops in one of the world's top food exporters could mean more than $1.3-billion (U.S.) in lost tax revenue for the hard-up government.

After the party of 2011, an election year in which government spending galloped 33 per cent and Cristina Fernandez won a second presidential term by a landslide, the axe is out as the government seeks to slash a ballooning subsidies bill. Argentina last year racked up a 31-billion-peso ($7.15-billion) budget deficit after debt repayments, according to official figures.

Argentina's debt and deficit levels are a fraction of what they were a decade ago when the country plunged to default on nearly $100-billion, and the country posted a primary surplus, before debt repayments, of 4.92 billion pesos in 2011. But that was 80-per-cent lower than in 2010 and came despite a year of blistering growth and buoyant prices for Argentina's farm exports.

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Spending on energy and transport subsidies rose 50 per cent last year to 75 billion pesos, though subsidies for social programs, including a well-respected child benefit policy, grew by just 7 per cent, according to a new report by the Argentine Budget and Public Finance Association, which scrutinizes state finances. That is well below inflation, estimated by private analysts in the absence of credible official figures to have been nearly 23 per cent last year.

Ms. Fernandez prefers to describe the new phase of belt-tightening as "fine tuning" of an economic model she credits with delivering economic growth of 9.2 per cent in 2011 and an unemployment rate of 6.7 per cent in the fourth quarter last year.

The government's challenge is how to keep alive a consumer boom that has been the motor of economic growth while shifting the subsidies bill to consumers. Wage negotiations with unions kick off in February and the government hopes to keep salary rises to around 18 per cent this year. At the same time, it is seeking to curb imports in a bid to keep the 2012 trade surplus in line with last year's $10-billion.

"Cristina's popularity is about 60 per cent in the latest polls. Negotiating lower wage settlements, cutting subsidies, increasing tariffs is a very tough road and it will lead to more conflict and more difficulties for the government," said Lucio Castro of independent think tank CIPPEC.

So the drought is bad news fiscally. The 2010-11 harvest earned some $9-billion last year for state coffers through export tariffs. But Gustavo Lopez of Agritrend, a consultancy, has pencilled in a fall to $7.7-billion for this season. Argentina has to find at least as much as $9-billion for debt repayments in 2012.

Despite rains in recent days, it is too late for some corn, though losses in soy, Argentina's top cash crop, may be lower than feared. Soy production could reach 48 million tonnes, down from the 52 million originally estimated for this year, Mr. Lopez added, and Argentina has about 4 million tonnes in stocks from last year.

That would be good news for the government. Because the stark truth, according to Joshua Rosner, managing director of independent research consultancy Graham Fisher & Co., is that "even if volumes remain constant, soy prices will have to rise by about $100 per ton (for export tariff revenue) just to stay flat compared with last year." March soy prices in Chicago are trading near $446.

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But at least Argentina's days of crippling debts are behind it. Foreign debt was 14.1 per cent of gross domestic product last year, down from 166 per cent in 2002, according to Amado Boudou, the vice-president.

Copyright The Financial Times Ltd. All rights reserved.

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