Argentina Keeps Positive Outlook, but Inflation, Reforms Will Be Tested

Economic reforms are well underway in Argentina since the country’s mid-term elections in October 2017, and are the basis for Fitch Ratings’ positive outlook and B rating. However, recent hikes to the official inflation targets and a large deficit have underscored ongoing policy tensions.

Since October, the country has passed a new tax bill that cuts corporate taxes, contains spending and changes the pension indexation formula to lower expenses, Fitch said. Capital market reforms are also in the works, as are “controversial” labor market and electoral reforms.

“This reform momentum is broadly positive for Argentina's credit profile,” analysts wrote. “It reflects improving executive governability vis-a-vis the congress and provincial governments. It could also support a stronger and more sustainable growth path after a decade of policy-related volatility.”

A large fiscal deficit, however, is still Argentina’s main credit weakness. In 2017, the primary fiscal deficit dropped to 3.9% of GDP from 4.3% in 2016. Still, the total fiscal deficit increased to 6.1% of GDP in 2017 from 5.9% thanks to interest charges.

Money supply growth remains high due to strong dollar inflows from public borrowing and ongoing central bank financing. Utility rate hikes are creating price pressures, credit growth is surging amidst weak financial markets and inflation reached 25% in 2017, above the government’s target of 12% to 17%.

“The subsequent jump in 2018 inflation expectations to around 18%—higher than the new target—highlights this risk and poses a challenging backdrop to upcoming wage negotiations,” Fitch said. “These will serve as a crucial test in the disinflation process.”

– Nicholas Stern, managing editor

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