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In our view, the announced measures of the stabilization plan begin to address the fiscal concerns yet will lead to higher inflation in the near term.
2023/12/01 | Andrés Pérez M. & Diego Ciongo



In a recorded video, the Minister of Economy Luis Caputo described the severe macroeconomic imbalances in Argentina and announced the stabilization plan's first set of measures, as expected. In total, Caputo announced ten measures that are designed to contribute towards bringing balance to the fiscal accounts over time. The government calls for a sharp fiscal adjustment of around 5.2% of GDP, leading to a balanced nominal fiscal balance by 2024, driven primarily by expenditure cuts, and less so from revenue measures. On the expenditures side, energy and transport subsidies will be reduced, capital expenditures will be frozen, and transfers to provinces will fall to a minimum. Revenue measures include higher taxes on imports and exports, the reversal of the recent income tax reform, and tax amnesty among others. Below a complete list of the announced measures and a table with the Ministry's estimated impact on fiscal accounts in 2024. 

 

1) Public employees with less than one year in place will not be renewed.

2) Fiscal spending on advertising would be suspended for one year;

3) Ministries and secretaries are reduced from 18 to 9 and from 106 to 54, respectively, significantly cutting the number of senior posts throughout the administration;

4) Transfers to provinces would be reduced to a minimum;

5) The government will not tender new public works and would review recently awarded projects. Infrastructure projects would be financed by the private sector;

6) Energy and transport subsidies would be reduced;

7) Social plans will be maintained, as a palliative for the rise in inflation.

8) The official exchange rate was set at ARS/USD 800, implying a sharp devaluation of 54%. The exchange rate on imports will have an additional tax and export duties will be imposed on non-agricultural products. 

9) The previous import framework (called SIRA) is replaced by an automatic import authorization system.

10) Social aid for child allowance and food cards will be doubled as a palliative against inflation. 

 



The central bank devalued the exchange rate, with multiple special regimes through taxes. The official exchange rate was set at ARS/USD 800, implying a sharp devaluation of 54%. Besides this, the new scheme allows exporters to liquidate 80% of their exports at the official exchange rate and 20% at the blue-chip swap, which is equivalent to an initial exchange rate of roughly ARS 860/USD (the previous formula was a 50%-50% scheme, meaning a special exchange rate of around ARS 600). For importers (good and services), the exchange rate will be determined by the official exchange rate plus a tax of 17.5%, meaning an initial exchange rate of around 940. On expenditures abroad (mostly tourism), a 60% tax rate above the official exchange rate will be applied, meaning an initial exchange rate of ARS1,280/USD. We note that the devaluation was greater than we expected (ARS670/USD), and market expectations (ARS526/USD) according to the latest central bank survey and the NDF prices as of yesterday (ARS760/USD). Even more important, the multilateral real exchange rate looks now high in historical terms and close to level reached in the 2022 crisis.

 

 

The central bank also adjusted rates on financial instruments. The central bank decided to maintain the reference rate (Leliq) at 133% despite a worse inflationary outlook. The BCRA cut the 1 day-repo rate (so called Pases) to 100%, from 126% before. Thus, from now on, the stock of Leliq and Pases will pay an average 9% monthly interest rate, while the expected inflation for the coming months is above 20%. Important to note that the stock of Leliq and Pases totalized around 12% of GDP. 

 

No pain no gain. In our view, the announced measures of the stabilization plan begin to address the fiscal concerns yet will lead to higher inflation in the near term, reflecting the pass-through effect of the recent devaluation of the currency and the correction of energy, transport, and fuel tariffs, among others. On the positive side, further progress in the stabilization plan should eventually contribute to a resumption of growth towards the end of 2024, while inflation should eventually decelerate, and create room for appreciation of the currency in real terms over time.