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Argentina government seen more frugal after vote setback
Reuters
June 29, 2009

By Gabriel Burin - Analysis

BUENOS AIRES (Reuters) - Argentina's government will likely slow state spending and focus on paying its debts after voters dealt a sharp blow to President Cristina Fernandez in Sunday's midterm election.

Argentina, which has been largely shut out of global credit markets since it defaulted on $100 billion of debt in 2002, faces $20 billion in debt payments through end-2010 just as a slowing economy tames tax revenue growth.

"After the election they're going to be frugal in terms of spending because they no longer have the money they did a few years ago," said Eduardo Levy-Yeyati, head of emerging market strategy at Barclays Capital.

Fernandez's allies lost their majority in both houses of Congress, which some analysts think could force them to tone down their interventionist economic policies and seek broader alliances.

Election campaigns typically see lavish government spending in Latin America's No. 3 economy, and the primary budget surplus shrank 85 percent in May from the same month a year ago as spending outstripped record-high tax receipts.

Spending jumped due to transfers to the provinces, higher spending on salaries and pensions and on infrastructure investments aimed at warding off a slowdown in the economy.

However, economists expect belt-tightening in the second half of the year as the weakened government seeks to protect the primary surplus, a pillar of its economic policy.

Diego Giacomini, from the Economia & Regiones consultancy, forecasts a surplus of 1.9 percent of gross domestic product for 2009. Still, that would be way below the government's target of 3.27 percent, an estimate drawn up before the global slowdown kicked in.

OPTIONS LIMITED

While Fernandez may want to boost her weakened political capital, she will be aware that options are limited.

Broad tax rises appear unlikely as the government seeks to cement its hold on power following hefty congressional losses. An effort to boost tax take by letting the peso depreciate would risk stoking inflation.

Analysts will be looking for any sign the government's limited options will prompt overtures to the International Monetary Fund, the Paris Club group of creditors to which Argentina owes $6.7 billion and "holdout" bondholders who rejected a 2005 restructuring.

Besides meeting its debt repayments, the government will likely face increased calls from provincial governments for a bigger share of state resources and Sunday's result could fuel their demands.

A messy conflict with farmers turned some governors against the government, and those who remained loyal to Fernandez have been emboldened to increase pressure on her.

Fernandez, in an apparent effort to soothe her provincial allies, unveiled a plan in March to share multimillion soy export taxes with the provinces. She said that would amount to $1.78 billion per year.

But any congressional drives to increase provincial income are not likely in the short-term. Election candidates who pledged to seek a bigger share of state income will not take their Congress seats until December and any proposals would involve lengthy debate.

A more immediate target for government cost-cutting might be state subsidies paid to energy firms and public transport operators, although such moves could also prove unpopular.

"The areas where the government has most leeway are private sector subsidies and investment, so they could be subject to possible belt-tightening," the Prefinex consulting firm said in a report.

But despite the government's being in a tight spot, according to some analysts it can probably meet its uncovered debt obligations by tapping the surpluses from other government agencies such as the pensions agency, flush with funds since private funds were nationalized last year.

On Monday the government announced it placed $351 million of debt with the pension agency.

(Writing by Helen Popper; Editing by Kenneth Barry)

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