(Adds analyst comments and context)
By Walter Bianchi and Richard Lough
BUENOS AIRES, Dec 19 (Reuters) - Argentina forecasts a sharp widening of its primary fiscal deficit in 2014 after the leftist government used high state spending in an attempt to sustain domestic demand in the stagnating economy dogged by runaway inflation.
Cabinet chief Jorge Capitanich said the primary deficit, which excludes interest payments, would come to 56 billion pesos ($6.55 billion), or 1.35 percent of the gross domestic product this year. Argentina ran a primary deficit of 22.5 billion pesos in 2013.
The numbers suggest a sharp fiscal deterioration is expected in the month of December, with data from the economy ministry showing the deficit in the eleven months to end-November standing at 15.2 billion pesos.
The result does not include debt interest payments. The primary budget is closely followed by financial markets as it represents a country’s capability of honoring its financial commitments.
Capitanich said the overall fiscal deficit would be 137 billion pesos, equivalent to 3.3 percent of GDP.
Argentina logged its first primary budget deficit in 16 years in 2012 when a decade-long boom hit a brick wall due to weak global demand, high inflation and government trade and currency controls on investments.
Heavy state spending on energy subsidies and welfare programs have failed to bolster domestic demand, with inflation running at one of the world’s fastest rates and the currency weakened under pressure from low foreign reserves.
The economy will contract in 2014 for the first time since its record debt default in 2002, private economists say. The government, again in default on some of its debt, forecasts 0.5 percent growth.
Maximiliano Castillo, director of the Buenos Aires-based economic consultancy ACM, said the 2014 primary deficit would hit 4.6 percent of GDP and the overall deficit 5.6 percent if intra-public sector transfers were excluded. These include payments from the central bank to the Treasury.
BNP Paribas said the government faced “considerable financing needs” in the final quarter of 2014 and estimated the fiscal deficit would stand at 5.5 percent of GDP.
“Although the government tried to issue U.S. dollar-linked bonds to simultaneously ease (currency) market tensions and supply this need of financing, this proved to be only a partial help,” BNP Paribas said in a client briefing note dated Dec. 18.
“We expect central bank financing to continue next month.” it said. (Reporting by Walter Bianchi; Editing by Richard Lough, Bernadette Baum and W Simon)