Interest rates choking off stronger economic recovery.  The slow pace of recovery is primarily the result of high interest rates.  Rates on 30-59 day peso deposits reached 8.1% at the end of May, up 30 basis points from January.  Interest rates have remained high both as a result of a rise in international interest rates and an increase in Argentina’s sovereign risk.  As a result, credit demand from consumers and industry has remained constrained.  In addition to feeling the impact of the recent fiscal cuts on disposable income, Argentine consumers and industry alike remain concerned about the possible negative effect that rising US interest rates may have on capital flows and the availability of public and private sector financing.  Furthermore, slower economic growth may push the tax take below the projected levels, which in turn has raised concerns in the private sector about the prospects for further tax increases and higher interest rates.  The slow economic recovery is likely to undermine the government's expectations to achieve 3.5% growth this year. 

Fiscal accounts on track in first half of 2000.  According to the Ministry of Economy, tax collection was up 15.4% in June over the same month in 1999, the third consecutive month of increasing tax collection.  The healthy tax inflows in the second quarter virtually guarantee that finance officials will comply with the fiscal deficit target of US$ 2.7 billion for the first half of this year agreed to with the International Monetary Fund under the current three-year Stand-By Facility.  Key drivers behind the improved tax collection were higher capital gains tax inflows and improved sales tax receipts.  Nevertheless, in order to meet this year's fiscal deficit target of US$ 4.7 billion (1.6% of GDP), the government will have to rely on continued healthy tax inflows.  Any deterioration in tax revenues is likely to force the government into further adjustment, for which political will and public support are waning, or risk renewed upward pressure on interest rates.  This month's Consensus Forecast indicates that panellists anticipate fiscal accounts to overshoot the IMF target.

Note:  The above text is an abridged version of the LatinFocus Consensus Forecast briefing on Argentina.  For more details please click here.

For five-year forecasts, please click here.