Argentina Tries to Tax and Spend Its Way Out of an Economic Crisis

By Ryan Dube

Argentine farmer Javier Rotondo says he should be reaping a historic bounty with grain prices surging to their highest level in years.

Instead, he reduced his corn crop by 20% after authorities temporarily suspended exports to reduce food prices, one of several measures by Argentina's leftist government that economists say are suffocating business. Mr. Rotondo expects to take on debt to pay a new wealth tax, and he is bracing for price controls after President Alberto Fernández recently warned ranchers that rising beef prices won't be tolerated.

"There's a lot of uncertainty. They are implementing crazy policies that don't make much sense," Mr. Rotondo said from his farm in the central Córdoba province. "There will be less investments, less production, and that'll be very negative."

Three years into a grinding recession, Argentina's economy is in the worst shape it has been since a 2001 debt default that led to rioting and deaths in the streets. For Mr. Fernández, the solution is to kick-start the economy and tax a prosperous farm sector and wealthy individuals, while avoiding austerity measures such as cutbacks to billions of dollars a year in subsidies.

"Industry will be the motor of the country's reconstruction," the president said recently.

The challenges are steep. The country's total stock-market valuation has collapsed from $350 billion in 2018 to $20 billion last year, according to EcoGo, an economic consulting firm. The economy shrank 10% in 2020, one of the world's worst contractions during the coronavirus pandemic. Poverty has risen to more than 44%, according to the Catholic University, the highest since the early 2000s.

Business owners -- from tech titans to airline executives and the farmers and ranchers who power what was once one of the world's wealthiest nations -- say they see little hope for a recovery in Latin America's third-biggest economy.

"I'm not sure where growth will come from," said Eduardo Levy Yeyati, a former central-bank chief economist and current dean of Torcuato di Tella University's School of Government in Buenos Aires. The government doesn't have the resources to stimulate the economy, he said, "and businesses are pulling back on investments."

With debt payments looming, Argentina is virtually broke, with just $5 billion in cash and gold reserves, half of what is on hand in neighboring Uruguay, whose population is 8% of Argentina's 45 million.

Facing the crisis, Mr. Fernández's government is implementing interventionist policies that will undermine hopes of increasing investments needed to generate employment, said Carlos Melconian, an economist and former chief of the country's top state-run bank.

"The measures are going to fail," he said. "There are no investments."

Argentina has banned companies from laying off workers, frozen telecom prices and increased export taxes on soybeans, wheat and corn. The government last year paid up to 50% of the salaries of workers at tens of thousands of small businesses. It has also restricted corporations from accessing dollars needed to service foreign debt.

The government says the measures will protect jobs and households struggling with a 36% inflation rate. The economy is starting to recover, Finance Minister Martin Guzmán said in an interview. He explained that capital controls are needed to prevent a depletion of reserves.

"It is a remedy to a worse evil," Mr. Guzmán said.

Several foreign companies, including Walmart, Nike and regional airline Latam, have abandoned Argentina. Some of the country's most successful entrepreneurs have packed their bags for Uruguay, which offers what Argentina doesn't: A business-friendly and stable economy.

"The day-to-day became unbearable," said Marga Clavell, a Harvard-trained corporate lawyer who moved to Uruguay's coastal city of Punta del Este in October. "There is a feeling like the country is closing itself off to the world, once again."

The ban on firing workers was intended to protect jobs during the start of the pandemic when the government enacted a strict lockdown. But a year later, business owners say it is saddling them with more costs in what already was a restrictive labor market.

"It is really serious, it's a big problem for the economy," said Blas Briceño, the chief executive of Finnegans, a software company. "We have people who are not performing, who are not adequate for the position, but we can't let them go."

Mr. Fernández, a member of the nationalist Peronist movement, inherited a highly indebted economy upon taking office in December 2019. A currency crisis had forced his predecessor, Mauricio Macri, to request a bailout from the International Monetary Fund, which now seeks payment on $44 billion.

Mr. Fernández is betting that the global economic recovery will mean higher prices for grain exports, helping rebuild reserves. The idea is to spend, even if it means accelerating the money printing that has sustained Argentina thus far.

There have been some gains. Whirlpool has plans to open a new plant that the government says will create 1,000 jobs. Canada's Lundin mining company said in February it will invest $3 billion to build a gold and silver mine.

Mr. Guzmán, the finance minister, said the economy should grow fast enough this year to reduce the fiscal deficit to 6% of gross domestic product from 8.5% in 2020.

With the government putting off cuts to public spending needed to help rekindle the economy, Mr. Levy Yeyati says the higher commodity prices won't be enough to turn things around. Private bondholders, who agreed to restructure $65 billion in debt after Argentina defaulted last year, said the policies are undermining a recovery, describing them as "short-term palliatives that are bound to fail."

Meantime, Argentina remains locked out of international capital markets.

Some of Argentina's most important companies are reeling. In February, state oil company YPF was pushed to the brink of its first-ever default after it couldn't access dollars to pay $413 million in debt. Private creditors agreed to restructure even as YPF faces falling oil production.

"If the company continues to shrink, it could become unsustainable," said Alejandro Lew, YPF's chief financial officer. He said YPF differs from other oil companies in the world, which enjoy ample liquidity to sustain operations. "Unfortunately, we couldn't do that," he said.

And then there are obstacles for companies whose employees have been laboring at home during the pandemic. A new law requires companies to have space standing by for employees in the event that they want to return to the office.

To comply, Sebastian Stanieri, the chief executive of cybersecurity company VU Security, had to open an office in Córdoba even though employees have been working from home without problem. The law prevents him from calling employees outside their established work schedule.

"If a bank has a problem with one of our solutions, we need to take care of it until 2 a.m., but the law prevents you from calling your employee, " said Mr. Stanieri. "It's frustrating." He now plans to hire 30 new workers in Uruguay, where he has been residing since December.

The crisis that has forced out companies such as French pharmaceutical group Pierre Fabre SA and the automotive-parts maker Saint Gobain Sekurit has hurt people like Geraldine Elola and her husband. They lost their jobs as flight attendants at Latam, the Chilean firm that left. Her family is now cutting back on eating beef, unable to afford the Argentine staple. "It's been a roller coaster of emotions," she said.

Some of Argentina's most prominent executives have moved abroad as Argentina in December passed a tax on the superrich -- up to 3.5% on assets in Argentina and 5.25% on assets outside the country -- that the government hopes will bring in $3.7 billion. Many are now across the River Plate, in Uruguay.

Among departures since have been Marcos Galperin, who founded Mercado Libre, Latin America's version of Amazon, and Gustavo Grobocopatel, known in Argentina as the "Soy King" for his giant industrialized farms. Spokesmen for both men declined to make them available for comment.

"There is a massive exodus of the majority of the founders of the super-successful Argentine technology companies," said Andrés Cerisola, chairman of Uruguayan investment firm EMTV Holdings, who knows many of Argentina's top tech entrepreneurs. "It's a huge opportunity for us."

--Silvina Frydlewsky contributed to this article.

Write to Ryan Dube at [e-mail]

(END) Dow Jones Newswires

03-09-21 0714ET