Argentina expects to return to budget surplus in two years

19 September 2018 Consultancy.lat

After months of economic uncertainty, this week the Argentinian President, Mauricio Macri will announce the new direction of his government’s fiscal policy. After increasing tensions between the financial markets and the central exchange and amid a rapidly depreciating peso, the “root of the distrust is at the fiscal-political level,” according to Soledad Pérez Duhalde of ABECEB.

Uncertainty is the only stable factor in Argentina’s markets. Distrust of the IMF stems from the Argentinian economic crisis in 2001-02, which many Argentinians blame on the austerity measures imposed by the IMF at the time. Spurred on by political instability in Venezuela – destabilising the region for fear of a knock-on effect – as well as currency shockwaves being sent through Brazil and a more general contraction in emerging markets, Macri’s deal with the IMF has caused national outrage. 

Whether or not Argentinians like it, however, the country has received its first $15 billion in relief funds to stabilize the nation at a macro-economic level. An unintended result has been that many economic agents have hedged their bets and begun hoarding foreign currency, further depreciating the Argentine peso. As the crisis falters for a moment, there is a glimmer of hope, according to management consulting firm ABECEB’s Soledad Pérez Duhalde. 

“Faced with this [distrust], the authorities stepped up the bet with a view to restore confidence,” said Pérez in Argentinian newspaper Perfil. The move is in line with Macri’s correction policies of ‘short term pain for long term gain.’ To show the international lenders that his cabinet is serious about its debt obligations, Macri has announced that it would alter its course back to budget surplus by 2020.

Argentina expects to return to budget surplus in two years

Originally, Argentina was set for a deficit of -1.3% diversion from surplus based on public spending; however, authorities announced this week their intention to achieve a 1% surplus within two years. “This will seek to sell the greatest effort in exchange for an advance of the funds by the IMF and to clear up any doubt about the Government's ability to honor its debt commitments,” said Pérez.

Politics are one thing – and politics and economics are intrinsically linked – but politics aside, the markets are digesting the move favorably. As the market corrects itself and restrictive public spending policy comes into effect, it is expected that consumption and investment will fall, with the recession expected to deepen. At first. 

“Our forecasts now point to an average GDP retraction of 2.2% in 2018 and a stagnant product scenario in 2019, even with a positive contribution from the agro product of the reversal of the drought effect,” said Pérez referring to ABECEB calculations. “Regarding inflation, the nominal depreciation of the currency raised the forecasts to something more than 40% by the end of 2018 and to 25% by December 2019.” 

The consulting firm – a regional expert in both economics and business strategy throughout the Americas – believes the route the government has taken is a hard but necessary return to stability. “In short, the ‘party is underway,’” added Perez. “There is no doubt that the goals that have been set are challenging. The fact that the world has become more complex for emerging markets does not help.”

“But the authorities have reacted in the right direction, realistically, admitting mistakes and compacting the cabinet to improve coordination. Anchoring expectations and restoring minimum levels of trust was imperative. A stabilization program is successful when it is credible. And the authorities are trying to rebuild this credibility that had been weakened by underpinning the integrity, consistency and viability of the program. The steps are given. The last word is missing,” he concluded.

Digitization could add $240 billion to Mexico’s GDP by 2025

22 January 2019 Consultancy.lat

New in-depth analysis by McKinsey & Company ranks Mexico 55th in digital maturity out of 151 countries. When compared to countries with similar economic output, Mexico is in good shape, but the country has “yet to achieve the kind of world-class digital transformation that fuels productivity and economic growth.”

Countries that have adequately transformed, such as Estonia and Malaysia, have incomes close to Mexico, but punch “above their weight” when it comes to digital maturity. Mexico is about halfway there. Taking steps to improve its global digital position, however, could increase the country’s GDP by  7-15% (approximately $155-240 billion) by 2025. Such an increase would be powered by increased productivity and employment in existing industries, new digital businesses, a broadened expanded information-and-communication-technology (ICT) sector, as well as the successful labor force transition into the digital world.

Mexico is the second-largest economy in Latin America, meaning it is in the unique position to set the regional standard for a “digitally enabled” government.

For their analysis, McKinsey & Company researchers Alberto Chaia, Gonzalo Garcia-Muñoz, Philipp Haugwitz, Max Cesar, and Andre de Oliveira Vaz defined digital maturity using four categories: government, foundations, economy, and society. The study also laid out steps that Mexico could take to improve its digital maturity. Of these four factors, Mexico has the most work to do in digital economy and digital foundations, categories in which its scores are just below average – and which are highly correlated.

Digital maturity of Mexico according to McKiney

The bad news first

Digital foundations essentially encompass the ability of citizens to participate in a digital society. This means internet access, mobile networks, and so forth. “In 2016, Mexico had just 13 fixed-line broadband subscriptions for every 100 inhabitants” the analysis found. “The rate of subscription to mobile broadband is higher, at 61%, but this still leaves a sizeable portion of the population unconnected and thus spending additional time and money getting to physical centers to access government services.” This lack of access causes Mexico to rank 93rd overall in the digital foundations category. 

Mexico’s digital economy, in turn, is hindered by its “shaky” digital foundations. It sits in 92nd place of all countries surveyed. There is a lack of access to high-speed internet, as stated, as well as an unreliable postal service and a lack of bank accounts among the population, with just 40% of citizens aged over 15 having an account. These factors decrease the country’s potential to develop an e-commerce industry that is widely and conveniently used. Exports of ICT goods, as well, account for an astonishing less than 1% of all exported goods and services.

And now for the good news

Mexico’s digital government, which ranks 39th overall, has made great strides in recent years. The creation of gob.mx, for example, provides "a one-stop portal that consolidates 34,000 databases from 250 government institutions and 5,400 public services. The platform is described as the “centerpiece” of Mexico’s digitization efforts, allowing citizens easy access to important legal documents such as birth certificates, as well as automating internal processes, making workplaces tasks run more smoothly for government employees.

Despite this – and the appointment of a national digital strategy coordinator who sits on the president’s staff - Mexico “receives low scores from its citizens on their overall satisfaction with the convenience and accessibility of government services.” Citizen experience was the worst-rated of those group countries surveyed (Canada, France, Germany, Mexico, the United Kingdom and the United States). There was also a largest perception gap between the private and public sector.

How digital can boost Mexico’s GDP

A digital society, according to the report, “can improve the quality of life for citizens by fostering greater civic participation, providing access to information, and offering new tools for health and education.” As previously shown, Mexico is pushing such platforms, including several subsections of gob.mx, on which citizens can participate in public polls and discussions, and present potential digital solutions to serious societal problems such as earthquake detection systems.

Mexico is well on its way to achieving a “good” or “very good” digital maturity rating (right now, the country is “acceptable”). According to McKinsey, “There are three basic initiatives Mexican government leaders could consider putting on top of their priority lists [to speed the transition into the upper echelons of digitization].”

First, the Mexican government must define a digital vision and strategy. Second, it must link that vision to policymaking. Entwining the two ensures that digitization acts as a “lever” to a policy’s success. “To establish a clear link between its digital vision and public value, Mexico’s incoming administration may want to consider revisiting the country’s "National Digital Strategy" for 2013 and aligning it with Mexico’s current and future needs, as well as with the new government’s priorities,” the report states. A “test and learn” attitude toward linking digital vision and policy will also be necessary, as the only way to avoid repeated mistakes is by closely evaluating those that have been made, then planning accordingly. Adopting this attitude, according to the report, will necessitate more flexible budgetary strategies.   

The third suggested initiative is all about power to the people. Successful digital transformations are those that are centered around the citizens, rather than the institutions that serve and govern them. This means service delivery is key, and centralization of digitalization efforts – initially, perhaps, in the form of a council that would oversee governmental transformation – could greatly aid government agencies in getting the people what they desire. As Mexico transforms, so would the ways in which ideas are generated and put into action. For instance, the United States has the US Digital Service, which works with the White House, and Singapore relies greatly on the Government Technology Agency, which reports to the country’s president and implements digital strategies.

Digital maturity benchmark

Filling in the cracks

Because Mexico ranks on the low end of the “digital foundations” category, it is obvious that the other four categories, which by nature fall under the “foundations” umbrella, are potentially negatively affected. As such, McKinsey offers five steps that could be taken to strengthen the country’s digital infrastructure. 

Private companies, for one, could be offered incentives to provide broadband internet to “marginalized” communities, such as those in Oaxaca and Chiapas. The study points to India as an example, where the government-created National Optical Fibre Network (BharatNet) “successfully brought broadband services to approximately 115,000 villages, aiming to deliver broadband connectivity to 250,000 villages overall.” 

Talent is also an issue. “In recent years, Mexico has made significant strides to boost the number of college graduates with degrees in science, technology, engineering, and mathematics (STEM),” the report states. In 2016, 25% of university graduates with a STEM degree. 

But degrees aren’t so much the problem as education in general. “Only 17% of Mexicans graduate from college, making the talent pool small.” Programs that keep primary and secondary school teachers in the loop are a must – as are “reskilling” programs meant to train a percentage of the workforce that is soon to be displaced by technology such as automation. 

Rounding out the five suggestions are a system that easily and simply explains new regulations regarding technology - an invaluable resource for startups; the development of cybersecurity units required to monitor the security of such a large, overarching transformation; and a streamlined, interoperable model for data sharing across multiple government agencies. 

It’s an investment

The challenges and obstacles in Mexico’s path to digital transformation are not inconsiderable, but are neither without long-term reward. “Going digital will require an investment of financial resources, extensive coordination among the multiple stakeholders and levels of government, and new regulations governing the growing e-commerce and fintech sectors. It most likely would entail participation incentives for the private sector, since governments should not attempt to 'go it alone.' In the end, both sectors of society stand to reap the value digitization will sow.” 

Related: Mexico leads Latin America in robotization, followed by Brazil and Argentina.