Tax amnesty in a volatile environment
Congress has finally approved the government’s broad-based legal bill, which incorporates changes in the social security and tax systems. The new law, called the "exceptional voluntary reporting system of tenure of national and foreign currency and other goods, locally and abroad” incorporates the much-anticipated tax amnesty.
Although the amnesty kicks in at a relatively high tax rate, the market expects payment participation to be significant. Even if the measure is successful, we think there might be less impact on the currency than expected. Most economic agents may opt to pay the tax, rather than subscribe to the new government bonds, or enter into mutual funds for five years.
The impact on BCRA reserves will differ greatly, depending upon whether participants choose to pay with a) Boden 17/Global 17; b) 10% in cash; c) 33% in 7-year bond; or d) 100% in a 3-year bond.
So, in light of the external imbalances and accumulated inflation, we would not be surprised to see the peso fluctuate in coming weeks, as it tests Q1 highs.
Newly published Q1 balance of payment data indicates that the current account deficit has improved mildly. Yet the general picture remains one of severe external imbalance. May’s trade balance indicated a similar situation, suggesting that in Q2 the annual CAD will remain sizeable.
When “translating” this week’s 15.26 AR$/dollar peak into the Trade Weighed Real Exchange Rate (TWRER) index, the FX rate represents a barely more depreciated index than in November 2015, prior to FX rate liberalization. Furthermore, the level of the TWRER reached in February/March would today represent an FX rate of close to 20 AR$ per dollar.
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