Itaú BBA - Argentina Minister sets fiscal and monetary targets for 2016-2019

Latam Talking Points

< Voltar

Argentina Minister sets fiscal and monetary targets for 2016-2019

Janeiro 14, 2016

Argentine Minister announced goal to reduce fiscal deficit to 0.3% of GDP by 2019 (after a 5.8% deficit in 2015).

Talk of the Day


Minister of Economy and Public Finances, Alfonso Prat-Gay, announced in a press conference on Wednesday the government’s fiscal and monetary targets for the period 2016-2020. Prat‑Gay reported that the fiscal deficit in 2015 was equivalent to 5.8% of GDP, once transfers of dividends of the central bank and other doubtful revenues have been excluded. The 2015 primary deficit rises to 7.1% of GDP once the extraordinary revenues due to payments in advance of the income tax are deducted. The government expects to collect more this year from soybean export taxes due to the depreciation of the currency, and to cut subsidies amounting to 1.1% of GDP while reducing other expenditures amounting to 0.8% of GDP. As a result, the goal for 2016 is a fiscal deficit of 4.8% of GDP. For the next three years, Prat-Gay set fiscal-balance goals of -3.3%, -1.8% and -0.3% of GDP, respectively.

Regarding inflation, Prat-Gay said that prices rose by 28% in 2015, while annual inflation hit 30% as of last quarter. The inflation target range for this year is 20%-25%. The minister said that he expected the evolution of prices in January to be consistent with a deceleration of inflation after a peak in December. The target ranges for the 2017-19 period are 12%-17%, 8%-12% and 3.5%-6.5% (5% average).

Finally, Prat-Gay confirmed that formal negotiations with the sovereign debt holdouts had begun.He said that the original amount of principal under negotiation is around USD 3.0 billion, but due to arrears and penalties applied by the U.S. courts, the total debt has risen to almost USD 10.0 billion.

We consider the announcement of guidelines as positive because they will permit the market to align inflation expectations with the official targets. We think that it will be quite challenging to reduce inflation to less than 25% this year. Inflation is likely to remain high in the coming months due to the pass-through of the currency depreciation and the adjustment in utility tariffs due to the cut in subsidies. Thus, the wage negotiations beginning in April will be an important test of the government’s capacity to contain inflation amid relative-price adjustments. In our scenario, inflation hits 34% year over year by December 2016 (although with a sequential deceleration in the second half). Tighter monetary policy will be key to moderating the pass-through of the ARS depreciation. The central bank will use the interest rate paid on Lebacs to tighten monetary policy. We expect the 35-day Lebac rate to gradually fall to 30% by year-end.


In line with the economic analyst's survey published on Tuesday, financial operators expect the central bank to remain on hold (at 3.50%) in tomorrow's meeting (unchanged from the previous survey), while a rate hike would come some before April. An additional 25bp hike would take place between July and December this year, so financial operators see the rate ending 2016 at 4% (same as economic analysts), with no additional rate movements expected during 2017. The survey also shows that inflation is expected to end 2016 at 3.5% (in line with our expectations), and to be at 3% by yearend 2017 (as did economic analysts). Therefore, inflation expectations - according to surveys - remain anchored at the 3% target. We expect the central bank to leave the rate unchanged tomorrow. For the reminder of the year, amid a currency that has continued to depreciate (putting pressure on tradable inflation), we anticipate to see additional tightening to ensure inflation converges to the target and inflation expectations remain anchored.


Although November retail sales surprised to the upside, weakness is set to continue ahead. Core retail sales advanced 1.5% m/m (survey: -0.8%; Itaú: -2.0%), whereas the broad index advanced 0.5% m/m, also beating expectations (survey: -0.4%; Itaú: -0.9%). The main positive surprise came from durable consumer goods. In our view, the reading suggests an anticipation in year-end purchases, thus we expect a payback in December. Looking ahead, we maintain our assessment that labor market deterioration and low consumer confidence are consistent with further declines in sales. ** Full story here.

Itaú Unibanco’s monthly GDP remained on a downward trend in November, suggesting downside risks for economic activity. Our proprietary PIBIU index slid 0.4% m/m (or 6.0% y/y). Six out of ten indexes that form the indicator posted an advance, yet the diffusion index remains close to its lowest level since 2009. For December, we expect another retreat (-0.4% m/m). The reading, along with other economic activity data, reinforces the downside risks to our 2016 GDP forecast of -2.8%. ** Full story here


< Voltar