Tax reform clears Argentina’s Lower House

The bill seeks to reduce the tax burden and labor costs for companies to encourage investment.

Talk of the Day

The Lower Chamber passed the tax reform in a vote of 146 to 77. The Senate will now take up the bill for debate. Approval came only a few hours after the same chamber passed the pension reform bill into law.

The tax reform bill seeks to reduce the tax burden and labor costs for companies to encourage investment.Its main changes include a gradual reduction in the corporate income tax rate (to 25% from 35%) starting in 2019, a cut in payroll taxes and the phasing out of the tax on financial transactions (use of checks) during the next five years. To partially offset the fiscal cost of the bill, the country will see hikes in levies on alcoholic and sweetened beverages and the introduction of a tax on earnings from financial assets (deposits, bonds) held by individuals. Still, the government estimates a fiscal cost of 1.5% of GDP in five years and is counting on a higher growth rate to compensate for this cost.

Congress works at full throttle before year-end. The Senate will likely debate tax reform this week and a capital market bill next week, the last step before they become law. The legislative pipeline also includes a 2018 budget, which sets a primary fiscal deficit of 3.2% of GDP (down from an estimated 4% this year), the fiscal responsibility bill (capping the real growth of provincial and federal primary expenditures at zero) and the fiscal pact (to cut provincial taxes and compensate the province of Buenos Aires in a tax-sharing revenue dispute). In March, the legislature will take up labor reform, which envisions a reduction in severance payments and new, flexible labor contracts.
The INDEC will release tomorrow at 5:00 PM (SP time) the current account balance for 3Q17. The current account deficit increased to USD 6.0 billion in 2Q17 from USD 2.8 billion in 2Q16. We expect a further deterioration in 3Q17 to USD 7 billion due to a narrowing trade and travel balance, in line with the Bloomberg market consensus.


The current account posted a USD 2.4 billion deficit in November, wider than our estimate (USD -1.9 billion) and market expectations (USD -1.8 billion). Equipment rentals and other services were behind the surprise. The current account deficit will likely end 2017 at a low level, supported by strong trade surplus, but the service and income deficit expanded during the year. For the next years, we maintain our expectation of a gradual increase in the current account deficit, in line with the rebound in economic activity, but not to the point of compromising Brazil’s external sustainability.

In the financial account, direct investment in the country (DIC) added up to USD 5.0 billion, topping our estimate (USD 4.0 billion) and market consensus (USD 4.3 billion). Equity capital transactions accounted for 91% of total DIC. DIC accumulated over 12 months has been stable around USD 80 billion. Foreign investment in the local capital markets was positive by USD 592 million, as USD 692 million inflows to the fixed income market outsized USD 100 million outflows from the stock market. For the first time since March 2016, foreign investment in the local capital markets over 12 months posted inflows, of USD 2.5 billion. ** Full Story here.

The Brazilian central bank announced reserve requirement reductions. The reserve requirement of demand deposits decreased to 40% from 45% and that of time deposits was lowered to 34% from 36%. According to a note published on BCB’s website, the measure is part of a broader agenda to simplify and reduce the operational complexity of complying with current reserve requirement rules. It also contributes to a structural reduction of the overall volume of reserve requirements in Brazil, according to the monetary authority.

Even with the reduction, the level of reserve requirements will still be relatively high in Brazil. According to the central bank statement, this measure will lower the reserve requirement by about BRL 6.5 billion, which represents about 1.4% of total liquidity held as reserve requirement (BRL 464 billion at end-October 2017).

The measure is likely to have little macroeconomic impact. At the present moment the level of reserve requirements does not seem to be a binding factor for bank lending. Regarding monetary policy, the move is consistent with our view that the BCB is still comfortable with the inflation outlook, amid a gradual recovery of economic activity. The authorities also stressed, when they announced the decision, that the change in reserve requirement regulations aims at making compliance easier and is part of its broader banking sector efficiency agenda – and not part of its monetary policy strategy. Thus, we stick to our call that the end of the easing cycle will only come in March, with a final cut of 25bps, leading to a Selic rate of 6.5%.

December’s IPCA-15 consumer inflation preview will be released tomorrow at 9:00 AM (SP time). We forecast a 0.36% monthly rise (consensus: 0.35%), with the year-over-year rate reaching 2.95%. The transportation and housing groups will make up most of the rise in the month, while the food & beverage group will contribute negatively for the seventh time in a row. Also, tomorrow the National Monetary Council will announce the TJLP long term interest rate. We and the analysts’ consensus expect it to be kept unchanged at 7.0%.


INEGI will publish CPI inflation figures for the first half of December tomorrow at 12:00 PM (SP time). We expect bi-weekly inflation to post 0.30% (consensus: 0.40%), driven by the seasonality of the end-of-year holidays. Assuming our forecast is correct, inflation would decrease to 6.55% year-over-year (from 6.67% in the second half of November). Together with the inflation data, INEGI will publish October’s monthly GDP proxy (IGAE), whose growth we expect to accelerate to 1.7% year-over-year (mkt: 1.32%).

LatAm Macro Calendar

Trade Recommendation

We believe Colombia’s credit risk will deteriorate going forward, as (1) structural fiscal challenges mount; (2) current account deficit remains wide; (3) global financial conditions become tighter and (4) we forecast lower oil prices ahead. Uncertainty over the presidential elections can also contribute to increase the sovereign risk premium. We recommend buying protection in Colombia’s 5y CDS, currently trading around 107bps, slightly below the average of countries rated BBB- by S&P. We believe the market will price in higher chances that Colombia will lose its investment grade, so CDS ought to trade at a level in between countries rated BBB- and BB+ by S&P. In addition, tighter global financial conditions are likely to shift upwards the CDS of all emerging markets.

Fuente: ITAU

Leer más Informes de:

Finanzas Sector Público / Fiscal