Stronger than expected opposition downplays growth optimism

ARGENTINA - Forecast 16 Jan 2018 by Domingo Cavallo

Negotiations with governors and trade union leaders during November and discussions in Congress during December proved to be more difficult than anticipated in our previous quarterly report.​

Several desirable features of the tax and labor reforms had to be abandoned or postponed. Instead, the government concentrated its efforts on imposing fiscal constraints to the provinces and in reducing the impact of six-months backward indexation in pension benefits in order to prepare the climate to get similar effects on the next round of wage negotiations. The final purpose is to negotiate future wages and pension benefits based on planned rather than past inflation.

At the same time, the regulated price adjustments, which had been postponed in the months prior to the election, were implemented in December, provoking a large jump in the consumer price index. This happened in spite of the fact that the rate of inflation of the prices set in free markets went down in December with respect to November and, in both months, stayed significantly below the average of the period July 2016-October 2017.

The Central Bank had been increasing the interest rate paid on LEBACs since July and the exchange rate had leveled around 17,5 pesos per dollar, however the increase in CPI inflation in December together with early warmings of lower growth, created concerns in the government about the efficacy of the high interest rate policy applied by the Central Bank.

The significant increase in the trade deficit and the deficit in the current account of the balance of payment with respect to almost all previous forecasts was perceived to be caused by the exchange rate overvaluation generated by the LEBAC’s induced carry trade.

To create space for lower interest rates paid on LEBACs and to reduce exchange rate overvaluation, the Chief of Cabinet announced that the inflation target for 2018 was adjusted up from 10% to 15 %, closer to the inflation rate assumed in the budget for 2018.

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