Life in Argentina is not becoming easier…
“Nothing can be said to be certain, except death and taxes.”
– Benjamin Franklin
The quote is usually attributed to Benjamin Franklin though others have also attributed the quote to two earlier writers: Daniel Defoe in “The Political History of the Devil” (1726) wrote “Things as certain as death and taxes, can be more firmly believed,” while in Christopher Bullock’s “The Cobbler of Preston” (1716) there appears the line, “Tis impossible to be sure of anything but Death and Taxes.”
This is not a discussion of who said it first…but rather an appreciation for the truth in those words, particularly in Argentina.
Physical death by way of covid-19
The Argentinian government, to its credit or demise, took decisive actions to confront covid-19 in its early stages. The first positive covid-19 case was registered in the country’s capital, Buenos Aires, on 3rd March. The infected individual—returning from Milan, Italy—would be the first covid-19 case confirmed in South America. A little more than two weeks later, President Alberto Fernández imposed one of the strictest lockdowns in the Latin America with residents only permitted to leave their homes for groceries and medicine. At that time, Argentina only had 128 cases of covid-19 with three deaths.
Argentines largely commended the Fernández administration for taking aggressive actions. But with the lockdown still in place seven months later, the sentiment is starting to change. The numbers of cases and deaths continue to rise with Argentina registering nearly 1 million cases and more than 26,000 deaths. Attempts by Argentina to gradually reopen Buenos Aires—the area most affected by covid-19 and home to more than 13 million people—in July was not successful as cases rapidly rose in the following days and the government was forced to re-implement restrictions. As a result of Buenos Aires’ lockdown, more than 30 percent of the country’s populations remains in strict quarantine with officials not having a clear path to controlling the mounting number of cases and deaths.
Economic death by way of lockdown
The Fernández administration has found relative success in reducing restrictions in other areas of the country. But this relative success still does not necessarily help prevent the other growing concern: the death of the Argentinian economy. Buenos Aires metropolitan area accounts for roughly 45% of the country’s GDP with only essential services being provided in the capital. Thus, until Buenos Aires returns to normal business activity levels, the country’s overall economic numbers have little chance of rebounding. To be fair, the government had critics at the beginning that warned about the potential economic damage of its strict lockdown.
Secondly, Argentina is in the third year of a recession, with the economy already having contracted about 17% in the second quarter of 2020 and expected to contract 12% by year end on year-over-year basis. Unemployment is high at 13% (as of June 2020) with poverty rising in the country (some estimates place the actual poverty level north of 50% today). In September, the Fernández administration was able to negotiate a deal with its creditors to restructure the country’s $65 billion in foreign debt. Yet, the central bank is printing pesos in order to pay for economic support measures amid the pandemic with locals wanting to exchange pesos for dollars (to escape the skyrocketing inflation) and the government, as a counter, implementing tougher capital controls.
In the eyes of many investors and locals, the recent restructuring deal is a perfect example of the country’s natural ability to fight through its economic challenges Still, many Argentines are asking how many lives the Argentinian economy has…the country has defaulted nine times since its independence in 1816. The Argentinian leadership appears to be equally concerned. Yet their strategy for avoiding economic (and physical) death is already too much a certainty of Argentinian life with not much flexibility: taxes.
“The art of taxation consists in so plucking the goose as to get the most feathers with the least hissing.”
– Jean Baptist Colbert
Cue the introduction of the Solidarity tax. Argentinian politicians want to apply a tax to approximately 12,000 Argentines that have more than 200 million pesos ($2.6 million) in assets. The tax would be progressive with the wealthiest citizens paying 5.25% for holding assets outside the country. This tax is sadly the result of a belief that the country can tax itself out of its problems yet again. In 2001, the country imposed additional taxes on income and exports, including agriculture. A similar attempt in 2008 to increase export taxes led to significant protests. This time, officials are clearly struggling to find a party willing or even capable of paying higher taxes thus the sole focus on taxing wealthy Argentines.
The sad reality for this situation is that Argentina already has high levels of taxation compared to other developing countries across the globe. The country, however, has a significantly large informal sector from which the tax officials cannot fully collect tax revenue. The economy is also semi-industrialized with a large part of that industry centered on the export of commodities. There is not too much in between the informal sector and the exporters of commodities thus, in the words of some economists, the country is a mix of a poor informal labor force and a rather wealthy upper class. Not surprisingly, Argentinian officials desire to increase the tax on the top income bracket from 35% to 41%. Locals sadly will tell you that they do not expect improved services for any additional revenue.
Officials already introduced other tax increases this year, including a 30% surcharge on foreign currency purchases and card expenses abroad, again to target wealthy Argentines. This tax was previously called the ‘solidarity’ tax in the “pre-restructuring” days (i.e., before this year’s restructuring was completed). It became a burden for those stranded overseas when the covid-19 pandemic restricted travel…as a result, the wealthy and non-wealthy were both afflicted by the tax.
The new ‘solidarity’ tax is simply the next attempt (likely in a series) at capturing revenue by taxing assets that some politicians believe are wrongly being held outside the country or not being used productively to grow the Argentinian economy. Some Argentines fear a worldwide U.S.-style tax system, but the Argentinian system currently lacks the resources to fully enforce a national tax system within its borders. Though, it is easy to imagine Argentinian officials already debating how to maintain some tax oversight (or control) on Argentines fleeing the country for Uruguay, which has made it significantly easier for foreigners to settle in the country, for example, by reducing the value of property required to qualify for residency.
Today, the Fernández administration is left with few options to support the economy, particularly as they want to avoid the swelling political and social tension in the country. An expansive monetary process, in particular printing money, has been the chosen option since the start of the covid-19 pandemic. That said, the country is already facing double digit inflation thus there is an increased chance of inflation spiraling out of control. No one is publicly discussing a potential restructuring again in the near term (i.e., one to three years) but it is a point of discussion in smaller investor circles and among local Argentines.
The nature of Argentinian economics is to focus on raising tax revenue…i.e., do not expect a big cut in spending from this left-leaning government. To be fair, there is an argument that increased tax revenue correlates with paying debts. Yet, the reduction of foreign investment in the country highlights shrinking confidence in the Argentinian economy as well as growing investor concerns around government interference and economic intervention in the next 6-12 months…little suggests that the covid-19 pandemic (and its effects) will be gone before then (i.e., with business activity and travel back to pre-2020 levels). As result, Argentines and their leaders must have a more serious discussion on the economy and Argentinian life. If not, the three certainties in Argentinian life may sadly become death (by covid-19), taxes (by the Argentinian government), and inflation…the economic pessimists may say you can also include sovereign restructurings. That would be a sad life.
