Inflation still above 20% in 2017, but better prospects for 2018
This quarterly report tries to answer the questions most frequently asked by prospective investors in the Argentine economy:
1. Will Macri’s government deepen the fiscal and pro-market reforms before the mid-term elections to take place in October 2017?
2. If, without deepening the reforms, the government gets a good electoral result, will it decide to expedite the fiscal and pro-market reforms immediately after the election? What if the government does not get favorable electoral results in October 2017?
3. In case the government does not deepen the reforms in 2018, and the fiscal deficit is not reduced, will Argentina continue to draw in the foreign financing it is receiving in 2016 and 2017?
Our answer to the first question is: Not likely. There are clear signs there will be no new fiscal or pro-market reforms before October 2017.
Our answer to the second question is: Very likely. In spite of the favorable results, Macri will be dissatisfied with the levels of direct investment and will not risk a sudden stop of financial inflows. Therefore, he will try to avoid postponing the pro-market and fiscal consolidation reforms.
Our answer to the third question is: It will be difficult to continue financing large fiscal deficits with debt. If the financial markets continue to send signals of readiness to finance large fiscal deficits, it is not unconceivable that Macri will be tempted to postpone the reforms again, as will be suggested by his political advisors. But in that case, the risk of a sudden stop of capital inflows in 2018 or 2019 would increase dangerously. Macri will likely expedite the necessary reforms to minimize the risk/effects of a sudden stop.
Complementary to the political analysis, in this report we use the information on the main economic variables for the third quarter of 2016 and the projections implicit in the budget bill for 2017 to revise our forecasts for 2017. Ongoing negotiations in Congress should not alter the budget bill significantly, so its projections can be safely used to fine-tune 2017 forecasts.
We completely discard the alternative scenario forecast presented in our July report, because it is clear now that the government will not deepen the pro-market and fiscal reforms that would have made possible a 1% per month inflation target.
We reconfirm our basic scenario for 2017 and we use our alternative scenario as a guide for our 2018 forecast, consistent with our opinion of a strong resumption of the reforms by the end of 2017 and the beginning of 2018.
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