Economic Analysis - Expenditure Constraints Support Deficit Reduction - APR 2018

BMI View: Argentina's fiscal deficit will narrow in 2018 amid growth-driven revenue gains and constrained expenditure growth. That said, debt levels will continue to rise, limiting potential for tax cuts.

  • Argentine President Mauricio Macri's administration will continue to narrow the fiscal deficit over the coming quarters.
  • We forecast the primary deficit will narrow to 2.9% of GDP in 2018, from 3.9% in 2017, with the overall deficit coming in at 5.2%, down from 5.9%.
  • We forecast total government debt will rise to 47.8% of GDP in 2018, from 44.8%, which will limit the administration's ability to pursue tax cuts.
Deficit Reduction Remains On Target
Argentina - Primary & Nominal Budget Balances
f = BMI forecast. Source: MECON, BMI

Argentina is most likely to outperform its budget targets in 2018. In 2017, its 3.9% of GDP primary deficit was notably below the government target of 4.2%, and we expect it will similarly outperform its 3.2% target in 2018. This reflects the administration's continuing efforts to constrain expenditure growth, and revenue growth driven by rebounding economic activity. We forecast real GDP growth of 3.3%, which will contribute to total revenues rising to 27.2% of GDP, from a five-year low of 26.0% in 2017.

Expenditure growth will be constrained by cuts to end-user energy and transport subsidies, pension obligations and administrative expenses. Subsidy cuts remain the lynchpin of consolidation efforts ( see 'Subsidy Cuts Support Narrower Deficits', May 23 2017), given that subsidies equaled an estimated 4.0% of GDP in 2015. Since securing a strong performance in the October 2017 legislative election, the government has stuck to a regular schedule of subsidy cuts, with another round of energy subsidy cuts planned for April. In December, the legislature passed a pension reform that will reduce obligations by changing how pensions are calculated. In January, Macri announced cuts to administrative expenses, including freezes on salaries for senior public servants and reductions in the number of political appointee positions.

Total public debt will continue to rise. From an estimated 52.7% of GDP in 2017, we expect debt will steadily rise due to persistent primary deficits over the coming years, peaking at 63.2% of GDP in 2023. While external debt will underpin government financing, domestic markets are likely to take on an increasing role as economic growth and financial sector reforms deepen local markets. In February, the government issued ARS70.5bn in peso-denominated one-year notes, which was oversubscribed.

Debt Yet To Peak
Argentina - Total Government Debt
e/f = BMI estimate/forecast. Source: Ministerio de Finanzas, BMI

A rising debt load will likely temper the administration's ambitious plans for tax cuts. In November, the administration introduced an ambitious tax reform that would cut corporate income taxes to 25% by 2021, from 35% currently, and reduce payroll taxes in order to encourage formal employment ( see 'Rising Debt Suggests Less Ambitious Tax Reform', November 29 2017). We expect that over the coming months some proposed tax cuts will be rolled back in order to preserve the government's revenue base. However, we expect this will have only a modest effect on investment and employment.