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Fitch: Buenos Aires Claim May Affect Provincial Funding.

New York: A Buenos Aires' lawsuit regarding the Conurbano fund could speed the political discussions around the distribution of nationally collected taxes to Argentina's provinces and lower other provinces' federal funding by up to 3% of operating revenue, Fitch Ratings says.

The discussion covers major structural reforms needed to improve funding disparities of the current federal tax co-participation regime and other tax reforms. A lawsuit brought by the province of Buenos Aires is being heard by the Supreme Court and alleges the current distribution formula for the Conurbano fund is unfair. The upcoming congressional election may bring further discussions to the forefront. The legislative elections, to be held on Oct. 22, 2017, will elect deputies and senators to the Argentinean Congress. Roughly a third of the Senate will be renewed for 2017-2023 and almost half of the Chamber of Deputies for 2017-2021.

The Conurbano fund was founded in 1994 specifically to raise the province of Buenos Aires' relatively low share of federal funding. It is funded with 10% of national income tax collections annually and assets are distributed to all the jurisdictions. Today, the amount transferred to each province is fixed as a percentage of federal taxes collected. The government aims to set a variable distribution that will consider total population, unmet basic social needs, amount of province tax collection and other parameters.

In 1996 a legal cap was placed on Conurbano fund transfers to Buenos Aires at ARS650 million. The cap was not adjusted for inflation or other parameters. If the rule eliminates the cap, Buenos Aires' share would rise to ARS49.9 billion or USD2.8 billion in 2017 and other provinces would lose ARS15.6 billion or USD900 million. However, with inflation adjustment, Buenos Aires' share would shrink to just ARS4.1 billion, or ARS1.3 billion less for the provinces. Buenos Aires is home to almost 40% of the country's population and accounts for roughly 30% of Argentina's GDP.

If Buenos Aires loses the lawsuit, the province would need to find other ways to raise revenue. The rule will affect the distribution of funds once the ruling is issued, while the stock of undistributed funds will need to be settled with the federal government and the provinces.Last month the federal government began confidential negotiations with the potentially affected provinces. Some provinces may be able to marginally raise tax revenue with better collections as the informal economy accounts for a relevant stake of the overall economy. However, cutting expenditures would be very difficult due to a high level of rigid payroll expenses and infrastructure needs. Absent these measures, and/or federal intervention, Fitch will evaluate the impact on specific ratings.

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Publication:Daily the Pak Banker (Lahore, Pakistan)
Geographic Code:3ARGE
Date:Dec 29, 2017
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