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Informe Mensual Económico Financiero N° 335 – Enero de 2018

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EXECUTIVE SUMMARY

For the year 2018, the international economic cycle looks favorable for Argentina:

sustained World economic growth (3.8%), which encourages the expansion of

trade (4.2% in physical volume) with prices of raw materials stable and good

liquidity. In the region, Brazil would grow 2.8%.

The Federal Reserve would increase the benchmark rate by 100 basis points in

2018 and this would increase 40–50 basis points the yield on Treasury bonds

(2.80% the 10 year one at the end of 2018). This adverse effect on the cost of

Argentina’s debt was offset by a similar decrease in the emerging risk premium,

which in the case of Argentina could be higher than the rating of its debt.

A risk: the tax reform approved by the United States Congress may cause a

reorientation of capital to that country, in addition to strengthening the dollar. In

the long term it implies an annual increase of the United States fiscal deficit of 1%

of GDP for 10 years.

In 2018, Argentina’s GDP would grow around 3% per year (2.8% estimated in

2017) driven by the increase in investment (12.5%) and exports.

External accounts begin to be a restriction. In the first nine months of 2017 the

deficit of the Current Account of the Balance of Payments was of 23.5 billion

dollars and the year will close around 30.0 which are close to 5% of GDP. For

2018 year, a deficit between 5% and 5.4% of GDP is estimated, so far as the

growth of the economy in general and of investment in particular, increases the

need of imported inputs and capital goods. For the same reason, the flow of

capital income is a key.

On the fiscal level, 2017 would end with a financial deficit of 650 thousand million

pesos, 6.3% of GDP (in the first eleven months 538 thousand million were

accumulated). For 2018, under prudent assumptions of spending growth (rising

as inflation) and of resources (growing as nominal GDP), the financial deficit

(primary plus debt interests) will be around 750 thousand million (6.0% of GDP).

In 2017 the monetary expansion was of 46%, of which 77% was destined to satisfy

Treasury needs (including the purchase of dollars from the placement of debts)

and the rest originated in the remuneration of Lebac (letters of the Central Bank).

This forced an aggressive strategy of placing new Lebac, whose stock grew by

more than two thirds, exacerbating the problem of the quasi-fiscal deficit.