Argentine provinces led by Province of Buenos Aires (PBA) (Ca/CCC-), Chubut (Ca) and La Rioja are preparing to face a difficult 2024, as they expect to see further revenue reductions under President-elect Javier Milei, three sources familiar with the matter said.

Provinces have already suffered a 13.6% reduction in revenues from national shareable taxes, known as co-participation, in November, according to a report from Argentine economic think tank IARAF. This drop is explained by the national government’s decision to raise the threshold for paying income tax, the IARAF report said.

The changes in Income Tax and in Value Added Tax (VAT) passed by congress in September are expected to reduce Argentina’s national tax collection in an amount equivalent to 2% of GDP in 2024, while for provinces it will represent a reduction equivalent to 3%-5% of their primary expenditure, the first source familiar said.

“It’s a difficult start point for next year,” the first source said. On top of it, president elect Milei has promised a cut of discretional transfers to provinces, and a tax reform that may also have an impact on provincial income.

Most governors are preparing expenditure cuts for 2024 that include employee layoffs and public works reductions, according to the first and second sources. However, they are also trying to find “alternative sources of revenue,” and some governors have requested the national administration to co-participate the tax on debits and credits with the provinces, the second source said.

A cut on discretional transfers can be expected, and provinces may also suffer the effect of the broad tax reform that Milei is planning, the third source said. The president-elect has already stated that he won’t go back on the recently approved changes on income tax, the source said.

National dependency, a weakness 

“Highly dependent provinces on national co-participation resources will be seriously affected,” by the expected tax reductions, Argentine portfolio manager PPI wrote in a report.

“Looking at the districts with hard currency debt, City of Buenos Aires (Caa3/CCC-) and Neuquen are the most autonomous provinces, as national revenue sharing (the sum of national co-participation taxes and discretionary transfers) accounts for only 13.5% and 20% of total income, respectively,” PPI wrote. On the other side stands Jujuy (CCC-), as national sources represent 83.2% of its total income; followed by La Rioja and Chaco with 79.9% and 71.5% ratios each,” it said.

Province of Buenos Aires, with 38% of its total income coming from co-participation taxes, will be one of the most affected by the reduction of discretionary transfers promised by Milei, the first source said. The largest Argentine district is usually assisted by the national administration with a large portion of those funds, the source said.

According to information from the National Direction of Provincial Affairs, discretionary transfers represent 8% of PBA’s total income, one of the highest rates.

In terms of liquidity and indebtedness, there are provinces such as Rio Negro, Chubut, La Rioja and Province of Buenos Aires which could have difficulties meeting their short-term obligations (12 months) due to a combination of liquidity challenges and a higher debt load than peers, said the PPI report.

PBA faces a USD 354m interest and principal payment in March 2024, while Chubut has USD 69m in debt payments scheduled between January and April of next year, according to PPI. “In the most favorably positioned group (marked by higher liquidity and lower debt), Mendoza, Santa Fe, and the City of Buenos Aires emerge as frontrunners,” the report said.

Provinces will have some leverage to negotiate funding with the national administration considering Milei’s weakness in congress, the second source said. The president-elect will need to gather consensus to pass the economic measures he intends to implement, and negotiations with governors will be key in securing the necessary Senate votes, the source said.

Most provinces are financially healthier than the national government and had posted two-digit primary fiscal surpluses this year, such as the City of Buenos Aires, Mendoza, Cordoba and Jujuy, said the third source. Those will likely adapt well to the new scenario, while others will have to make more painful adjustments, the source said.