Argentina's Economy Has Turned the Corner, Macri Says

Source: Bloomberg
9/28/2017

After less than two years in office, President Mauricio Macri says Argentina’s economy has turned a corner with single digit inflation now within sight for the first time in more than a decade.

The president’s decision to open up the country after years of isolation, slashing subsidies and import tariffs and freeing up the exchange rate, has produced a “cultural change that is deep and constant,” Macri said in an interview Thursday.

His government has bitten the bullet, backing the central bank in its fight against the highest inflation rate in Latin America after Venezuela. Policy makers have held the benchmark rate steady since April at 26.25 percent as they look to bring inflation to the target of 12 to 17 percent by year end. While it may not achieve that goal, inflation has fallen to less than half its peak of 47 percent in 2016.

“We have turned a corner,” Macri said on Bloomberg Television. “Without a fixed exchange rate, without any type of price controls, we have been reducing inflation. I am more confident than ever that in 2019 we will have single-digit inflation.”

Gross domestic product expanded 2.7 percent in the second quarter from a year earlier, driven by investment and consumption. It was the economy’s best performance since Macri took office in December 2015. Consumer confidence also has rebounded.

The recovery is having a knock-on effect on one of the pillars of his presidency: reducing poverty. The poverty rate fell 1.7 percentage points to 28.6 percent in the first half of 2017 from the previous six months, the statistics agency announced on Thursday.

Macri has committed to narrowing the fiscal deficit after it ballooned in the final years of former President Cristina Fernandez de Kirchner’s administration. Now, he has to step up efforts, with the government pledging to reduce the primary budget shortfall by one percentage point to 3.2 percent of gross domestic product in 2018.

The government’s first goal after the Oct. 22 legislative elections will be to get Congress to pass the 2018 budget, Macri said. Next: tax reform. The government plans to reduce income tax, custom duties and taxes at state and city levels, he said. The objective is to stoke the economy so that any lost revenue is recovered through increased productivity and less tax evasion. Ideally, the plan will have a neutral impact on the budget, but Macri warned that there is little room to increase taxes and no decision has been taken on whether to tax Argentina’s financial industry.

“The problem is that we’re facing a huge deficit but still I believe in many cases reducing taxes may increase the fiscal revenues because we have already reached the productivity limits of taxes,” Macri said. “I really believe that can be a win-win situation and we’re betting on that.”

The peso gained 0.46 percent to 17.48 per dollar, its biggest increase in two weeks following Macri’s comments. The yields on benchmark bonds due 2033 fell the most in a month.

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