Markets Doubt Zero Deficit for 2019

Several elements played in favor in 2018. Next year they will not. On the spending side, the social and social security is key, since the higher the increase, the greater the adjustment will have to be made in the rest.

As seen in the first ten months of 2018, the fiscal performance is shaping up to show a fulfillment, by far, of the goals agreed with the IMF. That would even allow him to advance payments corresponding to next year, instead of the classic mischief of increasing the stock of unpaid drafts. Or, as some suspect, improve the salaries of state and retired and some plus for social plans for the end of the year.

Of course there were a series of gadgets and factors that helped to make this performance possible and, unfortunately, would not be present in 2019, both on the side of income and spending. This is what makes analysts doubt that the fiscal goal of “deficit zero”, which some discount as a fact, is presented by other challenging.

It happens that in the first 10 months of 2018, the primary deficit fell 33% year-on-year, reaching contracting almost 50% in real terms. This retreat of the primary deficit was achieved from income that showed an increase above primary expenditure (31.4% vs. 22.6%). However, “the good performance of tax revenues was not due to the good collection performance, but to the strong increase in property income due to interest income obtained from Treasury fixed-term deposits in Banco Nacion” , warns the Broda Study. In addition, on the expenditure side, there was a 6.6% year-on-year drop in real terms. The items of expenditure that recorded the greatest setbacks were: public works, transfers to provinces, the deficit of public companies and state salaries. If the behavior of the expenditure is analyzed by its characteristic of inflexible and flexible, that is, between the one that is tied to some indexing scheme and the one that does not, it is observed that there was a “devastating” adjustment in the spending on pensions and pensions (fell almost 16% real year-on-year last October) and the same in family allowances, non-contributory pensions and PAMI. While in flexible spending the biggest drop in October last corresponds to salaries and transfers to provinces with 17% and 11% respectively.

Now, with a view to what is coming, we must take into account, mainly, five challenges that conspire with the fulfillment of the “zero deficit”, according to the Broda Study.

The real fall in tax collection could tend to accentuate in the coming months due to the recession. This is key, given the high correlation between the level of activity and the real tax collection.

The Treasury will not have the “boom” of the property rents of 2018. Since a good part of its deposits in the BNA must be used to cancel its obligations in pesos in this last month of the year. It should be recalled that Luis “Toto” Caputo had placed debt last January for US $ 9,000 million and with these funds, passed to pesos via the BCRA, were placed in the BNA for a fixed term. In 2019 not only are official deposits expected to be lower, but also interest rates will also fall back.

Primary spending has been accelerating in the last months of 2018 (between April-October it grew 29% year-on-year vs. 12.9% in 2017). Even the accrued expense has been growing above the cash level.

It is almost impossible that the expenditure on economic subsidies show a real fall in 2019 as projected by the Government (the IMF expects to lower the% of the subsidized rate to 30%). In the best of cases, this expense will remain constant in real terms. And still, for the latter to be feasible, the electricity rate should increase by at least 60%.

Social and pension spending will tend to accelerate because it is indexed by past inflation (6 months ago) and the recent rise in prices will cause this item to tend to increase more. The greater the rise in social and pension spending, due to the drop in inflation, the more the rest of the spending will have to adjust to achieve the “zero deficit”.