The government ratified its commitment to further reduce the primary deficit in the years ahead.
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The treasury posted a deficit of 3.9% of GDP (ARS 404.1 billion), slightly better than our forecast of 4.0% and 0.3% lower than the official target of 4.2%. The deficit was also 0.4% below the level registered in 2016. Excluding the effects from the tax amnesty (which benefited revenues both in 2016 and in 2017), the fiscal deficit fell by 1.3% of GDP between 2016 and 2017. In real terms, primary expenditures fell 2.4%, and total revenues dropped 1.8% (an increase of 2.6%, excluding the above mentioned extraordinary revenues). The interest bill increased to 2.2% of GDP in 2017 from 1.6% in the previous year, due to growing debt and less reliance on central bank financing. As a consequence, the nominal federal government deficit expanded to 6.1%, up 0.2% from the deficit registered in 2016.
The government ratified its commitment to further reduce the primary deficit in the years ahead. The treasury minister, Nicolás Dujovne, reaffirmed the next steps are to reduce the primary deficit to 3.2% of GDP this year and to 2.2% in 2019. As there will be no revenues related to the tax amnesty in 2018, we estimate a needed fiscal effort of 1.1% of GDP to reach this year’s target. In our view, the 2018 target can be achieved through recent changes in the way pensions are adjusted, continued efforts in slashing subsidies and higher tax collection due to the expected economic recovery. For 2019, we estimate a primary deficit of 2.4% of GDP, slightly above the official target (2.2% of GDP). We estimate that gross debt will likely reach 67.6% of GDP in 2019 from an estimated 61.3% in 2017 and 64.8% in 2018. Excluding central bank and social security holdings of treasury bonds, net debt will likely reach 38.4% of GDP from an estimated 32.4% in 2017 and 35.7% in 2018, a still low level. ** Full story here.
Industrial production grew for the first time since July, but was flat once corrected for seasonal and calendar effects. The industrial production year-over-year increase of 0.3% in November (-0.3% previously) was above expectations (Bloomberg consensus: -1.0%; Itaú: -1.5%), but was still weak. In the quarter ending in November, industrial production fell 0.6%, down from the +0.2% in 3Q17. At the margin, industrial production decreased 2.4% qoq/saar, a slowdown from the +3.0% in 3Q17 and +4.3% in 2Q17.
On the other hand, retail sales contracted once more, but activity looked better at the margin once vehicle and fuel sales are removed (likely benefitting from lower inflation and interest rate cuts). Retail sales contracted 1.2% year over year in November (-0.7% previously), consistent with both the Bloomberg market consensus and our call of -1.0%, in part due to a high base of comparison as in 4Q16 people brought forward purchases in anticipation of the VAT hike. Excluding vehicle and fuel sales, activity is better, rising 0.7% in the quarter ending in November (1.4% in 3Q17), similar to rates in 2Q17. At the margin, retail sales (excluding fuel and vehicle sales) accelerated to 5.8% qoq/saar, from 1.3% in 3Q17 and 1.1% in 2Q17.
Activity likely ended 2017 on a weak note. We estimate growth of 1.5% for 2017, down from 2.0% in 2016 and 3.1% in 2015. Nevertheless, we see a pick up to 2.5% this year, due to lower inflation, stronger external demand (supporting higher oil prices) and an expansionary monetary policy. Amid well-behaved inflation expectations, inflation that will likely near the 3% target in coming months and still weak activity, the argument in favor of rate cuts remains. However, recent commentary from central bankers suggest a new cut may not come this month. ** Full story here.