Itaú BBA - Government to freeze regulated prices in Argentina

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Government to freeze regulated prices in Argentina

April 18, 2019

While the policy, in our view, will not have a material impact on the CPI, it signals the government’s concern in maintaining support for the October election.

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The government will freeze regulated prices and basic food prices. The national government will not dictate further hikes in residential electricity tariffs, transportation fares or tolls – the cost of the measure will be covered by the treasury, which means more subsidies to companies (estimated officially at 0.04% of GDP), creating additional challenges to the targeted fiscal consolidation for 2019. The increase in gas tariffs scheduled for the next three months will remain in place. Mobile companies also committed to keeping the price of their services unchanged. Finally, the government announced an agreement with companies to freeze the prices of 60 basic products, such as meat, oils, rice, noodles, milk, yogurt, yerba, tea, sugar, cookies, jams and beverages. While the policy, in our view, will not have a material impact on the CPI, it signals the government’s concern in maintaining support for the October election. Uncertainty regarding the outcome of the presidential elections continues to be a drag on the economy and a potential threat to asset price stability.


The results of the central bank’s trader survey are broadly unchanged from last month, holding the view that stable rates for the time being holds sway, while the next move remains a hike. The policy rate is still seen stable at 3% for the next 6 months, while one rate increase to 3.25% would come during the next semester, and 3.5% continues to be expected in 24 months’ time. The US dollar is seen remaining near spot levels (660 pesos per dollar) over the next month. Meanwhile, short-term (1 year) inflation is now viewed at 2.8% (2.7% previously), following the upside surprise in March, and the relevant 2-year inflation forecast ticked up 0.1pp to 2.9% (3% target). We expect only one further 25-bp rate hike near the end of this year, taking the policy rate to 3.25%. The base rate is expected to end next year at 3.75% as the gradual normalization process advances. The central bank’s view that risks are tilted to the downside for the external scenario and inflation convergence path is slower provides room to retain monetary stimulus for longer.


Consumer confidence returned to optimistic ground in March after a semester of pessimism. Think-tank Fedesarrollo’s consumer sentiment index came in at 1.2%, improving 4.4pp over twelve months, while also posting a notable recovery from the previous month (-5.6% in February). The confidence recovery from March last year was explained by more favorable views on current conditions, as well as expectations. Despite consumers maintaining a pessimistic view on economic conditions, the sub-index improved to -1.4% from -7.4% one year earlier (-9.9% in February), driven by the perception that it is an opportune time to purchase household appliances. Meanwhile, the sub-index related to consumers’ economic expectations rose from -0.3% one year ago to 2.9% (-2.7% in February), as respondents believe that their households would be economically better off over the coming year. Improving confidence bodes well for the consolidation of the consumption recovery. Low inflation and the mildly expansionary monetary policy would likely keep confidence upbeat. We expect GDP growth to pick up to 3.3% this year, from 2.7% in 2018.


Macro Scenario: The central bank cut the monetary-policy rate by 25 bps for the second consecutive month in March due to the activity slowdown and low inflation. We believe that the monetary-policy easing cycle has ended, and see the monetary-policy rate at 4.75% at the end of 2019. GDP growth slowed in 2018. The negative statistical carryover this year, the drought, and the lower expected growth in Argentina and Brazil lead us to introduce downside risks to our YE19 growth forecast of 3.5%.
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Macro Scenario: Annual inflation accelerated in recent months and remains above the target range (3% -7%). Our YE19 inflation forecast stands at 7.5%. GDP data for 4Q18 disappointed, and available indicators for 1Q19 do not anticipate a rebound. We forecast GDP growth of 1% in 2019, with downside risks due to lower consumption, sluggish growth in Argentina and the downward revision of the GDP growth forecast in Brazil.
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