Hopeful support for policy continuity
Confidently betting for a good electoral result in October. Last Sunday primary elections represented a solid victory for the government, overtaking 10 provinces, 3 of the biggest districts in the country included. The technical tie with CFK in the Province of Buenos Aires was another positive development; expected to be biased in favor of the government in October, with the help of moderate votes not participating last Sunday (some 10% of the electoral register) and further polarization fueled by CFK´s substantial rejection rate. This electoral result should not only improve the chances for policy continuity beyond 2019, but also facilitate Congress´ discussion of necessary reforms. Meaningful reforms remain far from assured though, but we continue to expect improvement, investing in Argentine credit and the ARS. The recovery gains robustness. Activity indicators available for 2Q17 show a consolidating economic expansion, supporting our GDP growth projections of 2.6%-3.0% for this year and next. All components of domestic demand are driving growth momentum, which would have been even stronger, had the external sector not contributed negatively. Brazil´s gradual rebound represents another encouraging factor, as well as the ample external financing available. Furthermore, much contained political uncertainty ahead is expected to add robustness to the current recovery path. Sustained investment and productivity growth remain the challenge ahead. Central Bank upholds its anti-inflationary commitment. Although July´s inflation rate came out lower than expected, core inflation has continued to show strong slowdown resistance. This very same resilience together with programmed utility price adjustments will oblige the CB to keep its tightening bias for the time being. Such a hawkish monetary stance amid an expansionary fiscal policy financed in hard currency supports the continuation of high interest rates, particularly expressed in USD, and a strong peso. Based on such scenario, we continue to expect further strengthening in ARS assets, particularly sheltered by greater political stability after the primary elections. Fiscal policy at the crossroad, and financing conditioned by the electoral calendar. Public spending growth has been partially contained in the last couple of months, and the government has maintained its 2017 fiscal commitment aiming at a primary deficit of 4.2% of GDP. The current fiscal path forestalls a primary deficit adjustment of almost 1.8% of GDP next year, demanding a drastic control in expenditure and increases in utility prices. Meanwhile, the public debt ratio is set to move towards 40% by 2019. Still a manageable level from a regional standpoint, but nonetheless forcing to improve fiscal balances right after the mid-term election. Sustainability and a new upgrade in Argentina´s economic perspective depend critically on the reform agenda postOctober and the government´s ability to take advantage of a new political honeymoon next year. Financing will remain high until then, still representing the greatest source of fragility.