September 19, 2018 / 5:50 PM / a year ago

UPDATE 4-Argentina's GDP shrinks 4.2 pct in 2nd quarter

(Adds central bank reserve sale)

By Walter Bianchi and Scott Squires

BUENOS AIRES, Sept 19 (Reuters) - Argentina’s gross domestic product contracted 4.2 percent in the second quarter of 2018 from the same period last year and 3.9 percent from the prior quarter, government statistics agency Indec said on Wednesday.

Sky-high interest rates have shut off growth in the recession-hit country while failing to bolster its beleaguered peso currency, which has slumped more than 52 percent against the dollar so far this year. While fiscal austerity policies have substantially shrunk Argentina’s deficit, investors remain worried that the government still may not be able to meet its international debt obligations.

The peso closed 1.09 percent stronger at 39.37 to the U.S. dollar after the central bank sold $195 million on the foreign exchange market to support the currency. Argentina also allocated $2.73 billion in peso-denominated treasury notes, the economy ministry said.

Concerns over Argentina’s ability to service its debts have spurred the government to renew its deficit-fighting efforts. The primary deficit has contracted 31.7 percent in the first eight months of this year from the same period last year, the economy ministry said in a statement on Wednesday.

Argentina posted a primary fiscal deficit of 10.35 billion pesos ($408 million) in August, down 58 percent from the same month last year, the statement said.

The primary budget balance, which measures government spending relative to income and does not include debt payments, is followed by investors as an indicator of Argentina’s ability to meet its financial obligations.

In the 2019 budget released on Monday, Argentina’s government said it had a primary deficit target of 2.6 percent of gross domestic product for 2018, and was aiming for primary fiscal equilibrium next year.

“In terms of gross domestic product, the accumulated primary deficit through August was 0.9 percent, or half of that observed in the same 2017 period,” the statement said.

The economy ministry also said Argentina’s financial deficit was 14.5 billion pesos ($572 million) in August.

The central bank has spent more than $15.6 billion this year as it intervened to bolster the currency, according to official data. (Reporting by Walter Bianchi and Jorge Otaola; Additional reporting by Hernan Nessi; Writing by Scott Squires and Hugh Bronstein; Editing by David Gregorio and Tom Brown)

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