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Macri's relief package raises fiscal concerns

Argentina's President Mauricio Macri has announced a series of economic measures, following the highly adverse results of Sunday's primary elections, which left him trailing opposition candidate Alberto Fernández by 15.5 points. The relief package seeks to alleviate middle- and low-income households from the burden of a long-standing economic recession.

However, economists agree that the measures will not have a significant impact, but instead worry that loosening up the tight fiscal policy implemented during Macri's tenure could eventually jeopardize the lifeline secured with the International Monetary Fund in 2018.

To the relief package announced by the president Aug. 14, Macri yesterday added that installments for the UVA inflation-adjusted mortgages would be frozen until year-end, with the public purse to "make up for the difference." At the same time, he also slashed consumer taxes on basic products.

"The government's main intention is basically to try and recover some of the electoral base that was lost," Martín Vauthier, director at Argentine EcoGo, said in an interview, though arguing that they come in "late" and "scarce" as inflation would likely dilute the benefits in real wages, he said.

But the relief package could have another undesired effect. Macri's economic team has not explained what the funding sources for the rise in expenditures will be, raising concerns about fiscal discipline, one of the conditions to maintain the agreement reached with the IMF in the midst of a currency crisis for a $57 billion bailout. Of the outstanding program, an additional $5.40 billion are scheduled to be disbursed on Sept. 19, and $980 million in late December.

Sept. 15 is a "potential crunch point," for the country's public coffers, Edward Glossop, an emerging market economist with Capital Economics, wrote in a report. The creditor "could get tighter and ask for restructuring as a condition" to greenlight the disbursement.

"If these (announcements) lead to the agreement being dropped, the problems are much greater due to the issue of refinancing of short-term liabilities," Vauthier said.

The country's already counting on financing from the IMF to meet rollover needs during 2019, with a more uncertain scenario for 2020, as aid from the IMF program is expected to significantly diminish. Argentine bonds are currently pricing a default in 2020, analysts say.

"Expectations on regime change escape government's control ... (but) what the current administration can do is try to maintain the saving that was made and preserve it, especially because it is a necessary condition for the disbursements agreed with the IMF to be made," Fernando Díaz, a New York-based economist with Citi, told S&P Global Market Intelligence. According to Díaz, fiscal adjustment in the economy was quite significant over the last year.

Latest data from the Argentine Economy Ministry shows primary expenditures dropped by 22% in real terms in the 12-month period ended in June 2019, while income fell by a milder 7.6%.

Although the IMF has not made public statements since the Aug. 12 primary election results which roiled financial markets and further deteriorated the economy, Vauthier believes decisions by Macri must have been made with previous consent from the lender.

The government had committed with the IMF to achieve a fiscal balance this year, with special permission to incur a 0.2% of GDP primary deficit solely on social purposes. Meanwhile, the latest market survey from Banco Central de la República Argentina taken prior to the primaries shows that a minor deficit is expected for 2019.

In its latest review in July, the IMF had estimated a 0.3% of GDP deficit for 2019 year-end, but the recent events at the polls and the subsequent market reaction could push the economy back into recession, economists agree, as well as provide another inflationary spike.

Macri lost the primary election to Peronist front-runner Alberto Fernandez by 47.7% to 32.1% on Aug. 11. The difference of roughly 4 million votes makes a comeback highly unlikely for the Oct. 27 elections.