OREANDA-NEWS. Argentina's proposed 2017 budget includes more realistic forecasts than previous versions and could lead to better fiscal planning credibility without hindering the fiscal consolidation process that is already underway, Fitch Ratings says. However, we estimate that the magnitude of the sovereign's fiscal imbalance, expenditure pressures and risks to growth and inflation assumptions could challenge progress towards improving the sustainability of fiscal accounts.

The proposed budget would raise the public sector primary deficit target from 3.3% of GDP to 4.2% in 2017 on pension expenditures and lower subsidies for gas tariffs. The budget also would support the implementation of the Belgrano Plan, a key proposal of the Macri campaign that would build infrastructure in the Northern provinces. As such, it likely will not weigh on the expected economic recovery during the 2017 election year.

In Fitch's view, the proposed budget expenditures are an attempt to keep Argentina's recovery on track while taking advantage of increased funding sources - notably external credit. We believe that access to international capital markets and progress in tapping local US dollar and Argentinian peso liquidity will allow the government to gradually reduce the reliance on intra-public sector funding and discontinue the previous government's practice of using international reserves for debt service.

We also believe the budget is an attempt to re-establish the budgetary process as a valid tool to assess fiscal policy and increase its credibility. In previous years, the government presented budgetary projections with unrealistic inflation, growth and other macroeconomic parameters.

In 2016 the rebalancing of the Argentine economy has led to higher inflation and a sharper than initially anticipated contraction. By the end of this year the economy could contract by 1.5% and inflation could be above 40%. Hence, while this year's forecasts are more reasonable than those in previous budgets, assumptions of growth at 3.5% and inflation at 17% hold some risk of being too modest.

Continued macroeconomic underperformance would not hinder the ongoing fiscal consolidation process. However, it could also create a challenging political environment in the 2017 mid-term elections as economic underperformance would undermine the governing coalition's mandate and its representation in Congress.

Argentina's FX and monetary policy shifts have yielded some positive preliminary results. The effort to restore credibility to official figures through the reorganization of the National Statistics Institute (INDEC) could also contribute towards improving the predictability of economic policy. Currently a delegation from the International Monetary Fund is in Buenos Aires for the first time in 10 years to conduct its Article IV mission.

In May Fitch lifted Argentina's Long-Term Foreign-Currency IDR (Issuer Default Rating) to 'B' with a Stable Outlook, reflecting the improved consistency and sustainability of Argentina's policy framework, lower external vulnerability, and the easing of external and fiscal financing constraints. These improvements balance risks related to relatively weak external liquidity, continued macroeconomic underperformance and weaker public finances.