Abstract
Upon taking office in December last year, Argentina's new government faced pervasive macroeconomic imbalances, microeconomic distortions, and a weakened institutional framework. These encompassed unsustainably high consumption levels, historically low levels of investment, and large fiscal deficits financed by money creation, which led to high inflation. Distortions at the micro level included an extensive network of administrative controls (for example, trade barriers, foreign exchange restrictions, and price controls) and a business environment that eroded competitiveness and undermined medium-term growth. There was also an important weakening of the institutional framework for economic policymaking, perhaps most evident in the loss of credibility of the national statistics agency.
This note reports on information that has become available since the staff report was issued and does not alter the thrust of the staff appraisal.
Economic outlook. The monthly indicator of economic activity showed positive 0.2 percent (m/m) growth in August, the first time since March, but GDP is expected to have contracted again in Q3. Construction activity fell by 13 percent (y/y) in September and industrial production fell by around 7 percent (y/y) in Q3, driven by continued weakness in the automotive sector. Private consumption indicators were mixed, with consumer confidence increasing 6.3 percent in October but retail sales continuing to fall in real terms in August. The trade balance continued to improve in September, mainly due to subdued imports.
Monetary policy. The central bank has maintained the policy rate unchanged for the past six weeks at 26.75 percent, noting that inflation expectations for 2017 remain slightly above the 12–17 percent target (median inflation expectations for December 2017 were 19.7 percent in October, slightly below the 20 percent expected in September). The construction and retail sectors completed the second stage of their annual wage negotiations, which led to annual salary increases of slightly below 40 percent in both cases.
Fiscal policy. The fiscal deficit widened in September, with primary spending increasing at close to 37 percent (y/y), mainly reflecting increase in transfers to the private sector following the utilities tariff rollback. The authorities have announced a bonus in December for those receiving the minimum pension and beneficiaries of social transfers, with an estimated fiscal cost of around 0.2 percent of GDP. The first round of the tax amnesty ended on October 31 with a better-than-expected result of about US$4.6 billion declared in cash terms.
Debt issuances and FX reserves. The Treasury successfully issued 7 and 10 years fixed-rate peso bonds in October. Although conducted in the domestic market, the transactions attracted substantial interest from foreign investors, generating FX inflows that increased reserves to close to US$40 billion in late October (the highest level since mid-2013, up from around US$30 billion at end September). This allowed the central bank to pay back a US$2.5 billion loan from the BIS. The province of Buenos Aires managed to raise US$750 million, totaling US$3 billion year-to-date, while Santa Fe raised US$250 million in its first ever international debt sale.
Legislative progress. The lower house approved with a large majority the 2017 Budget with an overall deficit target for next year of -4.2 percent of GDP as in the original proposal. The Budget contains the obligation for provinces to reduce the fiscal deficit by 10 percent next year relative to the 2016 outturn. The lower house also approved a bill that limits government’s authority to reallocate spending without Congressional approval to 7.5 percent of total spending in 2017, falling to 5 percent in 2018. Finally, the lower house approved a bill that redesigns an institutional framework for public-private partnership investment projects. All bills now move to the Senate for final approval.