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The government asked the Legislative Council Relaxing fiscal targets The conditions will be set in November 2022 so that the Treasury can issue new debt on the international market. In short, the executive branch is asking for less ambitious goals in terms of the primary balance and a higher level of interest payments on the public debt.
Nine months ago, the authorities celebrated the second placement of $1.5 billion in international markets, with a term of 31 years. Performance 7.75%. Obviously, the placement cost is quite high and has a considerable impact on future interest payments. He also failed to fulfill his promise to replace Expensive debt for cheap debtAt the time, many thought it would make more sense to put the debt in the domestic market, but they were not listened to.
The fiscal narrative has changed dramatically in just a few months. It has gone from a roar to a meow. Tax revenues barely grew in the first half of the year. Tax revenues grew by 0.7%, but total expenditures grew by 8.9%. This has led to a smaller primary surplus and a larger fiscal deficit. The deterioration in fiscal data has already raised concerns among local and international analysts.
The finance minister recently pointed out that the reduction in revenues is due to the concentration of gross domestic product (GDP) growth in free zones, which are exempt from income tax. This is not the whole story. Firstly, free zones do pay other taxes, such as value-added tax (VAT), and have been the largest job creators in recent years.
Instead, tax collections were affected by the normal wear and tear experienced over time by the tax reform and the sharp fall in the exchange rate. The Treasury was happy with the amount of external financing it had received over the past two years, but it forgot that asking for so many dollars would have an impact on the foreign exchange market. The fall in the exchange rate means that tax revenues are reduced by €235 billion in 2023 alone. The effects are not just felt in the current year. They also affect income tax advances in 2024.
Another disturbing factor is the authorities’ silence on maintaining some type of agreement with the International Monetary Fund (IMF). The agreement negotiated by the Alvarado government ended in July and there has been no further mention of the Fund. The last agreement allowed the country to obtain external and domestic financing on better terms, thanks to the trust generated. If the fiscal situation deteriorates, why not consider signing a new agreement?
The worrying thing about relaxing the targets is that what has happened to other neighboring countries could also happen to us: a vicious cycle is formed, where when there is a danger of not being able to achieve the targets, the targets are revised in order to avoid admitting failure. Entering into such a process creates many risks. The first is the concerns of international rating agencies, analysts and even creditors.
Just as in a company, strategic plans and goals must be kept under constant review. However, this does not mean changing them at every opportunity. When goals cannot be achieved, there is a risk of creating instability and mistrust, and loss of credibility. Is the Treasury aware of these risks?
There are also reasons to question whether Eurobonds are the best option. Recently, the authorities agreed to postpone the 2024 settlement until next year. Why not seek financing with easier terms from multilateral organizations? Why not place the bonds in domestic markets, where interest rates are more favorable?
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