After the October 2019 elections, in which Mauricio Macri ended his presidency with a
gruelling defeat, Alberto Fernández was sworn in as president on December 10th.
And by his side, was Cristina Fernández de Kirchner as Vice President.
After four years where it looked like change could be imminent, Argentina went back to
square one.
The new President now faces two challenges that seem more complicated to achieve than
winning the Paris Dakar rally with a Model T Ford:
Number one on the list is to try to get the country out of the tough, tough crisis it’s
going through.
And second, to consolidate his power under the shadow of his Vice President.
Because, a new political war seems to be brooding at the core of Kirchnerism.
[Text: “Because of Argentina’s madness, because of our madness we sometimes distance
ourselves and then come together again knowing there were no vital differences between us."]
And this brings up all sorts of questions.
What were Fernández’s first measures after he came to power?
What steps does the new president plan on taking to get Argentina out of the ditch?
Will his plan help?
What lies ahead for the gaucho country?
Listen up.
(A TAINTED LEGACY)
Yes, I know this is something politicians often promise but you can't build a house
by starting with the roof.
[Text: “Many people asked me to declare on the state in which I had found the country
and I didn’t.
I think it is more constructive to do it today.”]
If we want to analyze the task that Fernández has ahead, first we need to understand the
country he was handed.
And the truth is that the situation that the new president has found himself in isn’t
exactly a relaxing tropical cruise.
Not at all.
Alberto Fernández got handed one of the worst scenarios that a politician can imagine.
We’ve already talked about it in lots of videos, which I’ll leave links for in the
description.
But here are three pieces of information to summarize this apparent race towards the abyss:
Firstly, in 2019 inflation closed at more than 50%, this number is equivalent to more
than 10 years of inflation in a normal country.
Second, the Argentine economy is in recession, one of the greatest economic recessions in
the world, where some sectors have dropped by a whopping 10%.
Third, the US dollar, which had an exchange rate of 42 pesos at the start of 2019, ended
the year at almost 80 pesos in the free market.
As you can see, a major, total and absolute disaster.
Because the so-called gradualism of previous leader Macri was so gradual that some are
still looking for it.
The only thing he achieved was a colossal debt pyramid.
Because in the end gradualism basically consisted of the following:
Not cutting public spending and just making small adjustments in order to attract more
investments that would make the economy grow.
With this strategy, the burden of public debt on the GDP would be reduced over the years,
but the debt amount itself would not be reduced.
At the same time, any public deficits would be bankrolled with more and more debt.
And that’s exactly what happened:
Public spending and debt went down in GDP terms while the public sector continued to
grow.
As you can see in this graph, year after year the public deficit just kept increasing.
(CHART)
The difference between income and expenses was basically paid with debt, which created
a huge debt balloon that finally burst, forcing Argentina to once again go running to the
International Monetary Fund.
Basically, in the end, as many economic and political analysts have argued, the great
difference between Kirchnerism and Macrism was more a matter of form than substance,
because their policies were practically the same.
It seems that the party doesn’t make much difference, all Argentine politicians seem
to share the same motto:
“More taxes, more spending, more controls”.
Over and over again.
And given the results...
Well the truth is that knowing exactly what they’re looking for isn’t really clear.
(AUDIO: “If we take the resources destined to what is called social spending we see that
from 1983, when democracy returned, until 2018, the resources destined for so-called
social expenditure increased by 10 percent of the GDP and poverty kept growing or remained
at very high levels.”
Roberto Cachanosky)
(CHART)
You saw it with Macri, social spending reached record numbers during the same period that
poverty levels shot up.
(December 2019: According to the Social Debt Observatory of the Catholic University of
Argentina, poverty in Argentina reached 40.8% and is the highest of the decade.
These indices imply that 16 million Argentines live in poverty and 3.6 million in extreme
poverty.
INFOBAE)
To give you a better idea, this country currently has 8 million workers who pay taxes to support
20 million people who directly or indirectly receive a check from the State, whether at
the national, provincial or municipal level.
Obviously, this isn’t feasible.
But... let's look at it another way: Who in their right mind would invest a single dollar
in a country with such conditions?
That, my friends, is the question that the new government is going to have to face.
But, hold on, do you think I'm exaggerating?
Well... check the analysis that the Taxpayers Association prepared: in Argentina, more than
half of the price of a car consists of taxes.
Specifically, on average, 54.8% of the price of a new car consists of taxes.
More than 50%.
(CHART)
And this is just for cars that are half manufactured and sold within Argentina, because if we talk
about imported and high-end cars, the taxes would rise even more… as well as the price.
This is why, in Argentina, a high-end car can cost up to three times more than it would
in the United States and more than twice what it costs in a European Union country – countries
where car sales also have significant taxes.
And that helps to explain why buying a late model car in Argentina, like the ones found
in any country in the developed world, isn’t an option for everyone.
But that’s not all.
We can also illustrate the point by looking at a typical shopping cart.
According to the Argentine Institute of Fiscal Analysis, more than 40, 40% of the price of
the usual food and non-alcoholic beverages that people buy consists of taxes.
At this point the burning questions are:
Faced with such a scenario, what measures has Fernández taken?
What strategy has he chosen?
Listen up.
[Text: “I ask you to remember the past so we don’t repeat it.
Because this is a different time.”]
(THE NEW GOVERNMENT’S PATH)
Given this situation; with Argentina drowning in the third highest inflation rate in the
world, with an economy that’s in free fall and a huge national debt...
What measures has Fernandez taken?
Has he decided to end the deficit once and for all?
Has he decided to approve new incentives so foreign companies will invest in the country?
Well, not exactly.
The new government has approved a very harsh adjustment, perhaps more severe than expected.
The problem is that this adjustment, once again, doesn’t include the public sector.
While the private sector is going to take a considerable blow...
No one will touch the public sector.
No cuts to administrative expenses, or political expenses, nor bureaucratic expenses.
So, what does this adjustment really consist of?
Well... let’s take a look at the main measures:
[Text: “Those of us who embrace the Peronist cause have come to be the voice of those who
have no voice.
To give rights to those who have none.”]
First of all, they’re raising taxes again.
Rates are raised, withholding taxes on agricultural exports are increased - this is a kind of
export tax for a very important sector in Argentina – and, most importantly, the non-taxable
amounts on personal taxes won’t be updated.
The latter, considering that the country has an inflation rate of more than 50%, is something
that amounts to a huge fiscal bite for taxpayers with a lower income.
But... let me explain this better.
You see, in every country, taxes, especially personal taxes, tend to have exemptions, so
if you earn less than a certain amount you don’t have to pay.
Well, in Argentina not updating this “minimum” considering the increases in inflation will
come as a tough blow to many people.
Imagine for example – and this is an example, that a freelancer, a professional, has an
exemption threshold of one million pesos, so everything he or she earns above that amount
is taxed.
As inflation sits at more than 50%, imagine that this professional’s income last year
increased by 30%, to 1,300,000 pesos.
This professional is actually poorer than the previous year, because his or her income
has increased less than the rate of inflation, so they won’t be able to buy as much with
the money.
However, on top of that taxes need to be paid on the 300 thousand pesos, as they exceed
the exemption threshold ... which means the take home pay is even lower and buying power
is weakened even more.
Well, that’s exactly what is going to happen in Argentina: higher tax rates and a non-updated
minimum tax threshold mean more fiscal pressure.
But it doesn't end there.
Another group that is really going to feel the adjustment is retirees.
Given the high inflation rates, the Macri government established a kind of semi-annual
adjustment, so that pensioners wouldn’t lose so much purchasing power.
Well, the new president has decided to freeze that update for 180 days for all retirees
who earn more than $250 per month.
And, of course, given the enormous inflation that exists in the country, this will mean
a very significant loss in purchasing power.
In other words, a harsh blow to the wallets of retirees.
And... that’s not the end of it.
Personal property tax, which is something like a wealth tax, has also been raised.
And, hold on because in Argentina the law considers everyone who has assets worth more
than $30,000 to be rich.
Thirty thousand dollars!
That’s crazy.
But perhaps, out of all the recent measures, the most controversial one is the new policy
regarding the dollar.
Fernández’s government has imposed a 30% surcharge for all people who want to save
in dollars, or who simply want to buy products or services abroad.
This is known as the solidarity dollar.
That way, even though the official exchange rate is at around 60 pesos per dollar, if
you want to buy dollars to travel abroad or to import a camera, the exchange rate applied
to the transaction will be over 80 pesos per dollar.
You want to travel, invest or buy things abroad... then you have to pay for the privilege.
That’s just the way things are.
It’s quite terrible.
As if this weren’t enough, the amount of dollars that you can officially buy is capped
at 200 dollars per person.
So, if you want more than that, you’ll have to exchange your money on the streets, in
the black market.
But... let's take a moment to think about all this.
Even though in principle companies aren’t affected, imagine a small Argentine professional
who exports products worth ten thousand dollars.
When this money enters the country, they will exchange it at the official exchange rate,
which is 600,000 pesos.
Now assume that that same professional wants to use that money to buy some equipment in,
say, Germany, which costs another 10,000 dollars.
Well, then he has a problem.
When he goes to exchange his money back to dollars, he’ll get the solidarity dollar
exchange rate, which is 30% more expensive, so his 600 thousand pesos will only get him
7,500 dollars.
And not only that, if he wants to go ahead with that transaction, his company will have
to go to the black market because he won’t be able to buy more than 200 dollars at the
bank.
So here’s the question, do you think this is the best way to attract investment and
grow businesses?
It really doesn't seem to bode well.
It’s true that with these adjustments, the government is sending a clear message to the
international markets that Argentina wants to pay, will pay its debts and therefore will
be able to renew its credits and even obtain more international financing.
But the problem is that if it doesn’t touch public spending and only punishes the private
economy even more, Argentina runs the risk of drowning completely.
This is not an easy situation, that’s clear.
But hey, maybe politicians could start the adjustment by setting an example, right?
Check out the calculation that Roberto Cachanosky developed based on the 2019 budgets.
Take a look.
[Monthly cost per senator]
Argentina: 188,000 euros per month Spain: 17,540 euros per month
Monthly cost per legislator
Argentina: 53,727 euros per month Spain: 21,700 euros per month
Calculated on 23/12/2019 on the 2019 budget.
2019 average exchange rate: $ 56.46 per euro.]
Anyway, that’s how things stand in Argentina.
Alberto Fernández’s government has begun his mandate with some harsh adjustments...
adjustments that follow the Argentinian tradition.
Could it be that Argentine politicians don’t know any better?
In VisualPolitik we’ll be keeping an eye on how events unfold.
So I really hope you enjoyed this video, please hit like if you did, and don’t forget to
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Don’t forget to check out our friends at the Reconsider Media Podcast - they provided
the vocals in this episode that were not mine.
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And as always, I’ll see you in the next video.