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UPDATE 2-Moody's says slower deficit cuts will not block Argentina upgrade

(Adds comments, quotes from Leos and Torres, background on Argentina economy)

BUENOS AIRES, Sept 29 (Reuters) - A slower reduction in Argentina’s deficit than initially promised by President Mauricio Macri’s government does not impede a credit upgrade in Argentina, Moody’s senior analyst Mauro Leos said in an interview on Thursday.

The government said earlier this month Argentina would register a 2017 fiscal deficit equivalent to 4.2 percent of gross domestic product, higher than the 3.3 percent promised in January but lower than its expected 4.8 percent gap in 2016.

Moody’s forecasts the deficit will actually be 5 percent of GDP next year.

Moody’s Senior Credit Officer Gabriel Torres told journalists in Buenos Aires that trends were positive in Argentina and the next step would be to change its outlook on the country’s credit rating, though there was no set date on when this could happen.

Because the government was largely absent from global capital markets due to sovereign debt defaults in 2002 and 2014, its debt to GDP ratio is relatively low, which means taking on modest amounts of debt to finance the fiscal deficit is not an urgent concern, said Leos, a senior vice president in charge of Latin American credit ratings for Moody’s.

“It’s one of this government’s most important changes - they are using that financing space, and the debt will rise. The levels are not so concerning,” he said, contrasting Argentina with neighboring Brazil, which is also mired in recession but has a much higher debt load.

Moody’s upgraded Argentina’s credit rating to B3 with a stable outlook from Caa1 in April, though the assessment is still six notches below investment grade. Days later, Argentina returned to global debt markets with a $16.5 billion bond sale at interest rates between 6.25 percent and 7.62 percent.

Leos said that after meeting with officials from Macri’s government, which took over in December, he understood they aimed to trim the deficit, lower inflation and boost growth.

“We differ in how fast this will occur, although that does not necessarily impede an upgrade,” Leos told Reuters. “For us the course is more important.”

Moody’s said Argentina’s economy would shrink 1.5 percent this year but grow 3 percent next year, short of the 3.5 percent the government expects. Moody’s expects inflation of 20 percent in 2017, above the 17 percent rate forecast by the government.

Torres said congressional elections slated for next year would be key in determining whether the government could continue to pass reforms. (Reporting by Luc Cohen; Writing by Caroline Stauffer; Editing by Chizu Nomiyama and Alan Crosby)