The fear of tighter financial conditions will encourage better post-election economic policies
The appointment of Nicolas Dujovne to replace Alfonso Prat Gay as Minister of the Treasury does not signal a fundamental change in economic policy. But it looks like the new minister will put more emphasis on fiscal consolidation and will draft a tax reform to be implemented in 2018.
Dujovne will try to strictly enforce the budget for 2017 in order to assure that the primary fiscal deficit will not exceed 4.2% of GDP. He proposes revisions in the composition of public expenditure, reducing non-wage current expenditure, transfers to the provinces for current expenditure and transfers to public enterprises to cover their deficits. This way the government will be able to raise capital expenditure, including transfers to the provinces to finance public works. In the last section of this report we introduce minor adjustments to our previous fiscal forecasts for 2017 and 2018 (those published in our October quarterly report) to take account of these changes.
Monetary policy will continue targeting inflation at 12-17% per year for 2017, but there are several reasons to expect that the actual inflation rate will be in the range 21% (for non-regulated prices, as measured by PriceStats) to 27% in the City of Buenos Aires (CPI CABA), the jurisdiction where increases in regulated prices have the highest incidence on inflation.
The deviation of actual inflation with respect to the target should not discourage the authorities of the Central Bank because it originates in factors that monetary policy cannot control. Once the realignment of relative prices is completed, these factors will cease to affect inflation. In addition to managing a strict anti-inflation monetary policy, the Central Bank is introducing beneficial regulatory reforms to money markets and the payment system which, in the future, will increase economic efficiency.
The recession was deeper than anticipated by the government and most economic forecasters, but by the end of the year there were some symptoms of recovery. The Central Bank is unlikely to increase the policy interest rate this year, even if the inflation rate exceeds the target, to avoid interrupting the incipient recovery.
The government is increasingly concerned with the perceived risks of tighter financial markets, particularly for years 2018 and 2019. In spite of the enthusiasm created by the success of the tax amnesty of 2016, the rate of return on bonds (both short and long-term), continues to be high (5.5% for the BONAR24 and 8% for the PAR38). For this reason the government tapped the external markets early in the year. This perceived risk will also encourage the authorities to prepare a more complete and ambitious stabilization and development plan to be implemented immediately after the October mid-term election.
The other forecast revision in the last section pertains to the ARS/USD exchange rate for 2017 and 2018. We are now using the estimate of the exchange rate for 2017 that was announced by the Ministry of Finance when it presented its 2017 financing plan (17.9 pesos per dollar average and 19.5 for year-end), which is higher than the estimate that was included in the budget for 2017 and higher than we used in our previous forecast (17.5 pesos per dollar and 18.9 for the end of the year).
Overall, the revisions to our 2017 forecasts reinforce our conviction that in 2018 the growth rate will pick up, and the inflation rate will decline significantly. In summary, we expect a better economic performance for 2018 than for 2017.
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