Itaú BBA - ARGENTINA – Treasury meets fiscal deficit target in 2018

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ARGENTINA – Treasury meets fiscal deficit target in 2018

January 18, 2019

The risk of a larger primary deficit in 2019 than that targeted (0% of GDP) is high.

The government of Argentina met its primary fiscal deficit target for 2018. The treasury posted an estimated deficit of 2.7% of GDP (ARS 374.3 billion), matching the official target and slightly worse than our forecast of 2.6%. The deficit includes some investment expenditures contemplated in the agreement with the IMF equivalent to 0.3% of GDP. The 2018 nominal deficit was 5.2% of GDP, down from 5.6% in 2017.

High inflation and strict control of expenditures allowed for a reduction of primary expenditures in real terms. Expenditures (excluding interest payments) fell by 8.9% yoy in real terms in 2018. Capital expenditures and transfers to provinces plummeted in real terms, by 24.7% yoy and 28.6% yoy, respectively. Energy and transport subsidies were cut in December, reversing the upward trend registered over the previous months and resulting in a 7.2% yoy drop in subsidies in real terms for the full year of 2018. The acceleration in inflation led to a 10.4% real decline in payroll and a 5% decrease in pension expenditures and other social benefits (which are indexed to past inflation).

The recession hit tax collection and offset the introduction of new taxes. Total revenues (excluding the extraordinary revenue linked to the tax amnesty collected in early 2017) decreased by 1.0% in 2018, despite the new taxes on exported goods that have been in effect since September of last year.

We think that the approval of a zero primary deficit in the 2019 budget (with significant Senate support) is a clear signal of political commitment to fiscal consolidation. The adjustments focus on increasing revenues (through export taxes and sale of public pension fund assets) and reducing transfers to provinces, energy subsidies and capital spending. Pensions (which are indexed to past inflation) are expected to increase. In our view, the risk of a larger deficit is high, given the frail economy and the uncertain political scenario.

Juan Carlos Barboza
Diego Ciongo

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