ARGENTINA: Public works package fans fiscal fears

Analysis

On December 15 President Cristina Fernandez de Kirchner announced a public works package totalling some 111 billion pesos (32 billion dollars) in a bid to sustain growth and employment next year. The package is even larger than the 71 billion pesos originally mooted on November 26, billed as "the most ambitious public works plan in living memory". It comes in the context of a series of stimulus measures including tax benefits for companies increasing their formal payrolls and those repatriating offshore capital (see ARGENTINA: Fiscal package will not soothe investors - December 12, 2008). The stimulus package aims to "guarantee employment" and "confront the new international scenario", according to Public Works Secretary Jose Francisco Lopez.

However, details of the Argentine Public Works Plan remain somewhat sketchy:

• Some 60% of the funds will be dedicated to road infrastructure and improved 'social habitat', with the remaining 40% to improve and expand natural gas, electricity and public passenger transport services.
• The first phase will involve projects with an economic and environmental impact such as river dredging and decontamination, while the second will involve construction of housing, schools and access roads.
• According to Lopez, the plan will focus on small-scale projects that can be carried out by small and medium-sized companies, and that will be administered at the provincial and local level with central government funding.

Funding questions. In practice, the new plan represents an expansion of the existing 'Strategic Territorial Development Plan' announced in March, and a number of the projects involved were already included in the 2009 budget, although spending will rise by some 24 billion pesos next year to 57 billion. According to Lopez, 71 billion pesos worth of funding has already been found:

• 33.0 billion pesos are already budgeted for next year;
• a further 12.0 billion will come from the state Banco Nacion and the social security body Anses;
• 6.0 billion will be provided by private investors;
• 5.5 billion will arise from cuts in government subsidies; and
• 2.5 billion will come from development loans.

However, a further 40 billion pesos remains to be financed, the possible origins of which are unclear. The recent series of stimulus plans -- including subsidies of 13.2 billion pesos to finance car and appliance purchases, and tax breaks to companies and individuals -- will place stress on a fiscal position already threatened by the likelihood of slow growth next year.

Fitch Ratings yesterday lowered Argentina's local-currency debt rating from B to B-, citing lower growth, falling commodity prices and possible difficulties in meeting fiscal targets and financing needs. The risk is increasing that the recently nationalised private pension funds, which administered some 30 billion dollars worth of assets, will become a source of short-term finance for the government next year -- a matter of concern primarily due to lack of transparency and minimal congressional oversight of discretionary central government spending (see ARGENTINA: New crisis appears increasingly likely - October 30, 2008).

Transparency tribulations. Although efforts to boost the economy in a deteriorating climate may be apposite, questions remain over the nature and effectiveness of the measures proposed:

• The welter of recent announcements has been unclear and sometimes contradictory, and decisions appear to have been taken by the president and her immediate circle without reference even to relevant members of the cabinet.
• The suspicion that the government will use pension funds at its discretion and that state intervention in the economy will escalate -- heightened by the recent takeovers of pension funds administrators and of the airlines Aerolineas Argentinas and Austral -- have renewed concerns over legal security among both foreign and domestic investors, raising doubts over the extent of the private investments envisaged.
• In broader terms, public works programmes are unlikely to be the fastest or most efficient vehicle for economic stimulus.

Moreover, the Planning Ministry, through which much of the process of awarding tenders will pass, has frequently been the target of allegations of corruption in similar processes, including the awarding of a construction contract to Swedish Skanska in 2006 and the awarding of the high-speed train concession to the Alstom consortium (see ARGENTINA: Transparency troubles will deter investors - October 9, 2008). At the same time, there are concerns at the provincial level that the substantial funds involved in the works plan will be disbursed disproportionately to jurisdictions governed by the president's allies, and thus used as both 'carrot and stick' to guarantee their support.

Employment impact. According to Fernandez de Kirchner, the works plan will boost employment in the construction sector -- a motor of strong growth in recent years, but one that has been flagging in recent months, with year-on-year growth in construction investment reaching only 2.8% in the third quarter -- to 780,000, from around 400,000 at present. In a context in which job losses are already beginning to be felt in a number of sectors, such an outcome would be welcome. However, it reinforces the perception that many recent initiatives are designed to placate (and strengthen) the increasingly combative trade union movement (see ARGENTINA: Union pressures hit waning confidence - December 5, 2008), whose leaders may have considerable influence in deciding employment opportunities and possibly the awarding of contracts.

Outlook. The government reportedly hopes that the public works plan will increase GDP growth by 2-3 percentage points next year -- despite the budget forecast of 4% growth for 2009, growth of around 2% now looks more likely and a recession cannot be entirely ruled out:

• Third quarter growth reached only 6.5% year-on-year and 1.3% quarter-on-quarter, a five-year low, with full-year growth now expected to fall to around 6.9%, from 8.7% last year.
• While the more optimistic private projections for 2009 now put growth at around 2.6%, more pessimistic estimates point to a contraction of some 2.0%.

However, there are doubts as to whether the level of public investment -- even with a substantial planned increase -- will be sufficient to generate such a strong boost. Indeed, public works announcements in the past have not always come to fruition, and inefficiency in public spending could further mitigate any positive impact. Moreover, slowing growth will reduce tax revenues, and existing budget projections may be optimistic (see ARGENTINA: Budget offers over-optimistic expectations - September 19, 2008). Competing pressures on those revenues (in particular as other public spending priorities come to the fore in advance of the October legislative elections) may force a reduction in ambitious public works plans -- and at worst could renew fears over short-term financing.