Financial Statements for the Year Ended December 31, 2017, Presented on a Comparative Basis
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GRUPO CLARÍN S.A. Annual Report and Consolidated Financial Statements For the year ended December 31, 2017, presented on a comparative basis GRUPO CLARÍN S.A. 2017 ANNUAL REPORT To the Shareholders of Grupo Clarín S.A. We hereby submit for your consideration the Annual Report and Exhibit, the Consolidated Company Balance Sheet, the Consolidated Company Comprehensive Statement of Income, the Consolidated Company Statement of Changes in Shareholders' Equity and the Consolidated Company Statement of Cash Flows and Notes of Grupo Clarín S.A. (hereinafter, “the Company” or “Grupo Clarín”) for fiscal year No. 19 ended December 31, 2017. The main subsidiaries in which Grupo Clarín S.A. has a direct or indirect controlling interest are: Arte Gráfico Editorial Argentino S.A. (AGEA), Artes Gráficas Rioplatense S.A.(AGR), Compañía Inversora en Medios de Comunicación S.A. (CIMECO), Compañía de Medios Digitales S.A.(CMD), Arte Radiotelevisivo Argentino S.A.(ARTEAR), GC Gestión Compartida S.A., Inversora de Eventos S.A.(IESA) and Radio Mitre S.A., and until May 1, Cablevisión S.A., among others. 2018 MACROECONOMIC ENVIRONMENT During 2017, the performance of the Argentine economy was marked by, on the one hand, the gradual progress in its normalization process, and, on the other hand, the typical political conditionings of an election year. This dichotomy contributed to the partial accomplishment, during this second year of administration, of the results originally envisaged. A glimpse at the events that took place during 2017 shows that the economy made headway with the disinflationary process and grew again, avoiding the exacerbated growth of primary public spending in an election year. In order to achieve the foregoing, the large fiscal gap in Argentine pesos was financed with external indebtedness. This scenario, far from being innocuous, generated a slide of the Ps./USD exchange rate lower than the inflation rate, which, even though it served as an anchor, it did so at the expense of triggering a marked deterioration of the external front. The performance of the price index at national level surveyed by the INDEC throughout the year represents the extent of the progress made in that disinflationary process. In fact, the price index closed the year at 24.8%, which represents a clear decrease compared to the 36.6% recorded in 2016. However, that percentage outstripped the upper level of the target established by the Government (15% with +/-2 percentage points), which brought to light both the difficulties to meet the targets adjusting relative prices (basically public utilities tariffs), and the limited scope of the Central Bank's reference rate to sterilize the monetization of the fiscal deficit and achieve the targeted inflation levels. During 2017, amid this disinflationary path achieved under a scenario marked by high interest rates in Argentine Pesos, the GDP grew 2.9% compared to 2016. Said figure, slightly lower than the projected level of 3.5%, reverses the 2.2% decline recorded last year. This was influenced by a certain level of recovery of the purchasing power of salaries and pensions and the resurgence of bank lending. The key role played by gross domestic investment -it grew slightly over three times as much as the level recorded by the GDP- provided sustainability and partially explains the growth prospects for 2018. The gradual recovery allowed the Government, for the first time since 2004, to maintain the growth rate of primary spending lower than that of the revenues, thus reducing tax pressure and 1 primary spending as a percentage of the GDP. As a result, Argentina's primary fiscal and financial imbalances closed the year at around 3.9% and 6.1% of the GDP. The first of these figures, which does not include the imbalances of the provinces or the quasi-fiscal deficit of the Argentine Central Bank, was 0.4 percentage points below the 4.3% level recorded in 2016 (which incorporated the extraordinary revenues from the tax regularization scheme for ~1.3% of the Gross Product.) However, and as a result of larger interest payments derived from the growing indebtedness, the total fiscal deficit closed the year with a year-on-year increase of 0.2 percentage points. On the other hand, the level of public debt continued to show an upward trend, reaching by the end of the year approximately USD 320.0 Bn, accounting for 58% of the GDP (28.5% when considering only the net debt with third parties). The level of indebtedness of the Argentine Central Bank, as a result of the issuance of Bills, followed this trend and closed the year at almost Ps. 1.2 Bn (~11% of the GDP and +66% above the level recorded by the end of 2016). The high fiscal imbalance had a significant impact on the external front, which showed a premature deterioration in this early stage of recovery mainly as a result of the delay in the adjustment of the Ps./USD exchange rate. This deterioration was due to the lack of dynamism of exports, the exponential surge of imports, the higher interest payments on sovereign debt and the strong demand for foreign currency for savings and tourism purposes. In this sense, the trade balance showed a sharp and premature reversal, from a surplus of almost USD 2.0 Bn to a deficit of USD 8.5 Bn from one year to the other. The above worsened the current account deficit, which closed the year at around USD 28.0 Bn (4.5% of the GDP.) The above suggests that the unwinding of many of the existing imbalances will take more time than expected. Therefore, two relevant considerations concerning the current strategy should not be overlooked. First, it should be noted that the current cycle of indebtedness (which, if naturalized, could be dangerous) only delays the unavoidable adaptation of the economy to its ability of genuinely generating foreign exchange and its necessary fiscal balance. Secondly, it should be noted that even though the possibility of leveraging the economy allows the country to spread over time the adjustment of relative prices, the convergence towards a balanced position in public accounts is essential to make sustainable progress along a foreseeable path of disinflation. In fact, as history shows, the mere presence of high and sustained levels of fiscal deficits, whatever its source of financing, always represents a potential source of imbalances for the rest of the economic fundamental variables. Perspectives for the Upcoming Year Argentina still has to face significant challenges to make headway in its normalization process. In addition, apart from the above-mentioned progress (including the favorable results of the election), Argentina can benefit from the impetus from the Brazilian economy, which is expected to consolidate the slight recovery achieved during the year, with a projected growth of around 3% (the highest of the last five years.) The main challenge for the economy in 2018 will be to make headway in the scheduled reduction of the primary fiscal deficit by one point of the GDP, trying to preserve the economy within the virtuous lane of growth, disinflation and generation of genuine employment, while preventing the Ps./USD exchange rate from continuing to part from its balance. The projected unwinding of the fiscal imbalance seeks to achieve in 2018 a primary fiscal deficit of around 3.2% of the GDP (almost a percentage point below the level estimated for 2017.) This fiscal effort, partially offset with higher interest payments, would drive the fiscal imbalance to 5.5% of the GDP (0.6 percentage points below the level recorded in 2017.) In this sense, it should be noted that this overspending above revenues involves financing needs for approximately USD 30.0 Bn (including direct aid from the Central Bank to the National Treasury for Ps. 140.0 Bn.) On the other hand, the public debt/GDP ratio is expected to stabilize 2 by 2020, according to official estimates. It would grow again coming close to 60% of the GDP for the first time since 2007 (~31% corresponding to third parties.) In order to meet this fiscal target, the rate at which primary public spending grows must remain below that of the revenues. According to the Government, this would be achieved with the scheduled cutting of economic subsidies (as from this year, the Government introduced a reduction in transport subsidies in the city of Buenos Aires), such as the impact of the recently enacted social security reform. The Government will have to sustain in time the growth of the GDP in order to boost revenues and gradually reduce the high level of participation of primary spending in the economy. In retrospect, it should be noted that, even when the last monthly market expectations survey developed by the Argentine Central Bank anticipates an increase that would be more moderate than official projections, GDP growth will represent, for the second consecutive year, a turning point in the behavior pattern observed from 2011 to date, of exacerbated increases in election years followed by subsequent downturns as a result of the need to adjust those excesses in non- election years. Lastly, it should be noted that almost by the end of the year under review, the Government decided to loosen up inflation targets for the following three years 2018 / 2020, so as to bring them into line with the projected path of tax convergence and their own private expectations. The target set for 2018 in particular is 15% and even when it is 5 percentage points above the previous figure of 10% (+/- 2 percentage points), the Government still faces the challenge of maintaining inflation levels above those expected by the private sector.