Building Fiscal Credibility

ARGENTINA - Report 10 Mar 2017 by Esteban Fernández Medrano

As we leave behind the more leisurely summer months of January and February, economic and political activity returns to a more vertiginous path. President Macri’s Address to the Nation, at the opening session of Congress on March 1, and Treasury Minister Dujovne’s presentation of new quarterly fiscal targets are signs of such an awakening. Bur so are the labor unions’ discussions on wage negotiations, the tone of which is rising to the point of threatening a general strike.

From a macro perspective, Macri started the second year of his mandate in an economic environment in which, despite the government’s ongoing efforts, he has not yet managed to tame the macro imbalances he inherited. The economy remains immersed in sizeable fiscal and current account deficits, with decreasing yet significant inflationary pressures despite soft activity data. These fiscal discussions, combined with the question of whether 2017 will be a year of economic growth, or better said, of how much growth, are at the core of most economic deliberations. In this report, we analyze the fiscal modifications recently presented by the Treasury and review the recent activity indicators.

Dujovne took a step to undo the “fiscal embellishment” or “fiscal make-up”. He published a new breakdown of the fiscal data from January 2016 on by eliminating the BCRA “accounting profits” from its fiscal results (both the primary and financial deficit). This acknowledgment implied an AR$ 109bn plunge of the official 2016 financial deficit, or in terms of GDP, a drop from -4.6% to -6.0%.
In the real sector, the latest activity indicators showed an improvement with respect to the previous recession. While this is doubtlessly positive, we need to see this recovery develop further in order for it to have a significant impact on the fiscal balance.

Among the factors that should help such growth we identify: 1) the newly registered assets from the tax amnesty, which represent potential capital for domestic consumption or investment, 2) a recovery in real wages (current wage negotiations are not only closing above the 17% BCRA inflation target, but also above the expected 22% variation in CPI), and 3) a positive agricultural crop, which should add to FX flows and have a wealth effect on the rural sector.

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