Fernández secures sweeping powers to conduct debt talks

Lawmakers handed President Alberto Fernández extraordinary powers to renegotiate debt terms with creditors and increase taxes on Saturday, a victory for the president with his first piece of legislation since taking office.

The Senate approved the main part of the bill early Saturday by a vote of 41 to 23, sending it to the president for approval. That followed passage in the lower house Chamber of Deputies on Friday after 15 hours of debate.

Fernández, who took office December 10, will now have more authority to negotiate with creditors, raise worker salaries and hike taxes. The government secured the votes needed with concessions including lower export taxes on oil, gas and mining, and tax relief for small farmers.

The government is seeking to renegotiate about US$101 billion owed to private creditors and the International Monetary Fund. The country’s bonds gained this week after Fernández unveiled the emergency bill.

The bill authorises Fernández’s administration to take as much as US$4.6 billion in Central Bank reserves to pay down debt denominated in dollars. Investors interpreted that measure as expressing a willingness to pay medium and long-term debt. However, the government on Friday postponed payments on short-term debt until August 31.

‘Good news’

The legislation is seen as positive for investors because it suggests Fernández is showing restraint in spending on social programmes. His vice-president, Cristina Fernández de Kirchner, was criticised for doing the opposite when she led Argentina from 2007 to 2015.

The primary fiscal deficit isn’t expected to change much next year as tax increases will cover new costs, according to analysts.

“Argentina’s fiscal underpinnings are temporarily in much better shape than they were just two months ago,” Walter Stoeppelwerth, chief investment officer at Portfolio Personal Inversores in Buenos Aires, wrote in a note Friday. “This is undeniably good news,”

Mauricio Macri's opposition Juntos por el Cambio coalition, which secured 40 percent of votes in the October 27 election, flexed its muscle in seeking concessions. For example, Fernández’s administration withdrew a clause Wednesday that would have given the president widespread discretion to intervene in dozens of state-run organisations as he sees fit.

Opposition leaders argued that measure went too far.

Risks

Critics say Fernández’s plan amounts to taxing the wealthy and middle class, while doling out benefits to lower-income people. In addition to heavy export tariffs on commodities, Argentines seeking to exchange pesos for dollars will now pay a 30 percent tax, and those travelling abroad will pay a 30 percent levy on credit-card purchases in foreign currency.

On the other hand, low-income retirees will receive two payments in December and January totalling 10,000 pesos (US$167). Utility rates for everyone will be frozen for 180 days.

The government is also weighing cuts in spending on bureaucracy, including reducing the number of advisers and official vehicles, Cabinet Chief Santiago Cafiero said Saturday, according to state news agency Télam. Another proposal is to scale back generous, dollar-based retirement plans for judges and diplomats.

The president's plan carries serious risks too, economists say. For one, it heavily relies on Argentina’s crops to generate tax revenue via tariffs. A drought would put revenues in doubt.

Spending on social security – more than half of all government expenditures – could also exceed expectations. All the tax hikes and a new labour decree that temporarily doubles worker severance pay could end up cooling investment, hiring and overall economic activity.

“The tax increases of this law are going to hit the middle-class pockets hard,” said César Litvin, senior partner at a law firm specialising in taxes in Buenos Aires.

Debt talks

The bill prevents Congress from meddling in or second-guessing debt talks. A US$56-billion bailout the IMF sealed with Argentina’s previous government last year is on hold as the lender waits for the president to roll out his full economic plan.

Fernández’s emergency bill only shows a slice of the policy pie.

“The fiscal and monetary programmes are missing,” said Eduardo Levy-Yeyati, director of Argentine consulting firm Elypsis. “Perhaps more important, in a country that has not grown in the decade, is the missing growth plan.”