What can we expect for the next two years

In November the Government took advantage of the great results in general elections of October and presented a package of reforms. Some of them have been already approved by the Senate and will be discussed in the Lower House. The tax reform stands out: it includes a new financial revenues tax for individuals, changes to internal taxes (sugary drinks, alcohol and tobacco), the reduction of corporate income tax rate from 35% to 25% if earnings are retained, the increase in the tax burden for employees with wages higher than AR$ 82,000 and the reduction in social security contributions for employers, among others. Also, Provinces agreed the reduction of some taxes and in exchange they will receive more funds from the National Government. The modification of the adjustment formula for pensions will also be discussed, while the labor reform has not been approved by the Senate yet.

The Central Bank maintained the policy rate at 28.75%, which is expected to remain at this level for at least 1Q-18 to bring down core inflation and reduce the impact of adjustments in regulated prices. In spite of monetary tightening, inflation expectations for 2018 increased from 16% to 16.6% -the highest monthly rise- according to the last Macroeconomic Expectations Survey published by the CB for Nov-17. Short-end Lebacs's yield is around 28.75% and long-end return is 29.6%. Two factors will affect the demand for Lebacs in the coming weeks.  On one hand, a new regulation for insurance companies precludes them from investing in these securities going forward.  On the other hand, the Opposition is proposing a 5% tax for foreign investors who purchase Lebacs and the initiative is currently under debate in the Congress with the tax reform bill.