Products that will benefit from the 0% VAT rate are sunflower oil and corn oil, rice, sugar, canned fruit, canned vegetables, canned pulses, cornmeal, wheat flour, eggs, whole and skimmed milk, bread, breadcrumbs, batter, dried pasta, yerba mate, tea, and whole and skimmed yogurt.
The decree 567/2019 took effect on 15 August and will be effective until 31 December 2019, inclusive.
In a televised speech, Macri said his only priority was to look after Argentinians, which is why he took this “exceptional decision”.
“It is the first time in the history of the country that VAT will be eliminated on food products," he said.
A country in crisis
Argentina’s economy is once again in crisis following the results of the primary presidential elections last Sunday, which saw center-right president Mauricio Macri lose to left-wing opposition candidate Alberto Fernández with 32.1% of votes against Fernández’ 47.7%.
The result has left investors’ confidence in the Argentinian market shaken as they fear Fernández, who counts former president Cristina Kirchner as his deputy, could return Argentina to the market-controlling policies of the past.
The primary election result caused the Argentinian peso to lose 20% of its value against the US dollar and saw its Fitch Rating downgraded from B to CCC.
‘Guaranteeing a normal supply’
According to the 0% VAT decree, “it is appropriate to ensure and guarantee the normal and habitual supply within the internal market in order to cover the needs of the Argentine people.
“[…] The lack of supply of products on the market causes a serious impact, damaging the entire society, requiring the adoption of urgent measures by the national government”.
In the past, Macri has criticized such measure as populist but, at a press conference, the government rebuked suggestions the 0% VAT rate was an attempt to win votes in the upcoming election.
However, the tax cut was criticized by Macri's political opponent Fernández on Twitter.
"It does not seem reasonable to reduce VAT indiscriminately as has been done. This will not result in a decrease in prices. It will surely become an additional profit for companies," he tweeted.
The analyst's view
According to Monica Ganley, principal at Buenos Aires-based agri-food consultancy Quarterra, the VAT removal will benefit both consumers, by offering them cheaper products, and food processors who will see an increased demand for their products.
Supermarket COTO, for instance, has been drawing consumers' attention to the cheaper prices.
However, it is unlikely to do much to change Argentina’s gloomy economic outlook.
“Given the surprising results of the recent primary election, and the market's reaction - dollar price, bond, and stock market performance- both consumer and business sentiment is very weak,” she told FoodNavigator-LATAM. “Under the cloud of uncertainty, I think that we will see consumer purchases stagnate and businesses will be very cautious in making any strategic decisions.
“Thus, while the elimination of the VAT tax should provide some lift, the prevailing market concerns for which it is trying to compensate are much greater and I don't believe will be resolved by this decision.”
According to Fitch Ratings, the downgrade of Argentina's ratings "reflects elevated policy uncertainty following the August 11 primary elections, a severe tightening of financing conditions, and an expected deterioration in the macroeconomic environment that increase the likelihood of a sovereign default or restructuring of some kind".
An increased risk of “policy discontinuity” since the election result has prompted a collapse in market sentiment as well as a sharp depreciation in the peso and widening of sovereign debt spreads, it added.
The rating agency predicted the Argentinian economy will contract 2.5% in 2019, down from a prior forecast of 1.7% while growth in 2020 will be flat.
