Itaú BBA - ARGENTINA – Fiscal consolidation in 1Q19 meets target

Macro Latam

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ARGENTINA – Fiscal consolidation in 1Q19 meets target

abril 22, 2019

We note an upward risk to our forecast of a deficit of 0.5% of GDP

Treasury registered a lower primary deficit in March. The federal government ran a primary deficit of ARS 13.0 billion, compared with a deficit of ARS 20.8 billion reported in March 2018. We estimate that the 12-month rolling primary deficit fell to 2.0% of GDP, from 2.4% of GDP in February 2019. The nominal deficit, which includes interest payments, was 4.9%, down from 5.4% of GDP in February.

The target for 1Q19 was met. The federal government ran a surplus of ARS 10.3 billion in the first quarter of the year, exceeding the target of a surplus ARS 6.0 billion for that period (or a deficit of ARS 2.3 billion, once that target is adjusted by the increased social expenditures allowed under the agreement with the IMF). The treasury targets a balanced primary deficit for 2019 (up to a deviation of 0.5% of GDP due to investments financed by multilateral institutions and additional social expenditures). 

The government tightened controls on expenditures to offset the decline in tax revenues. High inflation allowed primary expenditures to decrease by 13.8% yoy in real terms in 1Q19. Payroll expenses fell 17% and capital expenditures declined 16.3%, while pension and other social expenditures dropped 14.6% in real terms. On the other side, a weaker ARS led to an increase in energy subsidies (148% in real terms). As a consequence, the total subsidy bill (now including transportation subsidies) increased by 22.6% yoy. Finally, current transfers to provinces rose by 9.1% yoy.

Weak activity affected revenues. Tax collection fell by 9% yoy in real terms in 1Q19. Income-tax collection performed badly, while social security contributions dragged as nominal wages still remain unchanged and employment has declined.   

We expect the government to deliver further reduction in the fiscal deficit this year. However, we note an upward risk to our forecast of a deficit of 0.5% of GDP, after the government decided to freeze electricity tariffs for the rest of the year.

Juan Carlos Barboza
Diego Ciongo

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