Two Holiday Gifts
Santa brought Argentina two Christmas gifts: a promising reduction in the monthly inflation rate, and an impressive outcome for its tax amnesty plan.
The fall in monthly inflation will permit two policies that may favor economic activity recovery, and provide fiscal support to the Central Bank’s anti-inflation struggle. One policy falls under the auspices of the Bank: a cut in the nominal interest rate. The other comes under the jurisdictions of the ministries of Fiscal Affairs, Energy and Transportation: to cut economic subsidies, by adjusting prices of electricity, natural gas and urban transport.
At the price of a deeper and longer-than-expected recession, the Mauricio Macri government removed exchange controls, reunified the FX markets, eliminated most export and other distortive taxes paid by small and medium-sized companies, started adjusting public utility prices and drove monthly inflation, by last quarter, below that of 2015, when then-president Cristina Kirchner was repressing inflation by all imaginable distortive price and exchange controls.
Still there are no clear signs of recovery, and investment remains very low. But in 2017 a significant increase in public investment is expected, and part of the funds fiscally regularized through the amnesty may find their way into productive private investment.
Electoral campaigns will probably prevent significant fiscal and structural adjustments until the October elections. We presume the government will propose a fiscal reform (in both expenditure and revenue) to be discussed in Congress immediately afterward, as part of 2018’s budget debate. The appointment of Nicolás Dujovne as the new minister of fiscal affairs seems to have been made with such a reform in mind.
New Minister of Finance Luis Caputo is in charge of getting enough debt financing to cover public financial needs. He’ll be helped by the outcome of the tax amnesty, not only because it will bring significant additional revenue (more than 82 billion pesos, or $5 billion), but because much of the $90 billion of Argentines’ fiscally regularized liquid assets may go into Treasury bonds. Argentine Treasury bonds and bank deposits are the only financial assets exempt from wealth and income taxes. Portfolio reallocations by taxpayers who have regularized liquid assets are already cutting Argentine Treasury bond returns, especially the BONAR24, which matures in four years. The fall in long-term bonds has so far only reversed the jump after the election of Donald Trump. But rates may keep falling, as investors seek higher returns.
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