Brazil & Southern Cone - March 2009 (ISSN 1741-4431)

The fiscal position deteriorated in January, with the surplus down 40% year-on-year. One of the few constants in economic policymaking under recent governments (led by Néstor Kirchner and his wife and successor, President Cristina Fernández) has been solid, and often rising, fiscal surpluses.

In January 2009, the fiscal surplus was US$580m, about 40% down on January 2008. In 2008, the country ran a fiscal surplus of 3.2% of GDP. This was the sixth consecutive year of an operating fiscal surplus (i.e. before debt payments). Even after debt payments, the surplus was still a respectable 1.7% of GDP.
Both sides of the government's balance sheet are deteriorating. Spending is rising, as the government jacks up subsidies for gas and electricity charges and tariffs.

On the income side, revenues are no longer rising as the economy starts to slow down. In September and October 2008, revenues were still rising at a 40% annual clip, but in January the annual increase was only 20%. Indeed, government revenues would have contracted in January but for the effect of its recent nationalisation of the country's private pension funds. Members' payments into these funds are now classed as social security payments and government revenues.

The Fernández administration is under pressure. The government already lifted electricity, water and gas prices to appease the mostly foreign controlled companies which had invested heavily in these industries when they were first privatised only to see anticipated profits wither as successive governments capped price increases: the companies retaliated by slashing investment, leading to severe shortages. 

Another sign of the government's lack of room for manoeuvre is that it has been organising new deals to roll over maturing debts. The government has enough cash to meet scheduled interest payments in 2009, but does not want to take the risk of making capital repayments.

A third sign of fiscal pressure is the government's change of tone with the International Monetary Fund (IMF). On 26 February, the IMF announced that it would undertake an annual review of the Argentine economy “in the next few months". The Fund can only do this at the invitation of the government. Kirchner and Fernández had both previously opposed any dealings with the IMF. A new agreement with the IMF would reopen Argentina's path to fresh multilateral credit from the World Bank and the Paris Club. Former president Kirchner signalled how significant this step was by claiming that the country would neither ask for an IMF loan nor take its advice until the Fund changed its economic recommendations.

This looks like a fig leaf. The IMF is currently widely touting its support for additional government spending and the acceptability of fiscal deficits in order to stave off global depression. For the past 25 years, the IMF has preached the benefits of balanced budgets and privatisation. In Argentina, it is roundly blamed for the catastrophic economic crisis of 2001, when convertibility (i.e. the fixed exchange rate system) collapsed, leading to default and economic crisis. In 2006 the Kirchner government paid off all IMF loans and ended its annual reviews of the economy. Argentina was copying Venezuela's lead in both instances. Venezuela paid off the IMF back in 2004.

• Trade: In January, exports fell 36% year-on-year at US$3.7bn, while imports were down 38% at US$2.76bn. In volume terms, exports were down 25% while in prices terms they fell 14%. Imports were down very sharply in volume terms, as prices were only 1% lower.