BUENOS AIRES, March 14 (Reuters) - Argentina's economy will expand between 0.5 and 1 percent in the first quarter of 2018 compared with last quarter, and 3 percent year-over-year, though a severe drought will reduce full-year growth, a Treasury Ministry official said on Wednesday.
Four months of dryness that have slashed expectations for Argentina's soybean and corn harvests, backbones of the country's economy, will likely cut between 0.5 and 1 percentage points off 2018's headline growth rate, undersecretary of macroeconomic programming Luciano Cohan said.
"Some factors are compensating, but we believe growth has to be revised down. We are working with a scenario close to 3 percent," Cohan said, referring to expectations for 2018 gross domestic product (GDP) expansion.
"The first quarter is surprising us to the upside. We had expected a bit of a cooler first quarter but now we think it will be between a half a point and one point of growth."
Growth at 3 percent would be above the 2.8 percent rate in 2017 but below the 3.5 percent rate projected by the government in its budget and by officials just one month ago. Economists polled by the central bank see 2.7 percent growth.
Increasing automobile output thanks to strong demand from neighboring Brazil is helping to compensate for the drought's impact, while the construction, steel, iron, dairy and beef sectors also performed well in the first quarter, Cohan said.
He said the lower soy output would not reduce income from Argentina's export taxes on soybeans and soy products because of rising prices, a release of stocks and more imports from neighboring Paraguay, keeping crushing rates stable.
President Mauricio Macri's government is aiming to reduce the primary fiscal deficit to 3.2 percent of GDP this year, down from 3.9 percent last year, while gradually reducing taxes. The soybean export tax began the year at 29.5 percent and will be cut gradually to 18 percent by next year.
"In terms of the trade balance the negative impact will be much less than in terms of production, because prices have gone up and this year we expect the liquidation of inventories," Cohan said.
He said the central bank's recent interventions in the spot currency market as the peso hit record lows did not signal a "change in spirit" of Argentina's free-float exchange regime.
The weaker-than-expected peso currency contributed to the government's decision to issue bonds locally rather than internationally for the rest of the year, he said. (Reporting by Eliana Raszewski and Luc Cohen, Editing by Rosalba O'Brien)