Why you should care

Competing pressures of farmers and the IMF could shape the policies of Argentina’s reformist president.  

When a senior official from the International Monetary Fund showed up at the Argentine Rural Society (SRA) annual fair this month, coming face to face were two powerful and opposing forces that are shaping President Mauricio Macri’s attempts to repair his government’s finances.

Macri has made gradually reducing taxes on soybean exports one of his flagship policies. Proposals, backed by the IMF, to stall this plan have, for now, been successfully resisted by Argentina’s formidable farming lobby. However, his government must push on with a fiscal austerity drive as part of the deal that secured a $50 billion emergency loan from the IMF earlier this year.

The issue has exposed the challenges facing Argentina’s reformist president. Macri is confronted with numerous tough trade-offs to cut the fiscal deficit, fueling tensions among powerful sectors of the economy and generating political heat that threatens to weaken the government.

Macri visited the fair to defend what has been one of his signature policies since he took power. Flanked by his agriculture minister, a former SRA president, he told the receptive audience that export taxes “are not an intelligent tax, and they don’t benefit the most important thing that we have [to do], which is to export more every day.”

It has become clear that Macri wants to focus the fiscal cuts on spending, without backtracking on commitments to lower taxes.

Daniel Kerner, analyst, Eurasia Group

Some argue that there may have been political motives, as well as economic ones, behind Macri’s reluctance to squeeze more money out of farmers. The industry has just celebrated the 10-year anniversary of a historic decision by the Senate in 2008 not to increase export taxes on grains, a decision that put an end to seriously disruptive clashes with the previous government that caused months of strikes, demonstrations and roadblocks.

“It would be a serious mistake” to row back on the tax-cutting pledge, says Daniel Pelegrina, president of the SRA. Speaking at the farming association’s belle epoque showground, he says that export taxes were a direct hit to the productivity of Argentina’s farming industry, the world’s top exporter of soybean oil and meal.

A failure to keep cutting them would be especially damaging, he argued, at a time when the government needs to shrink the balance of payments deficit that made it particularly vulnerable to financial volatility in emerging markets this year. “The president understands this,” says Pelegrina.

Argentina was forced to seek a $50 billion bailout from the IMF in May after the peso lost almost a third of its value against the U.S. dollar.

Roberto Cardarelli, the IMF’s mission chief for Argentina, also paid a visit to the fair, leaving — according to Pelegrina — “very impressed” by the country’s state-of-the-art agricultural sector. “We practically saw eye to eye,” Pelegrina says.

Argentina’s farming sector, which accounts for more than a third of exports, has already had a bad year. After suffering the worst drought in at least three decades, causing a loss of about 20 million metric tons of soybeans, the sector shrank 35 percent in May, having already contracted 30 percent in April.

This was the main driver of a surprisingly steep 5.8 percent year-on-year contraction in the Argentine economy in May, with the full effects of the devaluation of the peso in May and June yet to materialize. In April the IMF had been expecting Argentina to grow 2 percent this year; last month it revised its forecast down to 0.4 percent.

But farmers could also be the engine behind a rebound that is expected to begin by the end of the year. “Expectations for the 2018–19 campaign are positive, mainly because of an increase in the area planted with wheat,” says Nieves Pascuzzi, an independent agricultural consultant. She expects a record wheat harvest of as much as 20 million metric tons, while soy production should return to its former levels of about 50 million metric tons.

Even if farmers have escaped what they lambasted as attempts to lumber them with the cost of the adjustment, it remains unclear how the government will achieve a reduction in the fiscal deficit to 1.3 percent of gross domestic product next year, from the targeted 2.7 percent in 2018.

Although the IMF argued in a recent report that forgoing the tax cut and maintaining export taxes on soy at an average of 25.5 percent would shave a helpful tenth of a percentage point off the 2019 deficit, Macri is looking elsewhere to tighten the purse strings.

“It has become clear that Macri wants to focus the fiscal cuts on spending, without backtracking on commitments to lower taxes, especially on agricultural exports,” says Daniel Kerner, an analyst at Eurasia Group, a risk consultancy. Measures include caps on public sector wages and a freeze on hiring new employees, a further reduction in energy subsidies, and cuts to less urgent infrastructure projects.

“The belief is that any break in contracts or agreements would further sour investor sentiment and hurt any chance of better [economic] conditions next year,” Kerner adds, pointing to concerns in the energy sector, where Macri has upset executives by rowing back some of his liberalization agenda.

As for the explosive issue of export taxes, memories of the disruptive conflicts a decade ago — and the farming lobby’s ultimate victory — remain vivid.

“Nobody else has to pay export taxes, so why should we?” asks one ruddy-cheeked farmer at the fair, losing his composure at the mere idea. “After what happened in 2008, politicians know what happens when farmers are unhappy.”

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By Benedict Mander

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