Treasury unveils 2020 budget bill
With no significant changes planned to the existing tax structure, the adjustment will come largely from the expenditure side. However, the government makes a rather sanguine assumption about the improvement in GDP growth next year, which raises doubts about the feasibility of its plan. Furthermore, the budget will be debated on the floor of Congress only after the October 27th general election, and an expected change in administration is likely further to complicate the situation. In this context, The Economist Intelligence Unit will not revise its outlook, which envisages a weaker fiscal balance and high financing risk.
The government has based its budget, for the most part, on reasonable assumptions of macroeconomic indicators. For instance, it envisages inflation slowing only moderately, from 52.8% at end-2019 to 34.2% by end-2020 (these projections are similar to our own). It also assumes an average exchange rate of Ps67.1:US$1 in 2020, up from Ps47.9:US$1 in 2019. Although our own projections assume a weaker peso, they are subject to revision if recently introduced capital controls are strengthened or expanded.
The one area where the government's forecast appears to be distinctly overoptimistic, however, is with regard to economic growth. Following an officially estimated economic contraction of 2.6% in 2019, the government forecasts modest GDP growth of 1% in 2020. This stems in large part from the government's assumption that the ongoing collapse in fixed investment will bottom out in 2020, with a full-year contraction of 4.9%. This assumption contrasts starkly with our own forecast for a 0.5% contraction in GDP in 2020, driven by a double-digit decline in investment that year.
A primary surplus is probably out of reach
Notwithstanding rosier growth projections for 2020, the government will find it hard to meet its fiscal target. With no new tax measures introduced, and no major privatisations planned, the government expects to increase central government revenue by just 0.2% of GDP. In fact, this revenue gain will almost entirely come from non-tax resources, including property income (where revenue flows are largely dollarised).
Consequently, the burden of fiscal adjustment will fall almost entirely on expenditure cuts. The government is looking to reduce primary spending by 1.2% of GDP, through acrossthe-board cuts to budget items. It is looking to reduce economic subsidies (largely to energy and transport) by about 0.4% of GDP. Capital spending will be cut by 0.2% of GDP. In addition, social spending, which received a slight boost in 2019, will be reduced in 2020 by 0.2% of GDP. Likewise, current expenditure on employee remuneration will diminish by 0.2% of GDP, amid a combination of staffing reductions and wage restraint. Current transfers to provinces and other expenses will similarly be cut by 0.2% of GDP. In this way, the government will seek to continue the fiscal consolidation process.
Although the budget presents reasonable measures, in theory, to achieve a primary fiscal surplus, we view success in this regard as unlikely, given the economic and political circumstances in which the government is looking to pass it. With Argentina in the midst of a fairly deep recession, securing political support for expenditure cuts will prove extremely difficult. This is especially true now that the president, Mauricio Macri, is viewed by the opposition as essentially a lame duck, following his defeat in the August primary election. As the budget will not be taken up for debate by Congress until after the elections—in which Mr Macri's Peronist challenger Alberto Fernández is expected to win the presidency— lawmakers are likely to demand significant changes to the draft budget bill, to better reflect the priorities of the incoming government. Mr Fernández has repeatedly stated his view that it is necessary to boost consumption (through increased salaries and pensions) to put the economy back on a solid footing. He is therefore likely to be opposed to a number of the austerity measures put forward in Mr Lacunza's draft budget.
The spotlight returns to financing risk
In these circumstances, we are unlikely to revise our forecast for a moderate primary fiscal deficit of slightly below 1% of GDP in 2020. Even under Mr Lacunza's proposed budget, the government would post an overall non-financial public-sector deficit of 2.3% of GDP in 2020, sustaining a fairly large financing requirement of about Ps5.1trn (16% of forecast 2020 GDP). However, the balance of risks is tilted towards an even larger financing need. Although just over half of the proposed financing gap could still be covered by borrowing from official sources and by issuing intra-government debt, the government would need to place a significant amount of debt with private creditors.
Under our benign baseline assumption, faced with a limited number of policy options, Mr Fernández will follow through on the debt reprofiling programme announced by Mr Lacunza, which should give the government some breathing space. However, risks to our outlook are extremely high. We will closely monitor policy announcements by Mr Fernández and adjust our forecasts if necessary.