Itaú BBA - Argentine GDP growth to decelerate further, as fiscal consolidation continues

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Argentine GDP growth to decelerate further, as fiscal consolidation continues

June 20, 2018

Growth was consistent with market expectations (according to the Bloomberg survey) and with the official monthly GDP proxy (EMAE).

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Argentina’s GDP slowed in 1Q18. GDP grew 3.6% YoY, compared with 3.9% in 4Q17 and 3.8% in 3Q17. Growth was consistent with market expectations (according to the Bloomberg survey) and with the official monthly GDP proxy (EMAE), which showed a 3.5% expansion in the quarter. On a sequential basis, output increased by 1.1%, following a 1.0% gain in the previous quarter. As a result, the cumulative rolling-four-quarter GDP growth is at 3.6% YoY, up from 2.9% YoY in 2017. Domestic demand (excluding inventories) grew a solid 5.9% YoY, down from a revised 6.9% increase in 4Q18. Gross investment showed a hefty increase of 18.3%, similar to the 19.3% registered in the previous quarter. Private consumption expanded by 4.1% in 1Q18 (from 4.5% in 4Q17). Public consumption contracted by 1.4% (from 2% previously).  

We expect the economy to decelerate significantly in the coming months. On a sequential basis, the EMAE (official monthly GDP proxy) retreated by 0.1% MoM/SA in March and by 0.2% in February. The impact of the drought will be harsher in 2Q18 and the tighter macro policies (faster fiscal consolidation and higher interest rates), implemented to cope with the negative international environment for emerging markets (Argentina in particular), will hinder domestic demand. We expect a weaker currency and higher inflation to lead to a decline in real wages and private consumption. We see downside risk to our 1.5% growth forecast for 2018, despite the favorable carry-over.

On a separate note, the primary fiscal deficit registered a significant improvement on a year-over-year basis in May. The treasury posted a primary deficit of ARS 7.8 billion in May, down from a deficit of ARS 27.2 billion in the same month one year before. As a consequence, we estimate that the 12-month rolling primary balance posted a new decline as a percentage of GDP, to 3.0% from 3.3% the previous month (to a deficit of ARS 366.1 billion from ARS 385.5 billion in April). The nominal deficit (including now the interest bill) fell to 5.2% from 6% in December 2017. Expenses fell 6.8% yoy in real terms in May (an increase of 17.9% yoy in nominal terms), and they are down 6.4% for the first five months of the year. While a weaker peso and higher oil prices impacted the energy subsidies in May (an increase of 21% yoy nominally), the treasury offset it through cuts in capital expenditure (-10.5%) and transfers to provinces (-28.7%). Pensions and wages increased 24.4% and 20.2%, respectively. Tax revenues increased 3.1% in real terms in May (30.2% yoy nominally) and 1.2% during the first five months of 2018, excluding the extraordinary revenues collected in 2017 linked to the tax amnesty.

The treasury is adjusting the fiscal result faster in response to adverse external conditions. The treasury is committed to a primary deficit of 2.7% of GDP this year (down from the original target of 3.2%) and 1.3% for 2019 (down from 2.2% before). The targets were agreed upon with the IMF as one of the main conditions for a USD 50.0 billion credit line. The recent deterioration of financial conditions in Emerging Markets, and Argentina in particular, forced a faster tightening of macro policies. Less financing from capital markets made a gradual reduction of macro imbalances non-viable (fiscal and current account deficits). We think the new ambitious targets are still feasible. In particular, a weaker currency and higher inflation play in favor of a lower primary deficit due to a reduction, in real terms, of the burden of expenditures.
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Consumer confidence in May was the highest since mid-2015 as it continued moving into optimistic territory. Lower inflation and interest rates, along with a broadly stable currency, have likely played a role in boosting consumer sentiment. Think-tank Fedesarrollo’s consumer sentiment index came in at 8.9 points, from the -16.9 points recorded one year before (1.5 in the previous month). The improvement from last year was evenly explained by more favorable views on current conditions as well as on expectations. The gain in the sub-index related to consumers’ economic expectations, from -12.4 one year ago to 13.5 (6.1 in April), was boosted by improved expectations for the country. Meanwhile, current economic conditions returned to optimistic territory, improving from to -23.7 points one year earlier to 1.9 (-5.4 in April), with both sub-indices showing significant gains over one year. Improving real wage growth amid stable inflation, the expansionary monetary policy, and decreased uncertainty following the electoral process, will likely lead to additional improvement in consumer confidence going forward. This, alongside a still strong external demand, will likely support growth of 2.5% in 2018 from 1.8% last year.

In its recently published Medium-Term Fiscal Plan (MTFP), the Colombian government maintained the fiscal deficit target for this year and expectedly raised its deficit targets thereafter. The revision is in line with a recently released recommendation by the Fiscal Advisory Council, which loosened fiscal targets given a larger than expected output gap. In fact, the 1.8% GDP growth recorded last year was inferior to 2.3% incorporated in the 2017 MTFP, resulting in the output gap being close to 0.4% larger than anticipated last year. Meanwhile, the government now works with better expectations for oil price for this year (USD 67/barrel vs. USD 55/barrel previously). The administration also made a marginal increase to oil production forecasts from 840,000 barrels per day to 844,000. We estimate these revisions mean some USD 1.6 billion in additional revenue, mostly coming from the revision to prices. Looking ahead to next year, a further activity pick up to 3.4% is expected, but is far below the 4.0% forecasted in last year’s MTFP. Overall, we see that the MTFP remains optimistic regarding the assumed path of fiscal consolidation, which means there will be need for additional fiscal measures in coming years, likely in the form of a new tax reform.

We believe the fiscal deficit target for 2018 (3.1%) is achievable on the back of higher oil prices, but challenges remain ahead. The central government’s fiscal deficit forecast for this year was unchanged from the 2017 MTFP, and implies a narrowing from the 3.6% deficit recorded in 2017. The corresponding structural deficit would be 1.9% of GDP, in line with the 2017 result. The anticipated higher oil prices means the government expects oil revenue to increase to 0.6% of GDP this year (doubling from the 0.3% of GDP in 2017) and to 1.2% in 2019. The upcoming administration will face a tradeoff between living up to the roadmap set by the current fiscal authorities, and keeping key campaign promises demanding tax reductions. A transitory measure to cope with the need for fiscal consolidation and lower taxes could be to adjust the fiscal rule, relaxing short-term fiscal deficit goals (a strategy considered during the campaign). We note this would likely be read negatively by rating agencies, risking Colombia’s investment grade status.
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Day Ahead: The central bank will publish the trade balance for the month of April at 4:00 PM (SP Time). We expect the trade balance correction to persist with a deficit of USD 182 million in April (consensus: USD -400 million).


Weekly Elections Monitor: Marina Silva's (REDE) advisors defend fiscal effort, but are against the spending cap. Eduardo Giannetti and André Lara Resende emphasized that the degree of urgency of the fiscal problem has increased, but that is also necessary to avoid an "excessively fiscal" view, positioning themselves against the spending cap. The highlight of the week will be the release, from Tuesday onwards, of a presidential voting intention poll carried out in the state of São Paulo by Instituto Paraná Pesquisas. In social media, Jair Bolsonaro (PSL) followers’ growth slowed down over the past week. João Amoedo (NOVO) was the pre-candidate with the highest growth of followers last week.
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Day Ahead: The Central Bank's Monetary Policy Committee (Copom) will announce the Selic rate. We and the consensus expect the rate to be maintained flat at 6.5%.


Day Ahead: The statistics institute (INEGI) will publish Q1’s aggregate supply at 10:00 AM (SP Time). We estimate a 2.5% year-over-year growth (consensus: 2.4%).


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