The economic recovery is being delayed and GDP will fall 2% in 2016, but then grow 3.2% in 2017. Positive signs of the slowing of inflation as a result of the monetary policy of the Central Bank. The fiscal deficit in 2017 will be similar to 2016 and will be financed with more debt. The real exchange rate tends to appreciate due to increased foreign exchange earnings.
During the second quarter GDP fell by 2%, a greater-than-expected decline that has led to an increase in the drop in economic activity in 2016 from -1% of GDP to -2%. While there are still no clear and widespread improvements in the activity indicators, the EMAE (monthly estimate of economic activity that anticipates GDP) showed a slight positive change in seasonally adjusted terms in August, so the recession may reach a floor during Q3 of this year to start growing in Q4 and reach the forecast of 3.2% for 2017. The latest inflation data confirmed market expectations that the monthly inflation rate may stabilize at about 1.5% MoM, excluding the exceptional effects of the reversal of the reduction in gas tariffs which affected the index in October. Inflation will continue to decline slowly accompanied by a tight monetary policy and relatively stable market changes. The Central Bank is strongly committed to the goal of lowering inflation and launched the inflation targeting scheme to be implemented from 2017. The official goals this year are relatively ambitious (12%-17%) while market expectations currently average around 20%. This disparity will mean that the Central Bank will maintain interest rates positive in real terms during next year, at least until the monetary authority considers that the expectations are converging towards the planned targets. the fiscal deficit target will be met in 2016 but the government is extending the strategy of gradual adjustment and for 2017 expects a similar primary deficit to this year’s figure, at 4.2% of GDP. The decision to reduce subsidies to economic sectors is becoming more difficult to implement and during the transition, the government will be financed through increased borrowing in the markets, a strategy that the markets have been willing to approve so far given the success of the medium-term placements in domestic currency and fixed rate. Argentina will maintain a current account deficit next year of around 2.5% of GDP, especially since we do not expect a trade surplus to be generated. The resolution of the debt default and the elimination of restrictions on the foreign exchange market from this year onwards reinforce the view that the deficit will be financed through capital inflows. The exchange rate will continue to face downward pressure during this year and the next, encouraged by the inflow of foreign exchange, the fiscal amnesty, debt issues and positive domestic interest rates in real terms. In return, the foreign currency excess has led to a sharp rise in the stock of international reserves, which reached USD 40 billion to October.