Argentina’s government is set to post a new primary surplus figure in March, for a third month in a row, thanks to a plunge in public spending, a source close to and a source familiar with the matter said.

Part of the primary fiscal surplus expected to be announced in the next few days has been achieved amid the government’s decision to delay energy payments from Cammesa, the administrator of Argentina’s wholesale electricity market, to power generators including Albanesi, MSU Energy and YPF Luz, among other factors, both sources said. Cammesa payment terms are now at more than 100 days, up from 92-95 days last month, the source familiar said.

Argentina’s federal government was able to reduce public expenditure by 36% in real terms last month, the source close said. The country will also post a financial surplus, the source close said.

A good part of the fiscal adjustment carried out by President Javier Milei in the first three months of the year was achieved by keeping pensions and social aid payments unchanged in a context of very high inflation, said the source familiar.

However, during March the government authorized a 27% increase in pensions, which was offset by a cut in energy subsidies and in transfers to provinces and a freeze in public works, the source stated.

“The fact that Milei is moving forward with its fiscal adjustment plan is great news, but he still has to make this adjustment more sustainable,” said an economist following the fiscal numbers closely.

In 1Q24, close to 30% of the adjustment was achieved by freezing pensions, social spending and public workers’ salaries, and about 15% by suspending payments to Cammesa which, in turn, delays payments to power generators, said the economist. The payments to Cammesa will have to be made eventually otherwise this will impact the functioning of the power sector.

On the revenue side, for March the government announced it saw a 16% YoY drop in tax collection in real terms, as reported. The plunge in economic activity negatively impacted the collection of taxes such as value added tax and income tax, among others.

Despite the drop in revenues, the government will be able to post another month of fiscal surplus and will be able to announce the over-compliance with the fiscal target for 1Q24 set by the International Monetary Fund (IMF), said the source close.

For 1Q24, Argentina agreed to post a fiscal surplus of ARS 962.4bn (USD 1.1bn), as reported. During the first two months of the year, the country already accumulated an ARS 3.2tn surplus, which leaves it with an ample margin to meet the 1Q target, said the economist.

Social relief

Starting in 2Q, the South American country is seen decelerating its fiscal adjustment plan amid the need to provide some social relief, according to the source familiar and the economist. Milei is expected to increase pensions, social aid plans and to release some funds for public works to provincial governments, the source familiar said.

Milei publicly stated his intentions to improve the country’s fiscal accounts by 5.5% of GDP, after finishing 2023 with a fiscal deficit of 2.9% of GDP, as reported.

“We do not foresee that the government will be able to achieve a 2% fiscal primary surplus this year, but fiscal balance is possible,” Argentine consultancy firm Econviews wrote in a report. Similarly, Morgan Stanley’s research team recently estimated Argentina will likely finish 2024 with a 0.8% fiscal surplus, below the 2% surplus target of the government.

Milei’s team would have some room to ease the fiscal adjustment in coming months as tax collection is expected to increase due to the grain crop liquidation, said the source familiar.

Further in the year, it will be key to see economic reforms passing in Congress, to enable a recovery of economic activity and give more sustainability to the fiscal balance, the source stated.

Spokespeople for Argentina’s Ministry of the Economy and Secretariat of Energy did not reply to requests for comment.