We expect the government to meet its official deficit target of 4.2% of GDP in 2017.
Total revenue continued to outpace primary expenditures over the last five months, but the gap is narrowing due to the fading impact of the collection of penalties related to the tax amnesty program. Revenues have increased by 34% year to date, reflecting a 31% gain in tax collection in that period. Excluding penalties related to the tax amnesty program, total revenues have increased by 27% (2.4% in real terms) in the first five months of the year. Primary expenditures increased by 23.6% in May, slightly below the annual inflation rate registered in the period (24%), bringing the increase in expenditures in the first five months of 2017 to 33% (or 7.2% in real terms). The government has maintained tight control of subsidies (which have risen by just 1% YoY year to date), which has partly offset the increases in capital expenditures (38%), payroll (34%) and pension payments (39%).
We expect the government to meet its official deficit target of 4.2% of GDP in 2017. However, we believe that achieving the 2018 target will be more challenging. For 2018 we currently forecast a deficit of 3.8% of GDP, above the 3.2% target.
On a separate note, the trade balance continued to deteriorate in May due to strong imports. Argentina registered a trade deficit of USD 642 million in May, compared with a surplus of USD 485 million in the same month one year ago. As a result, the 12-month rolling balance fell to a USD 0.3 billion deficit, down from a surplus of USD 0.9 billion in April. On a seasonally adjusted and annualized basis, the 3-month trade balance reached a deficit of USD 7.8 billion in May, from a deficit of USD 1.5 billion in 1Q17.
Imports increased by a solid 24% year over year in May across all product categories, reflecting both the strengthening of the currency and a recovery in domestic demand. Imports increased for capital goods (up 22.6% yoy), consumption goods (up 13.6%) and vehicles (up 52.7%), while oil purchases grew by 67%. For the first five months of the year, vehicle imports increased by 43%, and there were substantial increases in imports of oil (30.8%), capital goods (18.4%), and consumption goods (16%).
Exports were almost flat in May (0.8% year over year) mainly affected by lower soy shipments. Exports of primary products declined by 13.3% yoy, mostly due to lower exported volumes. Exports of manufactured agricultural products also dropped (by 9%). In the January-May period, total exports increased by a modest 1.6% due to the weakness of primary products, which fell by 5.4% yoy in the period.
In all, the trade balance is deteriorating faster than we have expected, on the back of a strong currency and internal demand recovery, posing downward risks to our forecasts for the external accounts this year: a USD 2.3 billion trade deficit and a current account deficit of 3.5% of GDP in 2017.
Juan Carlos Barboza