Sat | Dec 10, 2016

Province of Buenos Aires: Hanging On

Published:Friday | January 2, 2015 | 12:00 AMWalter Molano
File President of Argentina, Cristina Fernandez. Walter Molano said
AP Argentina's football team arrives in a bus as fans gather to welcome them home in Buenos Aires, Argentina following the World Cop gamaes last July.
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Times are tough for the Province of Buenos Aires.

Soaring inflation, declining commodity prices and the unending sovereign-debt saga has made it difficult for the provincial government to tap into the international capital markets.

Nevertheless, the province continues to hang on, raising tax revenues, limiting expenses and husbanding its cash resources. As a result, the government has been able to improve its fiscal position significantly.

In 2012, it posted a deficit of ARP$8.8 billion. By 2013, the shortfall dropped to ARP$1.03 billion, and last year it will post a surplus of ARP$541 million. The government expects to show a small surplus of ARP$78 million this year.

Thorough tax reform

It improved its finances through the implementation of a thorough tax reform. In 2013, it virtually doubled revenues to ARP$89 billion from a level of ARP$46 billion in 2012. The government implemented an impressive progressive tax programme, which focused on the highest income levels.

At the same time, it tried to keep a lid on expenditures. Nevertheless, the provincial government in La Plata was under a great deal of pressure to improve security measures. A spree of high-profile criminal incidents, as well as the social effects of the slowing economy, forced the government to expand spending on police programmes and public security.

In 2007, security spending represented only 1 per cent of provincial GDP. By 2014, it was 1.5 per cent of provincial GDP, and it is expected to rise to 2.1 per cent of provincial GDP this year.

One of the problems is that the Province of Buenos Aires is home for much of the urban poor who work in the capital. Large slums choke the outskirts of the city, forcing it to dedicate enormous resources to social support systems, public education and safety. An estimated 10 million people, or 65 per cent of the province's population, lives in this region, putting an enormous strain on the government's apparatus. Social expenditures are budgeted at 10.3 per cent of provincial GDP this year, compared to the seven per cent of provincial GDP that was spent in 2007. These financial burdens highlight the challenges that the province faces and why it must work so hard just to hang on.

The Province of Buenos Aires represents almost 40 per cent of the nation's numbers. It is 37 per cent of Argentine GDP, 39 per cent of the population and it generates 39 per cent of the government's tax revenues. However, it gets only 19 per cent of the government's co-participation funds that are transferred to all of the provinces.

This creates a structural deficit that leaves it at a severe disadvantage, and it was the reason why it was forced to overhaul its

tax system. In 2013, it formed the Provincial Tax Collection Agency, which, along with the Financial Administration Law, allowed the authorities to turn around the fiscal picture.

The Province of Buenos Aires is no longer living on a precipice. Its books are sound and it is largely self-sufficient. Moreover, it is preparing for all eventualities. This year's budget projects financing needs of ARP$19 billion, of which ARP$10 billion will be for capital spending. The government hopes to tap the international capital markets for the funds. Given the ongoing drama with the holdouts, it may be forced to rely on the domestic capital markets.

Treasury note programme

The Province of Buenos Aires has one of the most extensive local-currency Treasury note programmes in Argentina, providing it with ample financing. Argentine businesses and households are more than happy to participate, given the high rate of inflation and ample liquidity. However, the notes are short-term. It would be much better to have access to the longer-dated funds that are provided by the international capital markets.

Fortunately, the government's debt load is relatively low and declining. In 2010, the province's debt-to-GDP ratio was more than 10 per cent. This year, it will be only 7.6 per cent of provincial GDP. Likewise, its debt-to-revenue ratio was 75 per cent in 2010, and it is now only 46 per cent.

While its debt profile is fairly modest, it faces $2.4 billion in interest and amortizations this year. The biggest chunk consists of the 2015 bond which comes due one week before the presidential elections. The government expects to have access to the central bank vault to make the payment, but it is preparing for the possibility that the ongoing legal problems with the holdouts will preclude it from doing so. If that is the case, it is studying various liability management options, including an exchange to extend the maturity.

Regardless of what happens, there is a strong commitment to continue servicing its internal and external obligations through the careful management of its fiscal policy. Therefore, the province is hanging on.

• Dr Walter T. Molano is a managing partner and the head of research at BCP Securities LLC. wmolano@bcpsecurities.com