on Sunday Argentinian president Javier melee presented the country's annual budget true to form melee turned an event that's usually a relatively muted affair with the new budget presented by the Finance Minister to Congress into a national spectacle broadcast on National Television in an attempt to Rally support for his auster reforms melee himself presented the budget with his back turned to Congress announcing his intention to Shackle the state and attacking opposition lawmakers as quote miserable rats who bet against this country as You' expect the budget was ambitious promising further cuts to public services and a primary surplus of 1. 3% of GDP in a country that's already run massive deficits for most of recent history but perhaps most interestingly the budget forecast GDP growth of 5% next year and an annual inflation rate of just 18% which both feel optimistic given that Argentina is still moded with recession and inflation that has apparently stabilized at an annual rate of well over 100% so in this video we're going to take another look at the Argentinian economy why things don't look all that great for melee at the moment and whether his new budget can fix [Music] it before we start if you haven't already please consider subscribing and ringing the bell to stay in the loop and be notified when we release relas new videos so before we get into the specifics of the budget it's worth providing a little context as we've described in previous videos melee's immediate objective is stabilizing the Argentinian economy which has had a turbulent time for the past well few decades or so in effect this involves balancing Argentina's twin deficits in other words cutting the fiscal deficit I. E reducing government borrowing and cutting the current account deficit I.
E making sure that Argentina doesn't import more than it exports the main mechanism for balancing the current account is a devaluation of the peso which has been devalued by over 70% by melee as part of wider attempts to unify and simplify Argentina's currency ratio Anyway by reducing these two deficits melee would at least temporarily reduce GDP balancing the fiscal deficit will mean a reduction in government spending while balancing the current account deficit will mean a reduction in domestic consumption thanks to fewer Imports nonetheless M has always been optimistic that the Argentinian economy would enjoy a quote v-shaped recovery driven by Investments and exports now so far Mele has made good on his promise of balancing the fiscal deficit thanks to various Cuts government spending has fallen by over 10% allowing Argentina to run its first quarterly Surplus since 2008 earlier this year and Sunday's budget promises to continue in this vein not only does it promise further and continued cuts to public services but melee also asked for further cuts from provincial governments which have often stepped in to fill the gaps left by melee's recent austerity interestingly while health and education budgets are facing steep Cuts other departments have been spared including most notably the Army in fact M has promised to quadruple Argentina's military spending over the next 8 years from 0. 5% of GDP to 2% it's not really clear why melee wants to do this melee has previously suggested using the Army against drug gangs inside Argentina but this isn't a popular idea in a country that was run by military dictatorship not all that long ago and Argentina is hardly likely to go to war anytime soon it is possible that this is melee's way of buddying up to the Americans Argentina recently asked to become a global partner of NATO and melee clearly wants Argentina to side with America over China but this seems like an expensive and roundabout way of actually doing this anyway as we mentioned in the intro perhaps the most interesting part of the budget is its optimistic forecast for GDP growth and inflation we say optimistic not just because they're significantly better than what Argentina is currently experiencing but also because there just aren't really any signs that things are even on their way up at the moment again as we mentioned a second ago melee is hoping for an export and investment driven recovery facilitated by unified and devalued pay peso a unified currency would make it easier to invest in Argentina while a cheaper peso would make Argentinian exports more competitive internationally melee has also introduced a series of controversial policies designed to encourage new foreign investment into Argentina including perhaps most notably a large investment incentive regime improved by the Senate on June 12th this scheme known by its acronym rigi basically provides super generous 30-year tax incentives for big multinational companies investing more than $200 million in Argentina's export-led Industries including Agriculture and Shale with the promise that they can keep 100% of the profits of any exports this regime even exempts corporations from certain environmental regulations and includes Provisions allowing them to sue the Argentinian state if it gets in their way anyway while there have been some good data points slight upticks in exports or investments in certain areas of the economy have been insufficient to offset the wider downturn in the first quarter Argentina's GDP contracted by 5. 1% year on-year and while we don't yet have data for Q2 Argentina's economic activity estimator a sort of monthly proxy for GDP came in at - 3.
9% in June driven by declines in construction and Manufacturing this is way down from the 1. 4% increase we saw in May when we did our last video on Argentina and what you might expect weak economic activity to mean lower inflation this hasn't happened while Argentina's month-on-month inflation rate has fallen from its dizzying highs when melee first devalued the peso for the past few months it sat stubbornly around 4% why any fore in August inflation actually ticked up from 4% to 4.
