Better foreign financial conditions may slow the pace of reforms
Contrary to what we expected in January, the perception of a high risk of a sudden stop in foreign financing before the end of Macri’s first presidential term is being downplayed in the official circles. As a consequence, the economic authorities are not compelled to prepare a plan to speed up the fiscal and structural reforms. In addition, the fact that the Central Bank is using the CPI index measured by INDEC, which includes the direct effect of the government’s adjustments of regulated prices, as the main indicator for its inflation target supports the view that the removal of economic subsidies should be gradual and spread over the next three years. The government will want to avoid triggering BCRA interest rate hikes. In our January Quarterly Outlook we thought the remaining adjustment of regulated prices would take place between the last quarter of 2017 and the beginning of 2018. We now believe this is unlikely.
All our previous Quarterly Outlook forecasts since the inauguration of President Macri proved to be excessively optimistic, both for inflation and GDP growth. Those forecasts reflected our perception that the new president and his team had the correct view of how the Argentine economy should be organized, the right diagnosis of the severity of the inherited imbalances, and the courage to adopt difficult but inescapable adjustments as quickly as possible.
The decision-making process was not as efficient and assertive as we expected, and the actual outcomes, both for inflation and growth, were disappointing. Most well-trained economists share this view, but political analysts and operators close to the government argue that President Macri could not have adopted economic reforms at a speedier pace while preserving the support he needs in the coming midterm elections. If he were to lose the election, it would be more difficult to continue with his reform agenda.
Whatever the reason, in hindsight we were overly optimistic. Nonetheless, we still believe that Macri will succeed in showing good results by the end of his first presidential term in 2019, and that he has good chances of being re-elected for a second term.
In terms of forecasts, for 2017 we believe GDP will be lower than previously expected, and inflation will be the same, except for the official CPI measured by INDEC, which will be lower because many regulated prices will remain unadjusted. However, delaying the adjustment is shortsighted: it will increase the fiscal deficit due to the persistence of subsidies and will result in higher inflation rates in 2018.
The financial needs of the government will be higher in 2018 and 2019. That would have been avoided if the pace of reforms had been speedier. Therefore, if a sudden stop in foreign financing occurs during those two years, it will jeopardize the stability and growth of the economy. The government is simply downplaying this risk.
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