World Economy

Moody’s Expects Argentina Real GDP to Grow 3 Percent

Labor costs are the biggest expense item for local governments.Labor costs are the biggest expense item for local governments.

Argentina’s (B3 positive) sub-sovereigns are on track to record modest gross operating surpluses in the next two years, as a stronger economy helps support their revenue, says Moody’s Investors Service in a report.

Moody’s expects a pick-up in real GDP growth of 3% in Argentina for 2017 and 3.5% in 2018. In turn, the recovery of economic growth should boost tax revenues at both the local and the federal level. An agreement to gradually raise federal transfers to local governments will also boost revenues, BNamericas reported.

“Nonetheless, although we expect Argentina’s economy to return to growth, we only anticipate a modest improvement in the fiscal results for sub sovereign issuers,” says Alejandro Pavlov, a vice president and senior analyst at Moody’s. “Higher revenues alone will not eliminate the short-term challenges.”

Labor costs are the biggest expense item for local governments, and the pressure to increase salaries in an economy still hit by high inflation, is always strong. Payroll expenses rose at a compound annual growth rate of almost 34% between 2005 and 2015, outpacing the 32% growth in operating revenues during the same period.

As such, the main challenge for the majority of provinces and municipalities will be to close the gap between salary increases sought by public employees and the real financial capacity of the local governments.

Except for very few cases, maintaining stronger and less volatile operating results for long periods of time will also continue to represent a major challenge, as the operating performance of many sub-sovereigns have been very volatile in the past. This has led to high refinancing risks and an overall weak credit assessment.

Debt trends do not represent significant risk for the provinces, and international markets are offering longer-term funding opportunities. A number of Argentine sub-sovereigns, including the city of Buenos Aires (B3 positive), Province of Buenos Aires (B3 positive) and the Province of Cordoba (B3 positive), have tapped the international bond market in the past and in the current year.

Argentina’s GDP fell 2.1% year-over-year in 4Q16 compared to a 3.7% fall in 4Q15. Less growth can mainly be attributed to the following:

- a fall in government spending of about 2.0% in 4Q16

- a fall in investments and private spending in 4Q16 but less than the fall in 3Q16

- recovery in exports and imports of 7.7% and 2.1%, respectively, in 4Q16.

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