Bonds News

Argentina bonds drop, stocks rise after government unveils tax reform

BUENOS AIRES, Nov 1 (Reuters) - Argentine bond prices fell on Wednesday after the government unveiled a tax reform proposal that would tax capital gains from fixed income instruments, prompting an early rally in stocks and the U.S. dollar that petered out later in the day.

The benchmark Merval stock index was up 0.07 percent after earlier surging to a record high at 28,357.469 points. Government bonds were on average down 0.2 percent, while 2046 bonds led losses, falling 0.5 percent. The peso rose to 17.60 per dollar, up 0.3 percent, after earlier depreciating.

“The market may demand higher returns to compensate the capital gains tax in the case of bonds in dollars,” said Federico Furiase, an economist with consultancy Estudio Bein & Asociados in Buenos Aires.

On Tuesday afternoon, Treasury Minister Nicolas Dujovne presented a tax reform proposal that would slash corporate income taxes to 25 percent for companies that reinvest profits, but introduced a capital gains tax on locally-issued bonds and hiked other taxes to mitigate the fiscal impact.

That reflected the dilemma President Mauricio Macri’s government faces in trying to lower taxes to spur investment and growth while also reducing the fiscal deficit from 4.2 percent of gross domestic product this year to 2.2 percent by the end of Macri’s term in 2019.

The plan, which needs to be approved by Congress, would implement a tax of 15 percent on individuals’ capital gains from foreign-currency bonds, and 5 percent for income from local-currency bonds that do not adjust. Companies already pay capital gains tax, while individuals pay the tax for income from foreign-issued bonds.

Income from stocks would remain exempt, which is consistent with the aim of the tax reform to spur private investment, Furiase said.

“Stocks are up because the capital gains tax comes as part of structural reforms that is seen positively by the market,” he said.

Leading gains on the Merval was cement producer Holcim Argentina SA, up 10.2 percent after rival producer Loma Negra shares rallied after pricing an initial public offering at the top end of its expected range.

Other taxes, including duties on soda and alcoholic beverages, were likely to compensate the central bank’s target to lower inflation to between 8-12 percent next year, Buenos Aires-based Balanz Capital wrote in a note on Wednesday.

“The [central bank] will be forced to keep interest rates higher for longer,” Balanz wrote.

Reporting by Luc Cohen, Hernan Nessi and Walter Bianchi; editing by Diane Craft