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Government presents fiscal
plan for 2003
On 17 September, finance minister Roberto Lavagna presented the
government’s budget proposal for the coming year. The government expects
that the growing economy will lift tax revenues, which are anticipated
to grow 47.8% in nominal terms to 76.8 billion pesos (14.4% of GDP).
Public spending is anticipated to rise by 39.8% to 66.2 billion pesos.
Furthermore, the government projects deferred debt service payments
resulting from this year’s default to reach US$ 12.4 billion by the end
of this year (US$ 10.5 billion in public debt securities). The amount of
total deferred debt payments is expected to rise to US$ 26.9 billion by
the end of next year (US$ 20.3 billion in public debt securities). The
full amount of the debt service obligations is expected to be included
under the framework of debt renegotiations with international creditors.
The 2003 budget proposal provides for 14 billion pesos in debt service
payments to international lenders (US$ 3.9 billion).
The government hopes to achieve a primary surplus of 11.7 billion pesos
next year (2.0% of GDP), which would represent an increase from this
year’s anticipated 2.97 billion peso surplus (1.0% of GDP). As a result,
the overall fiscal deficit is anticipated to narrow significantly from
1.4% of GDP this year to 0.6% of GDP in 2003. The government’s
optimistic fiscal scenario is not shared by participants, who anticipate
the fiscal deficit this year to reach a higher rate this year and to
decline only moderately next year. The less optimistic Consensus outlook
for economic growth, lingering uncertainty over the likely terms of any
debt renegotiation and rising doubts over the global economic setting
next year are non doubt factors behind the more pessimistic market
sentiment.
Consumer price increases moderate
In September, consumer prices rose 1.2%, which was down from the 2.3%
rate in August and confirmed the moderation trend in consumer prices
observed since April. The September figure was the lowest monthly rate
observed since the devaluation and was even slightly below the figure
1.5% figure announced by government officials before. Consumer prices
continue to be contained by government decrees that have successfully
put off public service tariff hikes, as officials struggle to weigh
political and economic pressures against public services companies’
demands for a renegotiation of prices fixed in existing contracts. In
September, the government decided to finalize discussions with companies
in November. This means that public service tariff increases are likely
to kick in early next year. Firms have been battered by the economic
crisis and demands for tariff hikes range from 10-35%. Finance officials
are hoping that public service firms will agree to a much more moderate
10-12% increase, applied gradually over a period of twelve months.
Developments in the wholesale price index indicate that inflation is
likely to accelerate in the coming months. In September, wholesale
prices rose by 2.1%, which was down from the 4.7% increase in August.
The September figure raised the annual wholesale price variation to
114.5% from 107.7% in August. Once the government decides to liberate
public service prices, consumer prices may experience additional upward
pressure. Participants anticipate consumer prices to increase further
through the end of the year with the annual variation rising but below
the government estimate of 67.0%. Price increases are anticipated to
moderate further next year, in spite of the likely hike in public
service tariffs, with the annual inflation moderating by year-end, but
still double the government’s estimate.
Banks ease deposit restrictions and funds
remain, attracted by high interest rates
On 1 October, banks began to return deposits, which had been frozen by
the government in January to avert capital flight following the
devaluation. The lifting of the restrictions set by the so-called
corralito by government decree enables deposit holders with savings
between 7,000 to 10,000 pesos (US$ 1,900 and US$ 2,700) to withdraw
funds freely. The economy ministry calculated that the limited opening
of the financial system would release some 1.7 billion pesos (US$ 450
million) from controls. Fears of a massive run on the financial system
did not materialize. In fact, the recent stability of the currency in
exchange rate markets, high interest rates of up to 5% monthly and
inflation-indexed savings accounts, prompted the majority of deposit
holders to keep their funds in fixed term deposits rather than withdraw.
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