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

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ARGENTINA – GDP growth to decelerate further, as fiscal consolidation continues

June 19, 2018

We see downside risk to our 1.5% growth forecast for 2018, despite the favorable carry-over.

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 growth decelerated but remained strong in 1Q18, driven by gross fixed capital formation. 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).  On a sequential basis, fixed investment expanded by 3.3% and private consumption increased by 2.3%. Exports gained a solid 5.8%, while imports and public consumption were flat. 

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. 

Primary expenditure is still under control. 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.

João Pedro Bumachar Resende
Juan Carlos Barboza

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