## cr18297-argentinabundle

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---

### Key issues and context
- First review under the Stand-By Arrangement (SBA) occurs amid turbulent market conditions, a stronger-than expected decline in activity, and inability of the central bank to anchor inflation expectations.
- Since program approval, activity slowed markedly and inflation and inflation expectations rose, largely driven by a weakening currency.
- New emerging market volatility and a domestic corruption investigation limited Argentina’s access to market financing.
- Authorities requested use of IMF financing for budget support; resources in the program are no longer expected to be treated as precautionary.

### Program performance and corrective actions
- All end-June quantitative performance criteria and the end-June structural benchmark were met.
- Breaches and consultations:
  - Inflation exceeded the inner band since end-June (requiring staff consultation) and the outer band at end-September (requiring consultation with the Executive Board). End-September y/y CPI inflation: 40.5 percent.
  - Net international reserves (NIR) at end-September were US$6.7 billion below the program floor.
  - Stock of non-deliverable forwards (NDF) above end-September target; continuous ceiling set at US$3.6 billion (stock on September 28, 2018).
  - Reduction in net credit to government (NCG) target for end-September was not met.
- Authorities requested:
  - Waivers for non-observance of end-September NIR, NCG, and NDF targets.
  - Waivers of applicability for end-September fiscal targets.
- Corrective actions:
  - Recalibrated monetary policy: shift to zero growth in base money and large policy rate increases.
  - Accelerated fiscal adjustment toward a zero-primary balance in 2019 and a 1 percent of GDP primary surplus in 2020.
  - Reduction of outstanding NDFs begun: around US$200 million rolled off during September; stock to be monitored by a continuous QPC.

### Program design, access, and disbursements
- Augmentation and front-loading:
  - Requested augmentation of access by SDR 5.335 billion (around 167 percent of quota or US$7.1 billion).
  - Front-loading of access from 2020-21 into 2018-19.
  - Total access under the SBA would be 1,277 percent of quota (SDR 40.714 billion or about US$57 billion).
  - SDR 25.9 billion (about US$36.3 billion, 813 percent of quota) proposed as budget support between end-September 2018 and end-December 2019.
- Disbursement profile (as reported):
  - US$56.3 billion would be made available to Argentina for the duration of the program through 2021.
  - Fund disbursements for remainder of 2018 would total US$13.4 billion (on top of the US$15 billion already disbursed).
  - Planned disbursements in 2019: US$22.8 billion.
  - Planned disbursements for 2020-21: US$5.9 billion.
  - US$36.3 billion in Fund financing will be needed until end 2019 assuming a much lower rollover rate of sovereign debt than under the original SBA.
- Financing assurances and IFI support assumptions:
  - Assumes other IFIs provide new financing to at least cover upcoming amortizations in 2018-19, with financing assurances for about US$5 billion by World Bank, Interamerican Development Bank, and CAF.
  - Federal fiscal position adjusted to achieve primary balance in 2019 and a 1 percent of GDP surplus in 2020.

### Monetary and exchange rate policy framework
- Monetary framework:
  - Replacement of inflation targeting with a monetary base growth ceiling: commitment to zero percent per month until June 2019 and to one percent per month until end-2019 (seasonal adjustments in December and June).
  - After seasonal adjustments, average base money will grow by a cumulative 8.0 percent from September 2018 to June 2019, and by 11.6 percent from June to December 2019.
  - Operational tools: LELIQ issuance via fixed allotment, variable rate auctions; minimum bid rate to operationalize 60 percent floor; commitment to maintain short-term rates above 60 percent until 12-month-ahead median inflation expectations fall decisively for at least two consecutive months.
- Recent monetary actions:
  - Cumulative policy interest rate increases cited: 1500 bps in one note; elsewhere reported raising the policy rate by 2,000 bps and later by 2,000 bps total since program approval; reported policy rate reached 60 percent and in another update the weighted average 7-day LELIQ rate noted at 71.4 percent (mid-October reached 73.5 percent).
  - Reserve requirement increases: 5 percentage points reported; in other passages raising reserve requirement by 5 percent.
- Exchange rate policy and intervention rule:
  - Freely floating exchange rate with a non-intervention zone around AR$39 per US$ ± 15 percent (operational band specified elsewhere as 34 to 44 pesos per US$ with daily adjustments of 3 percent monthly until December 2018).
  - If currency moves outside the zone, BCRA may announce competitive auctions to buy or sell up to US$150 million per day.
  - All FX purchases/sales to be unsterilized, affecting base money.

### Macroeconomic developments and projections (staff projections)
- Growth:
  - 2018: now forecast to be -2.8 percent (versus 0.4 percent at SBA approval).
  - 2019: projected -1.7 percent (versus 1.5 percent expansion at approval).
  - Subsequent growth: 2020 2.7; 2021 3.1; 2022 3.4; 2023 3.6.
- Inflation (CPI eop, y/y percent change):
  - 2018: 43.8; 2019: 20.2; 2020: 13.0; 2021: 9.0; 2022: 5.0; 2023: 5.0.
  - Staff projection: end-2018 inflation expected to exceed 43 percent.
- External and exchange rate:
  - Real effective depreciation about 34 percent so far in 2018.
  - Current account deficit: 5.6 percent of GDP in Q2; staff projects current account deficit to fall to 1.6 percent of GDP in 2019.
  - Gross international reserves (billions of U.S. dollars): 2018 56.4; 2019 53.5; 2020 59.2; 2021 65.0; 2022 69.0; 2023 73.2.
  - Net international reserves (billions of U.S. dollars): 2018 23.1; 2019 20.3; 2020 26.0; 2021 31.8; 2022 35.8; 2023 40.0.
- Public finances and debt path:
  - Primary balance (percent of GDP): 2018 -2.7; 2019 0.0; 2020 1.0; 2021 1.1; 2022 1.2; 2023 1.4.
  - Total public gross debt (federal) (percent of GDP): 2018 81.2; 2019 72.2; 2020 67.0; 2021 63.7; 2022 60.5; 2023 59.3.
  - Public debt expected to peak at 81 percent of GDP in 2018 and fall to about 59 percent by 2023 under baseline.
- Baseline versus adverse scenario (selected):
  - GDP at constant prices: 2018 -2.8; 2019 -1.7; 2020 2.7; 2021 3.1; 2022 3.4; 2023 3.6.
  - CPI inflation (eop, y/y): 2018 43.8; 2019 20.2; 2020 13.0; 2021 9.0; 2022 5.0; 2023 5.0.
  - Rollover Rates for Public Debt: 2018 50.0; 2019 60.0; 2020 98.0; 2021 100.0; 2022 100.0; 2023 100.0.
  - Current account balance: 2018 -4.2; 2019 -1.6; 2020 -2.4; 2021 -2.6; 2022 -2.6; 2023 -2.5.

### Recent economic and market indicators
- Activity and labor markets:
  - GDP fell by 4 percent (q/q sa) in Q2 2018.
  - Unemployment rose to about 9½ percent in Q2 2018 (up from 8.6 percent in Q2 2017).
  - Poverty rose to 27¼ percent in the first half of 2018, about 1½ percentage points higher than previous six months.
- Inflation dynamics:
  - Inflation accelerated from 3.1 percent (month-on-month) in July to 6.5 percent in September; year-on-year inflation reached 40.5 percent.
  - Medium-term inflation expectations well outside the program’s inflation consultation clause outer band through end-2020.
- External and FX market moves:
  - Sovereign spreads rose to almost 800 bps in early September; 1-year CDS rose from 499 bps to 798 bps in one week.
  - Peso depreciations: 8 percent on the announcement day, a further 11 percent the next day, and 26 percent in August overall.
  - Central bank sold US$0.6 billion in foreign currency over a 5-day period in September; sold US$100 million on September 3; sold US$330 million in FX reserves on one day.
- Domestic debt issuance and rollovers:
  - Since June, federal government placed US$17 billion in domestic law debt.
  - Private sector rollovers of FX debt were low in June-August (~40 percent purchased by private sector); September auctions saw average 70 percent rollover (other passages note 63 percent and 83 percent in specific auctions).
  - Around US$5.3 billion in short term peso bonds were issued in August and September, with yields in excess of 50 percent for 3- to 6-month maturities.
- Banking sector (end-June indicators):
  - Ratio of ST Assets to ST Liabilities: 45.4
  - Liquidity coverage: 200.0
  - NPLs (%): 2.2
  - Provision Coverage Ratio: 124.0
  - NOP (% capital): 10.0
  - UVA linked assets minus liabilities (% capital): 33.0
  - ROE (nominal): 33.8
  - ROA: 4.0
  - Gross Exposure to Government (% total assets): 10.0
  - Private dollar deposits fell by around 5 percent since end-August but are roughly at program approval levels.

### Fiscal policy, 2018 outturn and 2019 budget measures
- 2018 fiscal outturn:
  - Government on track to modestly outperform 2018 fiscal target: primary deficit target was 2.7 percent of GDP.
  - Factors offsetting recessionary impact: depreciation boosting trade-related taxes and higher inflation raising revenue; pensions and social transfers respond with lag.
- 2019 draft federal government budget (submitted September 17) targets a primary balance of zero by:
  - Introduction of taxes on all exports (until end-2020).
  - Increase in the wealth tax.
  - Elimination of exemption of public employees’ wages from Personal Income Tax.
  - Elimination of non-taxable component of salaries and exemptions of financial profits of cooperatives and mutual institutions from CIT.
  - Draw-down of FGS assets.
  - One-year suspension of planned reduction in financial transaction tax (impuesto al cheque).
  - Scaling back energy subsidies: raise tariffs cost recovery from average 50 percent in 2018 to 70 percent in 2019; new gas pricing; reallocate transport subsidy responsibility to provinces.
  - Overall 5 percent real cut in spending on goods and services; 2 percent reduction in public employment.
  - Reduction of current discretionary transfers to provinces; elimination of Fondo Federal Solidario (30 percent of soy tax revenues redistribution).
- Summary fiscal impact on deficit (percent of GDP):
  - Primary federal deficit 2018: 2.7
  - Impact on deficit of revenue measures: -1.2
  - Impact on deficit of expenditure measures: -1.5
  - Primary federal deficit 2019: 0.0
- Structural fiscal adjustment:
  - Zero-primary balance target in 2019 implies a structural fiscal adjustment of 3.1 percent of potential GDP and a 1.7 percent of potential GDP larger negative fiscal impulse than built into the original SBA.
- Provincial position:
  - Provinces on aggregate had a primary surplus of 0.6 percent of GDP in June and expected to close 2018 with a small primary surplus.
  - Total transfers to provinces expected to fall only slightly in 2019 due to programmed increase in automatic transfers offsetting cut in discretionary transfers.

### Social protection and gender measures
- Social safety net:
  - 2019 budget keeps social assistance spending constant as share of GDP (adjusted for one-offs).
  - Preserves health spending in real terms; allows additional 0.2 percent of GDP in spending on specified social assistance programs if needed.
  - With World Bank support, ANSES to improve targeting and expand coverage of Asignación Universal por Hijo.
  - Monitoring system developed based on poverty, employment, and social program beneficiaries; comprehensive social protection reform strategy intended by end-2019.
- Gender equality measures:
  - Expansion of public childcare facilities.
  - Comisión Nacional de Valores to set up a registry of gender balance in listed companies’ executive boards and management positions.
  - Legislation extending paternity and maternity leave under consideration.

### Debt management and debt sustainability
- Pre-program debt management:
  - Relied on mix of monetary and external financing; BCRA advances created liquidity overhang absorbed via LEBAC issuance.
  - Large share of USD-denominated issuances exposed public debt to exchange rate risk.
  - Monetary financing suspended in program, but FX-denominated debt exchange rate risk remains.
- Treasury FX funding and rollover risks:
  - Remaining in 2018: about US$5.1 billion in FX LETES maturing, together with a US$3.1 billion repo with banks.
  - 2019 baseline FX gross financing needs with private sector: US$22.3 billion.
  - Rollover assumptions under program: private sector rollover 50 percent initially, rising to 70 percent by end-2019, nearly 100 percent in 2020.
- Development of peso market prioritized:
  - Regular peso issuance, benchmarks, secondary and repo markets, market making agreements, and reconsideration of regulatory limits on banks’ sovereign exposure recommended.
- Debt sustainability projections and risks:
  - Gross federal debt stock mid-August 2018: US$315 billion.
  - FX-denominated portion rose from ~68 percent at end-2017 to about 77 percent by mid-August 2018.
  - Debt projected to peak at 81 percent of GDP in 2018 and fall thereafter to ~59 percent by 2023 under baseline.
  - Standard stress test: 50 percent real depreciation with 0.25 pass-through could raise debt to 99 percent of GDP.
  - Staff assessment: debt sustainable but not with a high probability; significant downside risks remain.

### Safeguards, governance, and Fund risk exposure
- Safeguards assessment of BCRA completed:
  - Strong external audit arrangements; plan to transition financial reporting to international standards in 2020.
  - Need to strengthen central bank independence and board governance; recapitalization necessary.
  - Fiscal safeguards review planned for October-November 2018 given proposed additional budget support.
- Fund liquidity and credit exposure:
  - Original SBA reduced Fund’s one-year FCC by 16.0 percent; proposed augmentation would reduce FCC by further 2.8 percent.
  - Proposed augmentation would raise total access to SDR 40,714.0 (1,277.4 percent of quota).
  - Argentina’s share of outstanding GRA credit would increase from 21.8 percent to 27.9 percent after scheduled first-review purchase.
  - Projected repurchase obligations concentrated: repurchase obligations of SDR 14.5 billion in 2022 and SDR 16 billion in 2023.
  - Staff view: proposed augmented arrangement increases Fund’s elevated credit exposure and has significant though manageable impact on Fund liquidity; risks significant even by standards of other large exceptional access cases.

### Conditionality, reporting, and monitoring highlights
- Prior actions and structural benchmarks:
  - 2019 Budget submitted; revenue legislation on wealth tax submitted; FX auction regulation published; senior-level debt management coordinating committee established (with one-day delay).
  - Proposed structural benchmarks: passage of budget and tax legislation by end-November; three-year budget submission by end-October; central bank charter submission by end-March 2019; recapitalization of BCRA by end-December 2019.
- Quantitative performance criteria and targets (selected exact figures and definitions preserved from TMU):
  - Change in NIR (floor) (US$ billions, measured against value on June 4, 2018): 5.5; 2.0; 2.7; 5.5; -2.0; -8.7.
  - Change in stock of NDF (ceiling) (US$ billions): 1.0; 0.4; 0.0; 1.3 (continuous PC until end-December 2018; quarterly thereafter).
  - Change in central bank credit to government (ceiling) (change measured against end-May 2018 value of 2,204.4 billion pesos): 0.0; 0.0; -78.0; -39.4.
  - Change in net domestic assets of the central bank (ceiling) (change measured against end-May 2018 AR$432.9 billion): 15.0; 40.0; -98.0; 64.0; 251.2; 441.7.
  - Inflation consultation clause bands (y-o-y percent): Center inflation target entries include 27; 29.5; 27; 40.5; Inner band upper 29; Outer band upper 32.
- Reporting requirements:
  - Daily FX and central bank data, weekly BCRA balance sheet and Treasury account balances, monthly fiscal and debt data with specified lags (e.g., fiscal data within 25 calendar days).

*Italic source: International Monetary Fund — cr18297-argentinabundle (excerpts as provided).*

### 56.3 billion would be made available to Argentina for the duration of the program through

### 56.3 billion would be made available to Argentina for the duration of the program through

### Key issues and context
- First review under the Stand-By Arrangement (SBA) occurs amid:
  - turbulent market conditions, a stronger-than expected decline in activity, and inability of the central bank to anchor inflation expectations.
  - a new bout of volatility in key emerging markets and a domestic corruption investigation limiting Argentina’s access to market financing.
- Since program approval, activity slowed markedly and inflation and inflation expectations rose, largely driven by a weakening currency.
- The authorities requested the use of IMF financing for budget support; resources in the program are no longer expected to be treated as precautionary.

### Program performance (outturns and breaches)
- All performance criteria and the structural benchmark for end-June were met.
- Breaches and consultations:
  - Inflation exceeded the inner band since end-June (requiring staff consultation) and the outer band at end-September (requiring consultation with the Executive Board).
  - Net international reserves (NIR) are below the end-September performance criteria (at end-September, NIR were US$6.7 billion below the program floor).
  - Non-deliverable forwards (NDF) are above the end-September target.
  - The reduction in net credit to government (NCG) target for end-September was not met.
- Authorities requested waivers for non-observance of end-September NIR, NCG, and NDF targets; waivers of applicability requested for end-September fiscal targets.

### Program design and policy strengthening
- Authorities reshaped the policy program to restore stability by:
  - Eliminating the primary fiscal deficit in 2019 and targeting a primary surplus in 2020.
  - Establishing the growth rate in base money as a nominal anchor for monetary policy (replacing inflation targeting).
  - Having a freely floating exchange rate; rules-based, unsterilized FX intervention only in limited, pre-specified circumstances to prevent significant overshooting.
  - Increasing availability of Fund resources to address balance of payments (BOP) and fiscal financing needs.

### Access, financing, and disbursements
- Total augmentation and front-loading under the SBA:
  - An augmentation of access by 167 percent of quota (SDR 5.3 billion or around US$7.1 billion).
  - Front-loading of access from 2020-21 into 2018-19.
  - In total, access under the SBA would be 1,277 percent of quota (SDR 40.714 billion or about US$57 billion).
  - US$36.3 billion in Fund financing will be needed until end 2019 assuming a much lower rollover rate of sovereign debt than under the original SBA.
- Disbursement profile:
  - US$56.3 billion would be made available to Argentina for the duration of the program through 2021.
  - Fund disbursements for the remainder of 2018 would total US$13.4 billion (on top of the US$15 billion already disbursed).
  - Planned disbursements in 2019 are US$22.8 billion.
  - US$5.9 billion planned for 2020-21.
- The authorities requested that the domestic counterpart of access drawn under the arrangement be made available as budget support.

### Recent developments and market dynamics
- External and domestic shocks since SBA approval:
  - Emerging market volatility in August reduced availability of market financing.
  - Domestic corruption investigation implicated senior members of the previous government and major firms.
  - Market doubts about authorities’ commitment, partly due to communication and inconsistent FX intervention.
- Market outcomes:
  - Sovereign spreads rose to almost 800 bps in early September; 1-year CDS rose from 499 bps to 798 bps in one week.
  - Peso depreciations included: 8 percent on the announcement day, a further 11 percent the next day, and 26 percent in August overall.
  - At end-September, net international reserves were US$6.7 billion below the program floor.
  - Central bank actions included a 1500 bps policy interest rate increase, a 5-percentage point increase in reserve requirements, and the sale of US$330 million in FX reserves on one day.
  - Central bank sold US$0.6 billion in foreign currency over a 5-day period in September; sold US$100 million on September 3.
- Domestic debt issuance and rollovers:
  - Since June, the federal government placed US$17 billion in domestic law debt.
  - Private sector rollovers of FX debt were low in June-August (~40 percent purchased by private sector); September auctions saw average 70 percent rollover.
  - Around US$5.3 billion in short term peso bonds were issued in August and September, with yields in excess of 50 percent for 3- to 6-month maturities.

### Macroeconomic impact and indicators
- Activity and labor markets:
  - GDP fell by 4 percent (q/q sa) in Q2 2018.
  - Unemployment rate rose to about 9½ percent in Q2, up from 8.6 percent in Q2 2017.
  - Poverty rose to 27¼ percent in the first half of 2018, about 1½ percentage points higher than the previous six months.
- Inflation and expectations:
  - Large depreciation caused inflation and inflation expectations to depart from program targets.
  - Medium-term inflation expectations are well outside the program’s inflation consultation clause outer band through end-2020.
- External sector:
  - Current account deficit was 5.6 percent of GDP in Q2.
  - Interest payments on external debt account for more than one-half of the current account deficit.
  - In Q1, deficit was financed predominantly by public sector borrowing (including US$13 billion in federal government issuance to nonresidents).
  - In Q2, flows shifted: government precluded from issuing in international markets, nonresident holdings of LEBACs unwound, and private sector outflows occurred.
- Banking sector resilience (end-June indicators):
  - Ratio of ST Assets to ST Liabilities: 45.4
  - Liquidity coverage: 200.0
  - NPLs (%): 2.2
  - Provision Coverage Ratio: 124.0
  - NOP (% capital): 10.0
  - UVA linked assets minus liabilities (% capital): 33.0
  - ROE (nominal): 33.8
  - ROA: 4.0
  - Gross Exposure to Government (% total assets): 10.0
  - Private dollar deposits fell by around 5 percent since end-August but are roughly at program approval levels.

### Policy responses and commitments
- Fiscal:
  - Submission of a 2019 Budget targeting a zero-primary deficit, backed by an agreement with provincial leaders.
  - Measures include increased export taxes, cuts to capital spending, and reductions in subsidies and other spending (announced September 3).
- Monetary:
  - Replacement of inflation targeting with a monthly target on the growth of base money as a simpler, stronger, verifiable framework to lower inflation and expectations.
- Exchange rate:
  - Adoption of a freely floating exchange rate with limited, rules-based, unsterilized FX intervention only to counter significant overshooting.
- External support and social protection:
  - Agreement to increase budget support from other IFIs.
  - Seeking to increase the swap line with the People’s Bank of China (by US$9 billion).
  - Increasing social assistance benefits in main safety net programs.

*Source: https://www.imf.org/-/media/files/publications/cr/2018/cr18297-argentinabundle.pdf*

### 13.      The government is on track to modestly outperform the 2018 fiscal target (a primary

### cr18297-argentinabundle - 13.      The government is on track to modestly outperform the 2018 fiscal target (a primary

### 2018 fiscal outturn and near-term fiscal space
- The government is on track to modestly outperform the 2018 fiscal target (a primary deficit of 2.7 percent of GDP).
- Factors offsetting the recessionary impact on the fiscal position:
  - Positive effect of the depreciation on trade-related taxes (i.e., export taxes and the VAT on imports).
  - Effect of higher inflation on revenue.
  - Spending on pensions and social transfers responds to inflation with a lag.
- Additional measures implemented in early September:
  - New taxes on exports and reduced tax reimbursement to exporters.
- Planned uses of modest fiscal space in 2018:
  - Increase spending on externally-financed investment projects.
  - Boost social spending (one-off extra payments in September and December to universal child allowance recipients).
  - Pay a bonus to public-sector employees (whose wage would otherwise be locked into a public wage agreement providing for an average nominal increase of 8 percent from June 2018 to June 2019).
- Footnote expectation: net negative impact on exports expected to be small due to offsetting factors including increased productive capacity from last year’s strong investment in export industries, rebound of agricultural exports after the drought, and expected increase in energy exports as production in the Vaca Muerta basin picks up.

### 2019 draft federal government budget — targets and revenue measures
- The 2019 draft federal government budget (submitted to Congress on September 17) targets a primary balance of zero by:
  - Introduction of taxes on all exports (which will remain in place until end-2020).
  - Increase in the wealth tax (levied on the richest members of Argentina’s society and based upon assets held both within Argentina and abroad). 2
  - Elimination of the exemption of public employees’ wages (at all levels of government) from the Personal Income Tax.
  - Elimination of the non-taxable component of salaries (componente no remunerativo) and elimination of exemptions of financial profits of cooperatives and mutual institutions from the Corporate Income Tax (CIT).
  - Draw-down of the national pension fund assets (Fondo de Garantía y Sustentabilidad, FGS).
  - One-year suspension of the planned reduction in the financial transaction tax (impuesto al cheque).
  - Scaling back inefficient energy subsidies by:
    - raising tariffs to increase cost recovery from an average of 50 percent in 2018 to 70 percent in 2019;
    - introducing a new pricing system for gas production;
    - reallocating responsibility for transportation subsidies to provincial governments.
  - Containing capital spending, especially in transportation and energy projects where private sector participation is expected to pick up.
  - An overall 5 percent real cut in spending on goods and services (while increasing the purchase of food and medicine for the poor) and a 2 percent reduction in public employment.3
  - Reduction of current discretionary transfers to provinces (including eliminating the Fondo Federal Solidario, through which 30 percent of revenues from soy taxes were redistributed to provinces).
- Some fiscal resources will be used to:
  - Fund additional social spending.
  - Reduce the corporate income tax rate (to encourage investment).
  - Increase the minimum amount of income that is exempt from the employer’s social security contribution (to reduce the burden on lower income workers), according to the pace established by the end-2017 tax reform.

### Social safety net and social measures in the 2019 budget
- The 2019 budget:
  - Keeps social assistance spending constant as a share of GDP (once adjusted for one-offs in the last quarter of this year).4
  - Preserves health spending in real terms (while concentrating resources on the most vulnerable).
  - Achieves efficiency gains in the purchase of medicine and food for poor households.
  - Allows an additional 0.2 percent of GDP in spending on specified social assistance programs to protect the poor, should such an increase be needed.
  - Introduces a multi-transit public transportation fare to particularly benefit the poor.
  - With World Bank support, ANSES will continue to improve targeting and expand coverage of the universal child allowance (Asignación Universal por Hijo).5
  - Developed a system to monitor social conditions (based on multiple indicators including poverty, employment, and the number of social program beneficiaries).
  - Intends to finalize a comprehensive social protection reform strategy by end-2019.

### Fiscal consolidation, debt path, and cyclical concerns
- Zero-primary balance target in 2019 implies:
  - A structural fiscal adjustment of 3.1 percent of potential GDP.
  - A 1.7 percent of potential GDP larger negative fiscal impulse than was built into the original SBA.
- Debt trajectory under targeted path:
  - Debt peaks at 81 percent of GDP in 2018 and falls steadily thereafter to 59 percent of GDP by 2023.
- Required future commitment:
  - Authorities need to meet a target of a 1 percent of GDP primary surplus in 2020 and keep a primary surplus above 1 percent of GDP over the medium term.
- Possible quality improvements to fiscal consolidation to make it more growth-friendly include:
  - Eventual expansion of coverage of the PIT from the top decile to the top quintile of the wage distribution.
  - Reducing exemptions on VAT.
- Staff will continue to work with authorities to improve the quality of the fiscal consolidation.

### Provincial fiscal position
- Provinces are relatively healthy and well placed to achieve the targeted fiscal rebalancing without reducing essential services:
  - On aggregate, provinces had a primary surplus of 0.6 percent of GDP in June this year and are expected to close 2018 with a small primary surplus.
  - For 2019, provinces are expected to achieve a small primary surplus despite cuts in discretionary transfers and the handover of responsibility for subsidies on intra-provincial public transport and the payment of the social tariff on electricity.
  - The cut in discretionary transfers to provinces envisaged under the program will be almost fully offset by a programmed increase in automatic transfers (total transfers to provinces are expected to fall only slightly in 2019).6
  - The Fiscal Responsibility Law limits the increase in public employment at the provincial level and commits provinces to maintain non-wage current primary spending flat in real terms.
  - Modification to the 2017 Fiscal Pact will allow provinces to delay planned reductions in stamp duties and other taxes.

### Summary of 2019 fiscal measures under the baseline (federal government) — estimated impact on deficit (percent of GDP)
- Primary federal deficit 2018: 2.7
- Impact on deficit of revenue measures1: -1.2
  - Devolution to provinces of 3 percent of coparticipation and 2017 Fiscal Pact: 0.4
  - Loss of distortionary taxes from Dec 2017 tax reform2: 0.4
  - Reduction in tax devolutions to exports (reintegros): -0.1
  - Draw-down of FGS assets: -0.4
  - Taxes on exports and taxes on soy: -1.2
  - Increase in the wealth tax: -0.1
  - Reduce exemptions to the Personal Income Tax: -0.1
  - Elimination of the SSC-exempt component of salaries and reduction in tax expenditures on CIT: -0.1
- Impact on deficit of expenditure measures1: -1.5
  - Employment freeze and a 5 percent real cut in goods and services: -0.2
  - Increase in pension: 0.3
  - Reduction in energy subsidies: -0.2
  - Shift to provinces of subsidies for intra-provincial public transport and social tariff on electricity: -0.4
  - Cut in federal capital spending: -0.4
  - Elimination of the Fondo Federal Solidario: -0.2
  - Reduction in other discretionary transfers to provinces: -0.2
  - Reduction in other current primary spending: -0.2
- Primary federal deficit 2019: 0.0
- Note:
  - 1/ A -/+ sign means that the measure reduces/increases the primary deficit.
  - 2/ At program approval, the authorities were planning to suspend the increase in minimum salary above which employers pay SSC. Under the 2019 budget, the increase will proceed as originally planned.

### Gender equality measures
- 2019 budget commitments to promote gender equality:
  - Expansion of public childcare facilities to raise female labor force participation and level the playing field for women (particularly for lower income households).
  - Comisión Nacional de Valores is setting up a registry of gender balance in listed companies’ executive boards and management positions.
  - Legislation extending the duration of paternity and maternity leave is being considered by Congress.

### Monetary policy stance and inflation developments
- Since approval of the IMF-supported program, the BCRA has set its policy interest rate based on the gap between end-2019 inflation expectations and its inflation target.
- Recent developments and reactions:
  - Inflation accelerated from 3.1 percent (month-on-month) in July to 6.5 percent in September, bringing year-on-year inflation to 40.5 percent.
  - September survey of professional forecasters predicted inflation well above the outer band of the inflation consultation clause through end-2020.
  - BCRA policy responses in August and September included:
    - Raising the policy rate by 2,000 bps (to 60 percent).
    - Extending time-based forward guidance (committing to not lower the policy rate until at least December).
    - Raising the reserve requirement by 5 percent.
- Surveys indicate doubts about how long the BCRA would withstand high interest rates, though August and September surveys suggested doubts may be dissipating with policy rate expectations aligning closely with BCRA forward guidance. This increase in the forward curve raised the ex-ante real interest rate when measured at a 3-month horizon.

### Monetary base targeting framework (Box summary and operational details)
- With limited central bank credibility, unanchored inflation expectations, and accelerating inflation, the BCRA adopted a monetary framework centered on zero growth of base money as a transitional arrangement.
- Core of the new framework:
  - Commitment to a ceiling on the growth rate of nominal base money equal to zero percent per month until June 2019, and to one percent per month until end-2019.8
  - The targets will include adjustments in December and June to accommodate seasonal spikes in demand for currency. After seasonal adjustments, average base money will grow by a cumulative 8.0 percent from September 2018 to June 2019, and by 11.6 percent from June to December 2019.
- Operational changes to increase BCRA control over domestic liquidity:
  - LELIQ issuance calibrated to reach the base money target on average for each month based on fixed allotment, variable rate auctions.
  - Commitment to maintain short-term rates above 60 percent until 12-month-ahead median inflation expectations fall decisively for at least two consecutive months.
  - Minimum bid rate introduced at the LELIQ auction to operationalize the 60 percent floor.
  - Central bank will accommodate increases in the interest rate as needed to ensure achievement of the quantitative target.

### Exchange rate policy and intervention framework
- Recent conduct:
  - Central bank’s recent approach lacked a clear objective, resulting in excessive loss of reserves while doing little to address disorderly market conditions. Interventions were ad hoc and discretionary.
  - Interventions included selling reserves into an appreciating currency, selling reserves by auctions and direct sales, and occasionally staying out of the market during large daily currency movements.
- Current stance:
  - Authorities allow the currency to freely float and regard a floating exchange rate as best suited to current circumstances.
  - BCRA is prepared to intervene in a limited, simple, and rules-based way to prevent disorderly market conditions and significant overshooting.
  - Specifics of the intervention zone and auction option:
    - No FX purchases or sales within a “non-intervention zone” of AR$39 per US$ ± 15 percent.
    - If the currency moves outside this zone, the BCRA would have the option (but not a commitment) to announce a competitive auction to buy or sell up to US$150 million per day.
    - All FX purchases/sales will be unsterilized, resulting in an expansion/contraction of base money (i.e., base money would grow at a faster/slower rate than the announced monthly targets).

*International Monetary Fund — cr18297-argentinabundle (excerpts as provided)*

### 26.      Prior to the program, Argentina’s debt management has relied on a mix of monetary

### cr18297-argentinabundle - 26.      Prior to the program, Argentina’s debt management has relied on a mix of monetary

### Debt management before and during the program
- Prior to the program, Argentina’s debt management relied on a mix of monetary and external financing.  
- The BCRA’s advances to the Treasury created a liquidity overhang absorbed via issuance of BCRA securities (LEBACs), generating a significant quasi-fiscal cost and undermining disinflation objectives.  
- Debt management strategy relied on sizable U.S. dollar denominated issuances, exposing public debt to exchange rate risk.  
- Monetary financing was suspended in the context of the IMF-supported program, but exchange rate risk from FX-denominated debt remains.

### Treasury FX funding needs and rollover risks
- Remaining in 2018: about US$5.1 billion in FX LETES maturing, together with a US$3.1 billion repo with banks.  
- In 2019 (baseline rollover assumptions): FX gross financing needs (with the private sector) of US$22.3 billion.  
- Rollover assumptions under the program: private sector rollover of 50 percent of amortizations initially, rising to 70 percent by end 2019, and nearly 100 percent in 2020.

### Priority: develop liquid peso-denominated government securities market
- Requirements for success:
  - A successful macroeconomic stabilization effort and gradual increase in domestic currency debt issuance.
  - Treasury to issue peso-denominated securities more regularly, preferably on a pre-announced schedule, with benchmarks provided by a few (initially short) maturities to deepen the market and develop a yield curve.
  - Development of secondary and repo markets; introduction of a market making agreement would help.
  - Reconsideration of regulatory limits on banks’ exposure to sovereign risk (noting that limits resulted in a larger role for mutual funds).
- Administrative note: The limits will be adjusted daily at a monthly rate of 3 percent until December 2018, starting on October 1, 2018.

### Impact on the macroeconomic outlook (staff projections)
- Growth:
  - 2018: now forecast to be -2.8 percent (versus 0.4 percent at SBA approval).
  - 2019: projected average contraction of -1.7 percent (versus 1.5 percent expansion at program approval).
  - Recovery expected to begin in 2019Q2 driven by agricultural rebound; domestic demand growth expected to remain weak.
- Inflation:
  - End-2018 inflation expected to exceed 43 percent (versus 27 percent at SBA approval).
  - End-2019 inflation expected to be 20 percent.
- Exchange rate and external sector:
  - Real effective depreciation of about 34 percent so far in 2018 (exceeding prior estimated overvaluation).
  - Current account deficit expected to fall to 1.6 percent of GDP in 2019.
  - Public sector not expected to tap international markets in 2019; nonresident investors expected to purchase domestic law bonds.
  - A cumulative real appreciation of around 20 percent is expected by 2020 under the program scenario.
- Baseline versus adverse scenario indicators (selected)
  - GDP at constant prices: 2018 -2.8; 2019 -1.7; 2020 2.7; 2021 3.1; 2022 3.4; 2023 3.6.
  - CPI inflation (eop, y/y percent change): 2018 43.8; 2019 20.2; 2020 13.0; 2021 9.0; 2022 5.0; 2023 5.0.
  - Primary balance: 2018 -2.7; 2019 0.0; 2020 1.0; 2021 1.1; 2022 1.2; 2023 1.4.
  - Total public debt (federal): 2018 81.2; 2019 72.2; 2020 67.0; 2021 63.7; 2022 60.5; 2023 59.3.
  - Rollover Rates for Public Debt: 2018 50.0; 2019 60.0; 2020 98.0; 2021 100.0; 2022 100.0; 2023 100.0.
  - Gross international reserves (billions of U.S. dollars): 2018 56.4; 2019 53.5; 2020 59.2; 2021 65.0; 2022 69.0; 2023 73.2.
  - Net international reserves (billions of U.S. dollars): 2018 23.1; 2019 20.3; 2020 26.0; 2021 31.8; 2022 35.8; 2023 40.0.
  - Change in REER (eop, percent change): 2018 -30.3; 2019 6.2; 2020 3.8; 2021 2.3; 2022 1.4; 2023 0.9.
  - Interest rate (eop): 2018 69.6; 2019 32.0; 2020 20.0; 2021 15.3; 2022 14.0; 2023 13.1.
  - Current account balance: 2018 -4.2; 2019 -1.6; 2020 -2.4; 2021 -2.6; 2022 -2.6; 2023 -2.5.

### Implications for the Stand-By Arrangement (SBA)
- Balance of payments (BOP) need:
  - BOP need arises from pressures on current and capital accounts, driven by shifts in global appetite for emerging market assets and idiosyncratic Argentina concerns.
  - Tightened financial conditions constrained government’s ability to issue new debt and meet gross external financing needs; lower rollover rates have translated into lower international reserves.
  - Staff judges that augmentation and front-loading of access under the SBA is warranted to address Argentina’s actual BOP need.
- Access (assumptions and proposed augmentations):
  - Assumes other IFIs provide new financing sufficient to at least cover their upcoming amortizations in 2018-19, with financing assurances for about US$5 billion by World Bank, Interamerican Development Bank, and CAF.
  - Assumes private sector rollover path as noted above and public sector entities maintain/increase exposure to federal liabilities.
  - Federal fiscal position adjusted to achieve primary balance in 2019 and a 1 percent of GDP surplus in 2020.
  - Under such assumptions, requested IMF augmentation: SDR 5.335 billion (around 167 percent of quota or US$7.1 billion) with SDR 25.9 billion (about US$36.3 billion, 813 percent of quota) made available as budget support between end-September 2018 and end-December 2019.
  - Total access under the SBA would be 1,277 percent of quota (SDR 40.714 billion or about US$57 billion).
- Capacity to repay:
  - Capacity to repay assessed as adequate but subject to heightened risks.
  - Fund’s exposure in debt service metrics is at higher end compared with other exceptional access cases; frontloading results in bunching of repurchase obligations.
  - International reserves projected to remain adequate at end of program and throughout repayment.
  - Strengthened institutions, governance, and transparency provide assurances, but steadfast program delivery is crucial.

### Program performance and corrective actions
- Performance:
  - All end-June quantitative performance criteria (QPC) under the SBA were met, but some end-September QPCs (where data available) were missed.
  - Misses included: inflation exceeding inner band since end-June and the outer band at end-September (40.5 percent y/y), NIR below end-September target, stock of non-deliverable forwards above ceiling, and QPC on net credit to government missed due to financing conditions.
  - Waivers for non-observance requested for end-September QPCs for net international reserves, net credit to government, and non-deliverable forwards.
- Corrective actions:
  - Authorities recalibrating monetary policy and accelerating fiscal adjustment.
  - Reduction of outstanding stock of NDFs begun: around US$200 million rolled off during September; stock to be monitored by a continuous QPC.
  - Authorities requesting waivers of applicability for all end-September fiscal QPCs; preliminary data indicate targets will be met and a staff statement will report final performance if data become available before the board date.
  - Continuous QPCs for external payment arrears and central bank financing of government were met.
  - End-June structural benchmark for establishment of FX auctions was met; end-September structural benchmark on senior-level debt management coordinating committee implemented on October 1 (minor delay).

### Risks
- Primary risk: uncertainty on private capital participation; lower-than-assumed rollover rates could render Fund resources insufficient to fully finance BOP and fiscal needs.
- Financing terms failing to improve could raise concerns about program financing and federal debt sustainability.
- Weaker macroeconomic outturns could jeopardize fiscal objectives, increase debt-GDP path, raise sovereign spreads, and reduce market financing availability.
- Failure to achieve fiscal adjustment or reestablish central bank credibility could undermine policy efforts, debt sustainability, and inflation expectations.
- External shock risks: unanticipated changes to U.S. monetary policy, deepening trade tensions, geopolitical uncertainty, or exogenous tightening of global financial conditions, especially affecting emerging markets.
- Social and political risks: maintaining support for adjustment difficult amid a deepening downturn; national elections in October 2019 exacerbate this risk.

### Debt sustainability
- Debt burden indicators have worsened since program request and beyond the adverse scenario.
- Public debt expected to peak at 81 percent of GDP by end-2018, reflecting real exchange rate depreciation and high share of FX-denominated debt and lower GDP growth.
- Baseline with new monetary framework and additional fiscal consolidation envisages recovery in market confidence, partial and front-loaded real exchange rate unwinding, return of growth, and debt falling to around 59 percent of GDP by 2023.
- Downside risks to baseline: incomplete rebound in market confidence, structurally high share of FX-denominated debt, potential contingent liabilities from broader public sector.
- Mitigant: 40 percent of public debt is held by other public entities.
- Staff assessment: debt remains sustainable, but not with a high probability.

### Prior actions, structural benchmarks, and political assurances
- Prior actions:
  - 2019 Budget submitted to Congress with zero-primary deficit target; quantifies 2019 policy measures and tax expenditures; contains statement of fiscal risks and mitigating measures (including PPPs); eliminates article 27 of Law 11,672 regarding capital expenditures recording.
  - Government submitted revenue legislation (on the wealth tax) as a prior action.
- Structural benchmarks:
  - Passage of budget and tax legislation proposed as structural benchmarks for end-November.
  - New structural benchmark by end-October for submitting a medium-term budget to Congress.
  - Timing change proposed for structural benchmark limiting counterparties for LEBACs to end-March 2019 (from end-September 2019).
- Political assurances:
  - Provincial governors signed addendum to the 2017 Fiscal Pact agreeing on importance of federal government reaching primary balance in 2019; addendum to be submitted to provincial legislatures after Congressional approval.
  - Head of the Partido Justicialista block in the Senate expressed support for the fiscal plan underpinning the SBA.
  - Authorities’ fiscal and monetary measures and BCRA communication of new monetary policy provide sufficient assurances of commitment and ability to implement the program.

### Reviews and conditionality
- Reviews:
  - Staff propose adding a second review based on an end-October test date and a third review based on an end-December test date, then reverting to regular quarterly reviews.
- Key program conditions (selected):
  - Primary balance: target for 2019 set at zero for the year as a whole; quarterly targets to reflect seasonality. Adjustor for capital spending financed by official donors of up to 0.2 percent of GDP maintained.
  - Social targets: floor on social assistance spending and 0.2 percent of GDP adjustor for social spending maintained.
  - Net credit to government (NCG): starting end-October, targeted change in NCG reduced to zero; prospect of reinstating targeted reduction to be examined at each review depending on market conditions.
  - Net International Reserves (NIR): targets assume Fund resources fully drawn down as budget support; adjustors introduced: (i) downward adjustor based on cumulative FX sales outside non-intervention zone up to US$150 million per day; (ii) upward adjustor if cumulative issuance of FX-denominated debt exceeds program baseline; also an adjustor linked to timing changes of IFI disbursements.
  - Non-deliverable forwards: continuous ceiling of US$3.6 billion (same as end-September stock) until end-December 2018; starting 2019, becomes a quarterly performance criterion (with monthly indicative targets) and will be reduced gradually.
  - Inflation targets: inflation consultation clause eliminated from program conditionality reflecting change from inflation targeting to monetary targets.
  - Net Domestic Assets (NDA): NDA QPCs established consistent with programmed NIR path and central bank targeted growth in base money; targets defined as a ceiling on monthly average of NDA. No adjustor to NDA ceiling linked to FX sales (purchases); symmetric adjustor based on timing changes of IFI budget support disbursements included.
- Modifications requested for end-December performance criteria on: primary balance of federal government, domestic arrears, social assistance spending, NIR, NDF, and net credit to government.

*Source: IMF staff report (cr18297-argentinabundle, chapter text provided).*

### 43.      Safeguards. A safeguards assessment of the BCRA has been completed. The assessment

### 43. Safeguards. A safeguards assessment of the BCRA has been completed.

### Safeguards assessment of the BCRA
- The assessment mission found that the BCRA has strong external audit arrangements.
- The BCRA is planning to transition financial reporting practices to international standards in 2020.
- Plans to amend the BCRA Charter are underway.
- Central bank independence needs strengthening in key governance aspects, including:
  - Refocusing the bank’s objectives on monetary and financial stability.
  - Strengthening governance arrangements at the BCRA board (including the personal autonomy of board members and the Governor).
- Recapitalization of the BCRA will be necessary to strengthen the balance sheet.
- Staff recommended closer coordination between the authorities and staff on the use of budget support resources in line with the Memorandum of Understanding signed between the Treasury and the BCRA that sets out terms and responsibilities for handling IMF resources used for budget support.
- In light of the proposed additional budget support under the SBA, a fiscal safeguards review is planned for October-November 2018.

### Financing assurances and untendered debt settlement
- The combination of a larger fiscal adjustment and increased resources from the Fund ensure the program is fully financed.
- The authorities will continue to seek further bilateral and multilateral financing for Argentina (including larger support from other IFIs and an increase in the size of the foreign currency swap with the People’s Bank of China).
- Additional FX resources should be kept to build-up reserves in order to strengthen Argentina’s external position.
- It is expected that the increase in access and re-phasing of the program will play a key role in bringing back market confidence and supporting the authorities’ reform plan.

- Settlement of Untendered Debt as of December 31, 2017 (In billions of US$, unless otherwise noted)
  - Agreements: Nominal Amount 5.53; Claims 17.44; Agreements 11.34; Haircut (Percent) 35
  - Pending: Nominal Amount 1.18; Claims 3.29; Agreements 0.81; Haircut (Percent) 75
  - Total: Nominal Amount 6.71; Claims 20.73; Agreements 12.15; Haircut (Percent) 41
  - Source: Ministry of Finance.

### Outstanding arrears to private and official creditors
- Private creditors:
  - Around US$1.2 billion in principal (or US$3.2 billion including accrued interest) remains outstanding.
  - Since program approval, the authorities have continued to make payments under the agreements executed.
  - No new agreements since June, but authorities are in the final stages of approving and publishing instructions for the procedure for settlement of claims under Argentine Law.
  - Authorities expect this will bring in another wave of agreements for claims under Argentine Law out of a total of about US$90 million in original principal amounts eligible.
  - Terms offered are the same as those offered to the creditors who accepted in 2016.
  - Litigation by certain bondholders continues in several jurisdictions.
  - Staff view: authorities are making good faith efforts as required under the Fund’s Lending into Arrears policy.
- Official bilateral creditors:
  - Limited outstanding arrears of approximately US$30 million (in principal amount) claimed by the French export credit agency related to a gas pipeline in Tierra del Fuego built in the late 1970s.
  - Parties are in arbitration in the International Chamber of Commerce International Court of Arbitration; discussions are ongoing and both countries agreed that the constitution of the Court will be decided under Argentine Law.

### Exceptional access criteria (staff judgments)
- Criterion 1:
  - Argentina is experiencing exceptional balance of payments pressures on the current account and capital account leading to a financing need that cannot be met within normal limits.
  - Tighter global financial conditions since program approval in June reinforced shifts away from peso assets and intensified capital account pressures.
- Criterion 2:
  - A rigorous analysis indicates debt is sustainable but not with a high probability; exceptional access is justified if non-Fund financing improves debt sustainability and enhances safeguards.
  - Under staff’s new baseline, Argentina’s federal government debt is projected to increase above the high-risk threshold (70 percent).
  - Gross financing needs (GFN) are high but remain below the 15 percent of GDP high-risk threshold during the projection period.
  - The end-2018 federal debt-to-GDP ratio forecast for end-2018 is 16 percentage points higher than at program approval (due to depreciation, and to a lesser extent, lower growth rate).
  - Debt-GDP ratio is projected to fall over the medium term as a result of fiscal efforts, a return to growth, and a reversal of overshooting of the real exchange rate.
  - Sizable risks: high actual level of debt to GDP, large share of foreign currency debt, significant rollover needs, implementation risks around fiscal consolidation, potential contingent liabilities including BCRA recapitalization needs.
  - Mitigating factor: large share of public debt held by other public-sector entities.
  - Staff assessment: debt is sustainable but not with a high probability; required safeguards are judged to be in place.
  - Note: Of the outstanding stock of the federal government’s foreign currency debt held outside the public sector (US$147 billion), only about one quarter is expected to mature by end-2020.
- Criterion 3:
  - Staff judges the member has prospects of regaining access to private capital markets within a timeframe and scale to meet Fund obligations.
  - Despite tighter conditions and higher average yields on external bonds, Argentina maintains access to domestic financial markets with participation in recent peso- and US$-denominated bond placements.
  - Successful program implementation and international support are expected to help reestablish access to international capital markets on reasonable terms.
- Criterion 4:
  - Staff judges the policy program provides a reasonably strong prospect of success, including institutional and political capacity to deliver adjustment.
  - Government has reinforced ownership of fiscal adjustment needed under the program (though quality of adjustment can be improved) and worked within Congress and with regional governors to build political support.
  - Majority of provincial Governors have publicly expressed willingness to share burden of fiscal adjustment and, in an addendum to the 2017 Fiscal Pact, recognized the importance of the federal government reaching primary balance in 2019.
  - Head of the Justicialista party block in the Senate has publicly indicated support for the government’s announced fiscal plan underlying the Stand-By Arrangement, aiding passage of the 2019 Budget.
  - Social opposition to the program has been more subdued than might have been expected.
  - Monetary actions: central bank has raised policy rates by a cumulative 20 percent since program approval, increased reserve requirements, and on October 1 rolled out a simpler and tighter monetary policy framework, which led to a rise in short-term interest rates and commitment to a freely floating exchange rate regime with a transparent FX intervention rule.
  - These actions demonstrate commitment to achieve monetary goals.
  - Conclusion: concrete fiscal and monetary actions and BCRA communication provide sufficient assurances that authorities are committed and able to implement the program; strong, sustained, and consistent policy implementation and broad societal ownership remain essential.

### Staff appraisal — key points
- Argentina faces renewed financial market volatility driven by a significant current account deficit, large gross fiscal financing needs, and limited foreign currency reserves, leaving the country vulnerable to global market sentiment shifts.
- Market confidence has remained fragile despite Fund support; in the past 2 months, policy slippages and miscommunications have worsened sentiment.
- Authorities have responded by accelerating fiscal adjustment to achieve a primary fiscal balance in 2019 and redesigning the monetary policy framework to provide a simpler and more effective nominal anchor.
- Authorities are committed to protecting the vulnerable via increased social assistance programs, prioritization of social assistance and childcare spending in the 2019 Budget, and maintenance of program flexibility to increase such spending further in 2019 if necessary.
- Broad societal understanding of the need for reforms appears to exist, with most provincial governors endorsing the fiscal plan and statements of support from the head of the Partido Justicialista block in the Senate.
- Risks remain: a significant amount of Fund resources will support balance of payments adjustment and finance a large share of the government’s fiscal needs for the next 15 months.
- Staff view: international support together with a stronger policy framework should reassure investors and return Argentina to macroeconomic stability and an external position aligned with medium-term fundamentals; steadfast implementation is critical for program success.

*INTERNATIONAL MONETARY FUND.*

### 53.      Staff supports the authorities’ request to modify the program supported by the Stand-

### cr18297-argentinabundle - 53. Staff supports the authorities’ request to modify the program supported by the Stand-By Arrangement

### Program stance and Fund support
- Staff supports the authorities’ request to modify the program supported by the Stand-By Arrangement.
- Under the modified program:
  - "the debt remains sustainable, inflation will come down, and growth and job creation will be restored."
- Staff supports converting the program from precautionary to a drawing arrangement for budget support, an augmentation, rephasing, waivers of non-performance and applicability, completion of the first review and inflation consultation, and completion of the financing assurances review.
- "The government’s economic plans will address longstanding vulnerabilities and the Fund’s support will provide time for the administration to undertake the needed realignment of policies."
- "There will be challenging times ahead for the Argentine people, but the authorities’ policy plans merit the support of the international community."

### Recent market developments (high-level)
- Sovereign spreads peaked above 750 bps in September, but have narrowed since then.
- CDS spreads increased sharply in August and September then decreased thereafter.
- Yields of the 10-year sovereign bond in dollars have fallen but are still above their levels at the start of 2018.
- Equity markets have been volatile since June.
- Capital flows have stabilized recently (EPFR-based Bond Country Flows: ETFs/Mutual Funds).
- Soybean spot prices facing Argentine exporters have fallen, though less than U.S. prices.
- Chart annotations and sources: EPFR; Bloomberg.

### Real and external sector developments
- GDP growth decelerated in 2018: Q2, driven by weak exports, investment, private consumption and inventories.
- Economic activity remained weak in July.
- Industrial production fell sharply over the last few months.
- Labor market indicators have weakened; unemployment and labor force participation trends shown (INDEC).
- Weaker consumer confidence and anemic real wage growth are likely to continue to hinder consumption.
- "An adjustment in the trade balance appears to be underway."
- Contributions to GDP growth (q/q) series and trade/volume indicators sourced to INDEC.

### FX and monetary developments
- Headline and core inflation have accelerated since May (INDEC GBA CPI series).
- The BCRA has tightened monetary conditions (policy interest rate increases).
- Rate increases are being slowly transmitted to deposit rates (BADLAR gap and deposit rate series).
- The BCRA has reduced and re-intermediated its stock of sterilization instruments (LEBAC/LELIQ series).
- The peso depreciated sharply in August but stabilized in September and has appreciated so far in October (SIOPEL exchange-rate series; 20-day annualized volatility).
- Gross international reserves have fallen due to higher than expected interventions and lower than expected rollovers (BCRA reserve contributions chart).

### Key statistics and projections (selected figures from tables)
- GDP at constant prices (annual series shown): 2.7, -1.8, 2.9, 0.4, 1.5, -2.8, -1.7, 2.7, 3.1, 3.4, 3.6.
- Nominal GDP (billions of Argentine pesos): 5,955; 8,189; 10,556; 13,240; 16,068; 13,629; 17,872; 21,066; 23,948; 26,356; 28,597.
- Output gap (percent): 1.1; -1.8; -0.5; -2.9; -3.7; -4.8; -7.8; -6.7; -5.2; -3.9; -2.3.
- CPI inflation (eop, y/y percent change): ... 24.8 27.0 17.0 43.8 20.2 13.0 9.0 5.0 5.0.
- Exports f.o.b. (goods, billions of U.S. dollars): 56.8; 57.9; 58.4; 66.4; 71.6; 61.6; 65.2; 67.5; 70.2; 73.3; 76.6.
- Imports f.o.b. (goods, billions of U.S. dollars): 57.6; 53.5; 64.0; 65.7; 67.7; 58.3; 53.0; 60.2; 66.3; 73.5; 76.7.
- Trade balance (goods, billions of U.S. dollars): -0.8; 4.4; -5.5; 0.7; 4.0; 3.3; 12.2; 7.3; 3.9; -0.2; -0.2.
- Total external debt (percent of GDP): 27.9; 34.2; 37.2; 51.3; 52.6; 57.2; 60.6; 56.1; 53.2; 49.4; 45.6.
- Gross federal debt (billions of Argentine pesos): 3,280; 4,500; 6,078; 8,543; 9,786; 11,062; 12,911; 14,110; 15,265; 15,953; 16,952.
- Gross federal debt (percent of GDP): 55.1; 55.0; 57.6; 64.5; 60.9; 81.2; 72.2; 67.0; 63.7; 60.5; 59.3.
- Gross international reserves (billions of U.S. dollars): 25.6; 39.3; 55.1; 65.4; 69.0; 56.4; 53.5; 59.2; 65.0; 69.0; 73.2.
- Central Bank monetary base (end of period, AR$ billions): 822; 1,001; 1,260; 1,529; 1,350; 1,532; 1,893; 2,222; 2,505; 2,794.
- Policy interest rate (eop): 23.9; 28.8; 37.2; 22.5; 69.6; 32.0; 20.0; 15.3; 14.0; 13.1.
- Current account (percent of GDP): -17.6; -14.7; -31.3; -19.9; -18.6; -20.2; -7.0; -12.0; -14.1; -15.1; -15.5.
- Financial account (billions of U.S. dollars): 13.6; 28.8; 45.7; 6.0; 17.2; -7.3; -20.3; 12.6; 21.6; 33.1; 38.2.

### Fiscal and financing overview (selected items)
- Revenues (billions of Argentine pesos): 2,106.6; 2,871.6; 3,677.9; 4,633.7; 5,718.0; 4,859.0; 6,570.0; 7,883.7; 8,862.6; 9,633.3; 10,384.9.
- Primary expenditures (billions of Argentine pesos): 2,368.9; 3,255.5; 4,144.9; 4,998.7; 5,926.7; 5,197.0; 6,558.1; 7,621.0; 8,534.8; 9,221.6; 9,898.4.
- Primary balance (percent of GDP): -4.4; -4.7; -4.4; -2.8; -1.3; -2.5; 0.1; 1.2; 1.4; 1.6; 1.7.
- Overall balance (percent of GDP): -6.0; -6.6; -7.0; -5.1; -3.8; -5.5; -4.4; -3.2; -3.2; -2.5; -1.9.
- Federal government overall balance (percent of GDP): -5.8; -6.2; -5.0; -3.7; -5.3; -3.9; -2.9; -3.0; -2.4; -1.9.

### Financing needs and near-term gaps (high-level)
- Table summaries show large gross financing needs and amortizations across 2018–2021, with detailed quarterly breakdowns of needs and sources.
- Total needs, total sources, and gaps are presented quarterly and annually with implied private rollover assumptions and IMF disbursement schedules.
- Example aggregated totals shown for selected periods:
  - Total Needs (example row): 7,831; 6,258; 12,119; 18,227; 44,435; 51,949; 22,684; 24,488; 9,443; 12,226; 68,841; 95,661; 49,782; 53,725.
  - Total Sources (example row): 8,291; 6,746; 9,915; 11,366; 36,318; 51,949; 16,700; 14,000; 5,336; 6,595; 42,632; 95,661; 43,667; 52,090.
  - Total Gap (example row): (460); (488); 2,204; 6,861; 8,117; 0; 5,983; 10,487; 4,107; 5,631; 26,208; 0; 6,115; 1,635.
- Private rollover rate assumptions illustrated (e.g., 50%, 85%, 100% in various quarters).
- IMF scheduled availability and proposed augmentation and rephasing amounts shown (SDR millions): Original Amounts total 35,379; Proposed Augmentation and Rephasing total 40,714.

### Policy implications and priorities reflected in the material
- Support for a policy realignment timed with Fund resources to restore macro stability: lower inflation, sustainable debt dynamics, renewed growth and employment.
- Monetary tightening and tightening of monetary conditions by the BCRA to address inflation acceleration since May.
- Need for continued foreign-exchange market management given reserve drawdowns from interventions and rollover shortfalls.
- Fiscal consolidation path implied by structural primary balance and federal primary balance projections to reduce deficits and stabilize public debt ratios over the projection horizon.
- Importance of securing financing (multilateral, public and private rollovers, and IMF disbursements) to meet near-term gross financing needs and close projected gaps.

*Source: https://www.imf.org/-/media/files/publications/cr/2018/cr18297-argentinabundle.pdf*

### 2. Federal government accumulation of external debt payment arr

### 2. Federal government accumulation of external debt payment arr

### Quantitative fiscal and indicative targets (selected figures)
- Federal government accumulation of domestic arrears (ceiling): 8.2; -1.9; 14.9; n.a.
- Social assistance spending (floor): 87.7; 87.7; 131.1; n.a.
- Indicative target — Primary balance of the general government (floor): -163.0; -47.9; -272.0; n.a.
- Performance Criterion — Primary balance of the federal government (floor): -290.0; n.a.; -362.5; -370.0; n.a.; n.a.; 6.0
- Federal government accumulation of external debt payment arrears (ceiling) (continuous PC): 0.0; 0.0; 0.0; 0.0; 0.0; 0.0; 0.0

Notes on target definitions:
- Targets as defined in the Technical Memorandum of Understanding (TMU) dated June 12, 2018.
- Cumulative flows from January 1 through December 31.
- The accumulation is measured against the average during Q4 2017, which stood at 45.6 billion pesos.
- Targets subject to adjustors as defined in the TMU.

### Monetary targets and performance criteria (selected figures)
- Change in net international reserves (floor) (in billions of U.S. dollars, measured against the value on June 4, 2018): 5.5; 2.0; 2.7; 5.5; -2.0; -8.7
- Change in stock of non-deliverable FX forwards (ceiling) (in billions of U.S. dollars): 1.0; 0.4; 0.0; 1.3
- Change in central bank credit to government (ceiling) (change measured against end-May 2018 value of 2,204.4 billion pesos): 0.0; 0.0; -78.0; -39.4
- Central bank financing of the government (ceiling): 0.0; 0.0; 0.0; 0.0
- Change in net domestic assets of the central bank (ceiling) (change measured against end-May 2018 value of AR$ 432.9 billion pesos): 15.0; 40.0; -98.0; 64.0; 251.2; 441.7

Additional monetary notes:
- Increases in non-borrowed NIR reflect IMF budget support disbursements, which increase NIR.
- Change in stock of non-deliverable FX forwards: continuous PC until end-December 2018, thereafter quarterly PC with indicative targets.

### Inflation consultation clause (bands, percent y-o-y)
- Outer Band (upper): 32; 32
- Inner Band (upper): 29; 29
- Center inflation target: 27; 29.5; 27; 40.5
- Inner Band (lower): 25; 25
- Outer Band (lower): 22; 22

### Structural benchmarks and prior actions (timing and status highlights)
- Present a 2019 budget to Congress targeting a zero primary balance and including fiscal risk statement, estimate of tax expenditures, and elimination of article 27 of Law 11,672 — 1st Review — Met.
- Submit to Congress legislation increasing the rate and base of the wealth tax (Impuesto sobre los Bienes Personales) — 1st Review — Met.
- Publish a regulation to introduce a foreign exchange auction for BCRA intervention in the spot and forward markets — Jun-2018 — Met.
- Establish a senior-level debt management coordinating committee between Treasury-Finance-BCRA to meet weekly — Sep-2018 — Not met. Implemented with one day delay.
- Present a three-year budget document to Congress with transparent medium-term objectives — Oct-2018 — Proposed.
- Congress will pass the 2019 Budget targeting a zero primary balance — Nov-2018 — Proposed.
- Congress will pass revenue legislation underpinning the 2019 fiscal plan, including the wealth tax increase — Nov-2018 — Proposed.
- Provide sufficient resources to the newly created CBO (Oficina de Presupuesto del Congreso) — Dec-2018.
- Limit the BCRA’s counterparties for sale of LEBACs, open market operations and repos to domestic banks — Mar-2019 — Proposed (Change from Sep-2019 to Mar-2019).
- Submit to Congress a new charter for the central bank to ensure operational autonomy and strengthen mandate — Mar-2019.
- Design a compliance improvement plan and risk mitigation strategies around taxpayer segments and core taxes — Jun-2019.
- Recapitalize the central bank to ensure adequate capital as percent of monetary base plus outstanding LEBACs — Dec-2019.

### Indicators of Fund credit, 2018-26 (selected figures, in millions of SDRs unless otherwise specified)
- Existing and Prospective drawings (36 month SBA): 20,214; 16,300; 2,800; 1,400; ...
  - (in percent of quota): 634; 511; 88; 44
- Amortization: 0.0; 0.0; 0.0; 2,653.4; 14,494.4; 16,128.5; 5,600.1; 1,575.1; 262.5
- GRA charges and surcharges: 79.1; 939.5; 1,370.2; 1,596.8; 1,553.6; 760.9; 138.4; 26.9; 2.8
- Total debt service: 127.1; 1,021.0; 1,384.2; 4,257.3; 16,048.0; 16,889.4; 5,738.6; 1,602.1; 265.3
  - (in percent of exports of G&S): 0.2; 1.9; 2.5; 7.4; 26.4; 26.3; 8.5; 2.2; 0.4
  - (in percent of GDP): 0.0; 0.3; 0.4; 1.1; 4.0; 3.9; 1.2; 0.3; 0.0
- Outstanding stock: 20,213.7; 36,513.8; 39,313.9; 38,060.6; 23,566.2; 7,437.7; 1,837.6; 262.5; 0.0
  - (in percent of quota): 634.2; 1,145.6; 1,233.5; 1,194.1; 739.4; 233.4; 57.7; 8.2; 0.0
  - (in percent of GDP): 5.9; 11.5; 11.3; 10.1; 5.8; 1.7; 0.4; 0.1; 0.0
- Memorandum items:
  - Exports of goods and services (US$ mn): 73,551; 75,768; 79,077; 82,800; 86,827; 91,737; 96,925; 102,406; 108,197
  - Gross International Reserves (US$ mn): 56,360; 53,506; 59,193; 65,046; 68,979; 73,212; 78,816; 84,850; 91,345
  - Quota: 3,187.3 (each year listed)

### External Debt Sustainability Framework (selected projections and ratios)
- Baseline — External debt (percent of GDP): 27.3 (2013); 30.2 (2014); 27.9 (2015); 34.2 (2016); 37.2 (2017); 55.8 (2018); 60.2 (2019); 55.4 (2020); 52.8 (2021); 49.0 (2022); 45.2 (2023)
- Change in external debt: -1.7; 2.9; -2.4; 6.4; 3.0; 18.6; 4.4; -4.8; -2.7; -3.8; -3.8
- Identified external debt-creating flows (4+8+9): -0.9; 3.4; -2.7; 6.7; -1.7; 4.5; 2.1; 0.0; -0.3; -0.8; -1.2
- Current account deficit, excluding interest payments: 1.5; 0.9; 2.2; 1.8; 3.7; 1.7; -0.6; 0.7; 1.1; 1.3; 1.5
- Automatic debt dynamics (contribution): -0.9; 3.0; -3.1; 5.3; -3.2; 3.9; 3.1; 0.2; 0.0; -0.4; -0.6
  - Contribution from nominal interest rate: 0.6; 0.7; 0.6; 0.9; 1.2; 2.5; 2.0; 1.7; 1.5; 1.3; 1.0
  - Contribution from real GDP growth: -0.7; 0.7; -0.7; 0.6; -0.8; 1.4; 1.0; -1.5; -1.6; -1.7; -1.7
  - Contribution from price and exchange rate changes: -0.8; 1.6; -3.0; 3.9; -3.6; ...
- Residual, incl. change in gross foreign assets (2-3): -0.8; -0.4; 0.3; -0.3; 4.7; 14.1; 2.4; -4.8; -2.3; -3.0; -2.6
- External debt-to-exports ratio (percent): 186.4; 208.2; 255.5; 268.1; 326.7; 369.7; 357.7; 346.5; 340.8; 324.5; 303.3
- Gross external financing need (in billions of US dollars): 85.8; 82.6; 81.7; 104.5; 97.4; 137.5; 105.7; 97.7; 96.6; 116.9; 117.1
  - (in percent of GDP): 14.0; 14.7; 12.7; 18.9; 15.3; 10-Year; 10-Year; 28.2; 23.5; 19.8; 18.1; 20.3; 19.0

Key macroeconomic assumptions underlying the baseline (selected)
- Real GDP growth (in percent): 2.4; -2.5; 2.7; -1.8; 2.9; 1.7; 4.6; -2.8; -1.7; 2.7; 3.1; 3.4; 3.6
- GDP deflator in US dollars (change in percent): 3.0; -5.5; 10.9; -12.2; 11.8; 7.1; 10.9; -21.4; -6.1; 6.9; 5.0; 4.0; 3.3
- Nominal external interest rate (in percent): 2.3; 2.4; 2.2; 2.7; 4.2; 2.5; 0.6; 5.1; 3.4; 3.2; 3.0; 2.7; 2.3
- Growth of exports (US dollar terms, in percent): -5.0; -8.7; -14.4; 1.0; 2.7; 2.0; 15.3; 1.3; 3.0; 4.4; 4.7; 4.9; 5.7
- Growth of imports (US dollar terms, in percent): 9.6; -11.8; -8.4; -7.1; 19.6; 6.7; 24.1; -8.8; -9.2; 13.7; 10.2; 10.9; 4.4
- Current account balance, excluding interest payments: -1.5; -0.9; -2.2; -1.8; -3.7; -0.4; 2.1; -1.7; 0.6; -0.7; -1.1; -1.3; -1.5
- Net non-debt creating capital inflows: 1.5; 0.6; 1.7; 0.4; 2.1; 1.6; 0.7; 1.0; 0.4; 0.9; 1.4; 1.7; 2.0

### Annex I — Public Debt Sustainability Analysis: key findings
- Stock (mid-August 2018): gross federal government debt stood at US$315 billion, down from US$321 billion at end 2017. Peso exchange rate at end-2017 was AR$18.8/US$.
- Currency composition: FX-denominated portion of debt rose from around 68 percent at end-2017 to about 77 percent by mid-August 2018, driven by:
  - US$9 billion external bond placement in January 2018;
  - US$15 billion IMF disbursement in June 2018;
  - currency depreciation.
- About one quarter of peso-denominated debt is linked to inflation.
- Maturity: average maturity of total public debt at end-2017 was 7.7 years; average maturity of bonds 9.4 years. Stock of short-term LETES in private hands decreased from US$25 billion at end-2017 to around US$20 billion by mid-August 2018.
- Debt holders: about 40 percent of federal government’s debt is held by other public-sector entities and provinces; nearly two third of intra-public-sector debt is denominated in US$; debt to IFIs and bilateral creditors increased from about 9 percent to 13 percent of total debt.
- Recent placements and market access: since program approval in June, authorities placed US$17 billion of debt. Private sector rollovers of FX debt were low in June-August (about 40 percent of new FX LETES issuance purchased by private sector); September LETES auctions improved to about 63 percent and 83 percent private sector participation. New short-term Peso LETES placements were about US$5.3 billion in August and September; 3- and 6-month rates climbed to around 54.75 and 50 percent, respectively.

### Baseline scenario and projections (summary)
- Debt projected to increase to 81 percent of GDP in 2018 — 16 percentage points higher than projected at program approval — due to higher realized depreciation and lower projected growth.
- Under staff’s baseline (rebound in market confidence and faster fiscal consolidation), debt is expected to decline to slightly below 60 percent of GDP by 2023.
- Gross financing needs (GFN) are high but remain below the 15 percent of GDP high-risk threshold during the projection period.
- Key baseline assumptions:
  - Growth: 2018 -2.8 percent; 2019 -1.7 percent; rebound to 2.5 percent in 2020; rise to 3.6 percent by 2023.
  - Inflation: expected to erode real value of long-maturity, peso-denominated debt.
  - Primary deficit: fiscal consolidation throughout the period helps reduce debt accumulation.
  - Exchange rate: excess real depreciation in 2018 will unwind, with nearly 85 percent of the unwind between end-September 2018 and end-2019.
  - Financing: continued rollover of intra-public-sector financing; capitalization of interest payments; statutory advances from the BCRA are zero starting July 2018; no further international bond issuance expected until 2020; IMF plays a key role in financing for remainder of 2018 and 2019.
  - Average effective interest rate on total debt expected to drop from 8.2 percent in 2018 to 7.1 percent by 2023.

### Realism assessment and risks
- Realism:
  - Historical track record: median forecast error for real GDP growth in lowest quartile; median forecast error for inflation suggests somewhat pessimistic bias.
  - Median forecast error for the primary balance has been on the optimistic side; projected fiscal adjustment is ambitious relative to cross-country distribution.
- Solvency risks:
  - High share of foreign currency debt makes exchange rate shock a major vulnerability. Standard DSA stress test (50 percent real depreciation with 0.25 pass-through) shows debt could jump to 99 percent of GDP.
  - Growth shock could raise debt to 81 percent of GDP.
  - Given long maturity profile, interest rate shock is less of a risk for central government debt (BCRA debt, mostly short-term, is excluded).
  - If primary balance remained at 2018 level (–2.7 percent of GDP), debt would remain largely flat at 79 percent of GDP by 2023.
  - A ‘combined macro-fiscal’ shock could cause debt to peak at nearly 116 percent of GDP.
- Liquidity risks:
  - A combined macro-fiscal shock would lead to GFN of 31 percent of GDP, which may not be financeable through market access on favorable terms.
  - Liquidity risks mitigated somewhat by significant share of debt held by public sector entities, but even full rollover of these obligations leaves significant GFN.

### Overall assessment (staff view)
- Federal government debt is projected to rise to 81 percent in 2018 but start declining from 2019 under the baseline.
- The peak in 2018 is 16 percentage points of GDP higher than at program approval due to higher depreciation and lower growth.
- Under staff’s baseline with market confidence rebound and faster fiscal consolidation, debt expected to fall to slightly below 60 percent of GDP by 2023.
- Important downside risks remain: weaker-than-envisaged economic and financial conditions; structurally high share of foreign currency denominated debt; fiscal and external financing needs; potential contingent liabilities.
- The re-phased and augmented access under the program should ensure the program remains fully financed.
- Staff’s overall assessment: Argentina’s debt is sustainable, but not with a high probability.

*Source: IMF staff estimates and analysis as presented in the provided content.*

### 7.      Debt is expected to peak at 81 percent of GDP in 2018 and fall thereafter. The fiscal

### cr18297-argentinabundle - 7.      Debt is expected to peak at 81 percent of GDP in 2018 and fall thereafter. The fiscal

### Debt trajectory and headline projections
- Debt is expected to peak at 81 percent of GDP in 2018 and fall thereafter.
- Under the planned fiscal consolidation, debt would fall to about 59 percent of GDP by the end of 2023.
- The fiscal adjustment, economic recovery, and lower real interest rates (as central bank credibility is established) are the channels expected to place public debt-to-GDP on a steady downward trajectory from 2019 onwards.
- The rephased and augmented access under the program is needed to ensure the program remains fully financed.

### Key baseline DSA figures (selected, as reported)
- Nominal gross public debt:
  - 2018: 81.2 (percent of GDP)
  - 2019: 72.2
  - 2020: 67.0
  - 2021: 63.7
  - 2022: 60.5
  - 2023: 59.3
- Public gross financing needs:
  - 2018: 13.6 (percent of GDP)
  - 2019: 11.2
  - 2020: 13.4
  - 2021: 9.2
  - 2022: 11.7
  - 2023: 14.3 / 14.2 (table shows 14.3 and 14.2 in different columns/rows)
- Real GDP growth (in percent):
  - 2018: -2.8
  - 2019: -1.7 / -2.8 (table shows differing entries across scenarios; baseline cited as -1.7)
  - 2020: 2.7
  - 2021: 3.1
  - 2022: 3.4
  - 2023: 3.6
- Inflation (GDP deflator, in percent):
  - 2018: 33.4
  - 2019: 32.5
  - 2020: 14.9
  - 2021: 10.4
  - 2022: 6.4
  - 2023: 4.7
- Primary balance (percent of GDP):
  - 2018: -2.7
  - 2019: 0.0
  - 2020: 1.0
  - 2021: 1.1
  - 2022: 1.2
  - 2023: 1.0
- Effective interest rate (in percent):
  - 2018: 8.6
  - 2019: 8.2
  - 2020: 8.6
  - 2021: 8.6
  - 2022: 8.5
  - 2023: 7.7 / 7.1 (table shows 7.7 and 7.1 in different rows)
- Change in gross public sector debt (cumulative row shown):
  - 2018: 23.6 (percent of GDP increase)
  - Subsequent annual changes: -8.9, -5.3, -3.2, -3.2, -1.3
  - Cumulative identified debt-creating flows over projection: -35.8 (percent of GDP)
- Automatic debt dynamics contribution (annual):
  - 2018: -13.5
  - 2019: -5.8
  - 2020: -3.1
  - 2021: -1.4
  - 2022: -0.8
  - Cumulative: -34.1

### Identified near-term risks to debt sustainability
- The size of the gross financing needs under a stressed scenario.
- The large (and potentially rising) share of foreign currency debt, making debt dynamics susceptible to deviations from the programmed path of the real exchange rate.
- The large external financing needs of the economy, which in past emerging market crises has shown to be a strong predictor of a debt crisis.
- The proposed fiscal consolidation is ambitious relative to similar country situations (it is in the top 5 percent of the distribution of fiscal consolidations achieved by a broad sample of program countries).
- The DSA covers only federal government debt and so could understate the sustainability of general government debt.
- The national government faces contingent liabilities from needing to recapitalize the central bank, from loss-making publicly-owned corporations, and from unfunded pensions.

### Risk notes, vulnerabilities, and mitigating factors
- Provincial debt at end-2017 was projected to be around 6 percent of GDP; most provinces are running close to a balanced budget (mitigating the omission of provincial debt from the DSA).
- A high share of federal government debt is held by other public-sector entities (mitigating factor).
- The relatively long maturity of dollar-denominated debt issued on international markets is noted; about one quarter of the government’s US$-denominated debt held outside the Argentine public sector will mature by end-2020.
- The report flags that gross financing needs and market perception indicators (EMBIG, 5Y CDS) are notable components of the risk assessment.

### Stress tests and alternative scenarios (summary)
- Stress tests performed include: Primary Balance Shock; Real GDP Growth Shock; Real Interest Rate Shock; Real Exchange Rate Shock; Combined Shock; and a Constant Primary Balance Scenario.
- Example scenario parameters and outcomes (as reported):
  - Historical scenario and constant primary balance alternatives are presented alongside the baseline.
  - Under the Real GDP Growth Shock scenario, 2019 real GDP growth can fall to -6.3 in the stressed path reported in the stress-test table.
  - Under a Real Exchange Rate Shock, inflation spikes are shown (e.g., inflation 2019: 49.9 in that shock table).
- Charts and heat maps in the DSA illustrate percentile distributions of gross nominal public debt, composition by currency and maturity, and gross financing needs under baseline and stress scenarios.

### Program financing and policy implication
- The report emphasizes that rephased and augmented IMF access under the program is needed to ensure the program remains fully financed given projected financing needs and downside risks.

*Source: IMF staff (as presented in the provided content).*

### Appendix I. Letter of Intent

### Appendix I. Letter of Intent

### Program request and ownership
- Government requests augmentation of access under the existing IMF Stand-By Arrangement by SDR 5.335 billion (about US$7.1 billion), to make the arrangement equivalent to SDR 40.714 billion (about US$57 billion), or 1,277 percent of Argentina’s quota with the IMF.
- Requests waivers of non-observance for end-September performance criteria on net international reserves, net credit to government, and non-deliverable forwards, and waivers of applicability for performance criteria on the primary balance of the federal government, domestic arrears, and social assistance spending (final data not available at Board consideration).
- Requests that all tranches can be used as budget support and that the full amount of access be drawn.
- Requests increase in IMF reviews frequency: bi-monthly reviews based on end-October and end-December performance criteria in the near-term, and quarterly reviews thereafter.
- Government reaffirms ownership: revisions “designed by, and fully owned by, the Argentine government.”

### Macroeconomic objectives
- Fiscal: achieve fiscal balance (zero primary balance excluding interest payments) in 2019 and put public debt on a firm downward path; continue to strengthen public finances to reach a 1 percent of GDP primary surplus in 2020.
- Monetary: redesign Central Bank policy to ensure inflation falls to single digits by 2021.
- External: allow exchange rate to operate flexibly as a shock absorber, increase international reserves, lower current account deficit, and reduce external financing needs.
- Social: protect most vulnerable citizens; ensure burden is shared fairly.

### Fiscal policy measures and governance
- 2019 Budget submitted to Congress designed to achieve a zero-primary balance while mitigating short-term adverse effects on growth and job creation; includes statement of fiscal risks, estimate of tax expenditures, elimination of article 27 of Law 11,672.
- Revenue and tax measures included in 2019 Budget:
  - Increase in export taxes and reduction in export tax refunds.
  - A wealth tax levied on assets of the most affluent held within Argentina and abroad; submitted legislation to increase rate and base of the wealth tax.
  - Scale back energy subsidies and reallocate transportation subsidies and social electricity tariff responsibility to provincial governments.
  - Contain capital spending; compensate via Public-Private Partnership projects and higher provincial capital spending.
  - Expand PIT coverage to some exempt public employees; reduce tax expenditures on corporate income tax by limiting exemptions for cooperatives and mutual organizations.
  - Reduction of discretionary transfers to provinces, and a 6 percent real cut to other current spending.
  - Freeze on new hiring of public employees, reducing overall public payroll.
  - Reduction in other goods and services spending of the federal government by 18 percent in 2018 and a further 5 percent in 2019 in real terms.
  - Reduction on transfers associated with operating deficit of Government enterprises not related to public utility tariffs by 68 percent in real terms.
- Provincial Fiscal Pact updates: double the collection of wealth taxes as percent of GDP, suspend reduction in the financial transaction tax (impuesto al cheque), allow provinces to suspend reduction in stamp duties.
- Governance and oversight:
  - Ensure CBO (Oficina de Presupuesto del Congreso) has sufficient resources to evaluate macroeconomic and budgetary forecasts, provide independent costing, assess fiscal plans, and monitor public finances.
  - Request IMF technical assistance on revenue administration, compliance improvement, and risk mitigation strategies.
  - Submit a three-year budget by end-October 2018 with transparent medium-term objectives for the primary balance consistent with program parameters.

### Social protection and gender equity
- Protect social spending and vulnerable populations:
  - Two additional payments to nearly 4 million beneficiaries of the Universal Child Allowance (Asignación Universal por Hijo) in 2018.
  - In 2019 budget: protect benefits in family allowances per capita in real terms.
  - Real increase in budget allocations for basic products for vulnerable sectors by 19 percent in real terms.
  - Pharmaceutical products and vaccines budget to grow 44 percent in real terms.
  - Social spending in nominal terms will grow more than 10 percentage points faster than overall primary expenditure and will remain at about record-high levels in 2019.
- Targeting and coverage improvements:
  - Regular monitoring of multi-dimensional social indicators (poverty, employment, number of social program beneficiaries).
  - Identify eligible children not covered by Universal Family Allowances.
  - Introduce multi-transit public transport tariff to benefit low-income households.
  - Improve targeting of social energy tariffs via data sharing and expanded qualification criteria.
  - Develop umbrella social protection strategy by end-2019 with World Bank assistance.
- Gender equity measures:
  - 12 percent expansion of public childcare facilities in 2019 budget.
  - Comisión Nacional de Valores to set up a registry of gender balance in Boards and managerial positions of listed companies.
  - Urge legislators to accelerate discussion and approval of legislation that extends paternity and maternity leave.

### Monetary and exchange rate policy
- Shift announced from inflation targeting to targeting the growth rate of the monetary base (issued banknotes and coins plus commercial banks’ peso reserves at the central bank).
- Commitments:
  - Monetary base to remain stable until June 2019 (adjusted for seasonality in December and June), and to grow no faster than 1 percent per month thereafter.
  - Open market operations (7-day LELIQ) using fixed allotment, variable rate auctions to achieve base money target on average each month.
  - Keep short-term rates (7-day LELIQ rate) at or above 60 percent at least until average 12-month-ahead inflation expectations in the REM survey decline decisively for two consecutive months; 60 percent acts as a floor and does not constrain upward movements.
  - Operate this quantity-based framework as a transitional arrangement with return to inflation targeting when conditions warrant.
- Exchange rate stance:
  - Fully flexible exchange rate determined by market forces without central bank intervention.
  - Option to purchase FX transparently to rebuild reserves if currency strengthens significantly; option to offer daily auctions to provide liquidity if currency depreciates excessively.
  - Non-intervention zone defined as approximately ± 15 percent around AR$39 per U.S. dollar; outside this zone, competitive auction to sell or buy FX up to US$150 million per day may be announced.
  - Limits of the zone adjusted daily by a 3 percent monthly growth until December 2018.
  - All FX intervention, if it occurs, will be unsterilized.
  - Commit not to undertake FX sales through state-owned banks; no intention to conduct FX sales of IMF disbursements for remainder of the year; system for conversion and use of disbursements for peso budgetary financing to be worked out before needs arise and in context of next review.
- Forwards market:
  - Reduce participation by keeping total stock of non-deliverable forwards at or below end-September level until end-December, and gradually reducing it thereafter.
- Central bank governance:
  - Transfer BCRA counterparties for sale of LEBACs, open market operations and repos to domestic banks by end-December 2018 (market conditions may delay until early 2019).
  - Submit draft of new BCRA charter to Congress by end-March 2019 to ensure operational autonomy, strengthen mandate, enhance decision-making, and improve transparency and accountability.
  - Work towards injecting necessary amount of peso-denominated, interest-bearing marketable securities onto BCRA balance sheet to achieve adequate capital by end-December 2019.

### Debt management and banking sector
- Continue developing local peso-denominated securities market with regular benchmark issuances and market making arrangements; seek IMF technical assistance.
- Senior-level debt management coordinating committee established; meets weekly to coordinate sterilization and debt issuance plans.
- Commit to depositing all proceeds from FX issuances into the Treasury account at the BCRA to preserve net international reserves and foster FX market development.
- Banking sector assessment:
  - Risks viewed as limited due to small sector size, high capital and liquid assets, and limited sovereign exposure.
  - Will closely monitor developments and be prepared to respond to any deterioration.

### Economic outlook and projections
- Near-term downturn expected:
  - Quarter-on-quarter economic growth expected to be negative until the first quarter of 2019.
  - Expect growth to contract by between 2 and 3 percent in 2018 and between 0.5 and 2 percent in 2019.
  - Expect a V-shaped recovery beginning in second quarter of 2019, supported by rebound in agricultural output.
  - Growth rebound projected to 8½ percent year-on-year in the fourth quarter of 2019.
- Demand and external balance:
  - Rotation of demand from domestic consumption and investment toward export-led recovery during 2019.
  - Trade balance swing from a deficit of 0.9 percent of GDP in 2018 to a 1.2 percent of GDP trade surplus in 2019.
  - Current account deficit to be cut by more than half to end-2019 at between 0.5 and 1.5 percent of GDP.
- Inflation path:
  - Headline inflation expected to peak at slightly above 40 percent by January 2019 and fall quickly to slightly above 20 percent by end-2019.
  - Inflation expected to continue falling to reach single digits by end-2021.

### Supply-side, governance, AML/CFT, and statistics
- Anti-corruption: continue strengthening anti-corruption regime, implementation, institutional framework, prosecutorial and judicial proceedings; cooperate with OECD.
- AML/CFT: commit to further strengthening frameworks and implementation; accelerate concrete measures in consultation with Fund staff and welcome IMF technical assistance.
- Statistics: continue collaboration with international organizations (OECD, IMF) to align statistical system with internationally accepted methodologies and reporting standards.
- Structural priorities: develop domestic credit markets, reform competition policy, cut red tape; incorporate new measures at second and third reviews.

### Financing needs and program modalities
- Government requests increased IMF support until end-2019 by US$19 billion and that all tranches be direct budget support.
- Program financing schedule (Original Amounts vs. Proposed Augmentation and Rephasing):
  - Approval of Arrangement (June 20, 2018): Original SDR millions 10,613.71 (% Quota 333%); Proposed same 10,613.71 (% Quota 333%).
  - First Review and end-September 2018 performance criteria (October 26, 2018): Original SDR millions 2,063.78 (% Quota 65%); Proposed SDR millions 4,100.00 (% Quota 129%).
  - Second Review and end-October 2018 performance criteria (December 15, 2018): Original SDR millions 2,063.78 (% Quota 65%); Proposed SDR millions 5,500.00 (% Quota 173%).
  - Third Review and end-December 2018 performance criteria (March 15, 2019): Original SDR millions 2,063.78 (% Quota 65%); Proposed SDR millions 7,800.00 (% Quota 245%).
  - Fourth Review and end-March 2019 performance criteria (June 15, 2019): Original SDR millions 2,063.78 (% Quota 65%); Proposed SDR millions 3,900.00 (% Quota 122%).
  - Fifth Review and end-June 2019 performance criteria (September 15, 2019): Original SDR millions 2,063.78 (% Quota 65%); Proposed SDR millions 3,900.00 (% Quota 122%).
  - Sixth Review and end-September 2019 performance criteria (December 15, 2019): Original SDR millions 2,063.78 (% Quota 65%); Proposed SDR millions 700.04 (% Quota 22%).
  - Seventh Review and end-December 2019 performance criteria (March 15, 2020): Original SDR millions 2,063.78 (% Quota 65%); Proposed SDR millions 700.04 (% Quota 22%).
  - Eighth Review and end-March 2020 performance criteria (June 15, 2020): Original SDR millions 2,063.78 (% Quota 65%); Proposed SDR millions 700.04 (% Quota 22%).
  - Ninth Review and end-June 2020 performance criteria (September 15, 2020): Original SDR millions 2,063.78 (% Quota 65%); Proposed SDR millions 700.04 (% Quota 22%).
  - Tenth Review and end-September 2020 performance criteria (December 15, 2020): Original SDR millions 2,063.78 (% Quota 65%); Proposed SDR millions 700.04 (% Quota 22%).
  - Eleventh Review and end-December 2020 performance criteria (March 15, 2021): Original SDR millions 2,063.78 (% Quota 65%); Proposed SDR millions 700.04 (% Quota 22%).
  - Twelfth Review and end-March 2021 performance criteria (June 1, 2021): Original SDR millions 2,063.71 (% Quota 65%); Proposed SDR millions 700.05 (% Quota 22%).
  - Totals: Original 35,379 SDR millions (1110% quota); Proposed 40,714 SDR millions (1277% quota).
- Government states intention to consult IMF on any additional measures and to provide data and information requested for program assessment.
- Reaffirm commitment to publication: consents to IMF publication of this letter, the MEFP, the Technical Memorandum of Understanding, and accompanying Executive Board documents.

*Source: Appendix I. Letter of Intent (cr18297-argentinabundle)*

### 2. Federal government accumulation of external debt payment arr

### 2. Federal government accumulation of external debt payment arr

### Quantitative performance targets and outturn indicators
- Federal government accumulation of domestic arrears (ceiling): 8.2; -1.9; 14.9; n.a.
- Social assistance spending (floor): 87.7; 87.7; 131.1; n.a.
- Indicative target — Primary balance of the general government (floor): -163.; 0; -47.9; -272.0; n.a.
- Performance Criteria — Change in net international reserves (floor) (in billions of U.S. dollars, measured against the value on June 4, 2018): 5.5; 2.0; 2.7; 5.5; -2.0; -8.7.
- Change in stock of non-deliverable FX forwards (ceiling): 1.0; 0.4; 0.0; 1.3.
- Change in central bank credit to government (ceiling) (measured against end-May 2018 value of 2,204.4 billion pesos): 0.0; 0.0; -78.0; -39.4.
- Central bank financing of the government (ceiling): 0.0; 0.0; 0.0; 0.0.
- Change in net domestic assets of the central bank (ceiling) (measured against end-May 2018 value of AR$ 432.9 billion pesos): 15.0; 40.0; -98.0; 64.0; 251.2; 441.7.

(Note: targets defined in the Technical Memorandum of Understanding (TMU) dated June 12, 2018; targets subject to adjustors as defined in the TMU.)

### Fiscal targets (selected outturns and proposed values)
- Primary balance of the federal government (floor) (cumulative flows from January 1 through December 31): -290.0; n.a.; -362.5; -370.0; n.a.; n.a.; 6.0.
- Federal government accumulation of external debt payment arrears (ceiling): 0.0; 0.0; 0.0; 0.0; 0.0; 0.0; 0.0.
- Federal government accumulation of domestic arrears (ceiling) (cumulative): 17.0; n.a.; 21.6; 24.4; n.a.; n.a.; 30.0.
- Social assistance spending (floor) (cumulative): 144.0; n.a.; 177.5; 173.0; n.a.; n.a.; 60.0.
- Indicative targets — Primary balance of the general government (floor): n.a.; n.a.; -382.4; -370.0; n.a.; n.a.; -14.0.

### Monetary targets (selected)
- Change in non-borrowed net international reserves (floor) (in billions of U.S. dollars; change measured against the value on September 28, 2018): 3.7; 2.1; 5.5; 7.1; 5.3; 3.5; 12.5.
- Change in stock of non-deliverable FX forwards (ceiling) (continuous PC until end-December 2018): 0.0; 0.0; -0.5; 0.0; 0.0; -0.7; -1.0.
- Change in central bank credit to government (ceiling) (change measured against the value on September 28, 2018, which stood at 2,592.86 billion pesos): 0.0; 0.0; -156.0; 0.0; 0.0; 0.0; 0.0.
- Change in net domestic assets of the central bank (ceiling) (change measured against the average value for September 2018, which was AR$ 557 billion): 97.7; -55.7; 166.0; -46.2; -112.1; -36.0; -185.6.

### Inflation consultation clause — inflation bands (y-o-y, percent)
- Outer Band (upper): 32; 32.
- Inner Band (upper): 29; 29.
- Center inflation target: 27; 29.5; 27; 40.5.
- Inner Band (lower): 25; 25.
- Outer Band (lower): 22; 22.

### Social spending and adjustors
- Social spending (program definition): sum of all federal government spending (recurrent and capital, cash basis) on specified social protection programs including Asignación Universal para Protección Social and several Asignaciones Familiares subprograms.
- Social spending subject to adverse economic (program baseline) — cumulative AR$ millions from January 1:
  - end-June 2018: 37,187
  - end-September 2018: 55,368
  - end-October 2018: 65,102
  - end-December 2018: 74,836
  - end-March 2019: 25,679
  - end-June 2019: 47,735
- Adjustor to the primary balance for social spending: capped at 13,500 million pesos in 2018, 35,800 million pesos in 2019, and the peso equivalent of 0.2 percent of GDP in each successive calendar year.

### Adjustor for external financing projects
- Adjustor to the primary balance for shortfalls (excess) in expenditure financed by disbursements of external project loans: capped at cumulative 30,000 million pesos in 2018, 35,800 million pesos in 2019, and 0.2 percent of GDP in each successive calendar year.
- Starting in 2019 the benchmark is the expenditure financed by disbursements of external project loans by IFIs and bilateral partners, as stated in the budget.

### Ceilings on accumulation of domestic arrears
- Definition: domestic arrears = floating debt = difference between primary spending on an accrual basis (gasto devengado, SIDIF) and primary spending on a cash basis (base caja, Treasury). Excludes intra-public transfers and includes personnel, goods and services, non-professional services, capital expenditures, and transfers.
- Measurement: arrears measured daily; program caps the average of arrears during the three months prior and up to a test date at 0.5 percent of GDP, according to the path set in Table 2.
- AR$ millions (cumulative from January 1):
  - end-June 2018: 15,171
  - end-September 2018: 20,025
  - end-October 2018: 25,183
  - end-December 2018: 30,341
  - end-March 2019: 10,000
  - end-June 2019: 20,000

### Federal government non-accumulation of external debt payments arrears — definitions
- Residency-based definition of external debt; debt defined as a current liability created under a contractual arrangement requiring future payments in assets or services.
- Debt instruments covered include:
  - Loans (including deposits, bonds, debentures, commercial loans, buyers’ credits, repurchase agreements, official swap arrangements).
  - Suppliers’ credits (deferred payment contracts).
  - Leases (debt for program purposes is the present value at inception of lease payments expected during the agreement, excluding payments that cover operation, repair or maintenance).

### Program exchange rates (rates published by the BCRA and Bloomberg as of September 28, 2018)
- Argentine Pesos to the US dollar 1/41.25
- Argentine Pesos to the SDR 1/57.55
- Argentine Pesos to the Euro 1/47.90
- Argentine Pesos to the Canadian dollar 1/31.91
- Argentine Pesos to the British pound 1/53.79
- Argentine Pesos to the Renminbi 1/6.01
- Gold prices (US$/ounce) 2/1,190.88

### Reporting and monitoring requirements (selected)
- Fiscal and social spending data: provided to the Fund with a lag of no more than 25 calendar days after the end of each month.
- Arrears data: recorded at daily frequency and provided to the Fund with a lag of no more than 25 calendar days after the end of each month.
- TMU: definitions and measurement conventions apply for program monitoring; any omitted variable relevant for program targets requires consultation with Fund staff.

*Source: Technical Memorandum of Understanding and related tables in the IMF staff report chapter "2. Federal government accumulation of external debt payment arr."*

### 20.      Definition of external arrears: External debt payment arrears for program monitoring

### 20. Definition of external arrears: External debt payment arrears for program monitoring

### Definition and scope of external arrears
- External debt payment arrears for program monitoring purposes are defined as external debt obligations (principal and interest) falling due after May 30, 2018 that have not been paid, considering the grace periods specified in contractual agreements.
- Under the debt definition used, arrears, penalties and judicially awarded damages arising from the failure to make payment under a contractual obligation that constitutes debt are debt.
- Failure to make payment on an obligation that is not considered debt under this definition (e.g., payment on delivery) will not give rise to debt.
- Coverage: This performance criterion covers the federal government.
- Exclusions: This performance criterion does not cover (i) arrears on trade credits, (ii) arrears on debt subject to renegotiation or restructuring; and (iii) arrears resulting from the nonpayment of commercial claims that are the subject of any litigation initiated prior to May 30, 2018.
- Monitoring: This performance criterion (PC) will be monitored on a continuous basis.

### Non-borrowed Net International Reserves (NIR): definitions and targets
- Definitions:
  - Non-borrowed Net international reserves (NIR) of the BCRA are equal to the balance of payments concept of NIR defined as the U.S. dollar value of gross official reserves of the BCRA minus gross official liabilities as defined below.
  - Non-U.S. dollar denominated foreign assets and liabilities will be converted into U.S. dollar at the program exchange rates.
- Foreign exchange auction:
  - Mechanism through which the BCRA sells US dollars to banks in exchange for Argentine pesos.
  - All banks in Argentina can participate.
  - Bids allotted solely based on the rate proposed by counterparties, starting from highest peso per US dollar rate until pre-announced amount exhausted.
  - The auction weighted average rate, marginal rate, total bid amount, and the final allotment are published within one hour after the auction allotment.
- Gross official reserves (BPM6-consistent) include:
  - (i) monetary claims, (ii) free gold, (iii) holdings of SDRs, (iv) the reserve position in the IMF, and (v) holdings of fixed income instruments.
  - Exclusions: assets pledged, collateralized or otherwise encumbered; claims on residents; claims in foreign exchange arising from derivatives in foreign currency vis-à-vis domestic currency; precious metals other than gold; assets in nonconvertible currencies; illiquid assets.
- Gross official liabilities in foreign currencies include:
  - (i) all borrowed reserves, including foreign currency swaps, loans, and repo operations with all counterparties (domestic and foreign), regardless of maturity,
  - (ii) other foreign currency liabilities including deposits of financial institutions,
  - (ii) the use of Fund resources for Balance of Payments support extended in the context of the exceptional financing package,
  - (iii) any deliverable forward foreign exchange (FX) liabilities on a net basis—defined as the long position minus the short position payable in foreign currencies directly undertaken by the BCRA or by any other financial institutions on behalf of the BCRA.
  - The Federal government’s FX deposits at the BCRA are not considered gross foreign liabilities of the BCRA.
- Baseline and measurement:
  - The change in non-borrowed NIR, starting with the end-October 2018 targets, will be measured as the change in the stock of non-borrowed NIR at each test date relative to the stock on September 28, 2018, which stood at US$15.788 billion.
- Monitoring: Foreign exchange asset and liability data will be provided to the Fund at daily frequency within one day.

### NIR adjustors and program disbursements
- Adjustor for Multilateral loans:
  - The NIR targets will be adjusted upward (downward) by the surplus (shortfall) in program loan disbursements from the IMF and other multilateral institutions (the IBRD, IDB and CDB) and grants, relative to the baseline projection reported in Table 4.
  - Program loan disbursements are defined as external loan disbursements (excluding project financing disbursements) from official creditors that are usable for the financing of the general government.
- Adjustor for FX intervention:
  - The NIR targets will be adjusted downward by the total amount of U.S. dollars sold via foreign exchange auctions, executed in accordance with the intervention rule described below.
- Baseline cumulative flows from end-September 2018 (In millions of US$): Budget support loans from IMF
  - end-October 2018: 5,752
  - end-November 2018: 5,752
  - end-December 2018: 13,469
  - end-January 2019: 13,469
  - end-February 2019: 13,469
  - end-March 2019: 24,412
- Baseline cumulative flows from end-September 2018 (In millions of US$): Budget support loans from other multilateral sources
  - end-October 2018: 0
  - end-November 2018: 1,000
  - end-December 2018: 2,000
  - end-January 2019: 2,000
  - end-February 2019: 2,000
  - end-March 2019: 2,000

### FX intervention: definition, exchange rate, and intervention rule
- Definition of Intervention:
  - Foreign exchange interventions are defined as official foreign currency market sales and purchases (both in spot and deliverable forwards).
  - Only the BCRA will be allowed to implement foreign exchange intervention.
  - State-owned banks will not be allowed to engage in official FX sales on behalf of the government.
  - In the context of the next review under the SBA a system for the orderly and transparent conversion and use of the Fund disbursements for peso-denominated budgetary financing needs in 2019 will be worked out.
- Exchange Rate:
  - The AR$/US$ exchange rate for the purpose of the intervention rule is the rate of the Mercado Abierto Electrónico (MAE). The MAE publishes continuous updates of the AR$/US$ exchange rate throughout the trading day and a daily fixing (see BCRA Communication A3500).
- Intervention rule:
  - The BCRA will have the option to sell U.S. dollars in the foreign exchange market only if the peso depreciates beyond the rate of 44 pesos per U.S. dollar and to buy U.S. dollars in the foreign exchange market only if the peso appreciates below the rate of 34 pesos per U.S. dollar.
  - These limits will be adjusted daily by a 3 percent monthly growth until December 2018, starting on October 1, 2018.
  - Beyond that point, the BCRA could decide (but is not committed) to sell or buy up to US$150 million per day as long as the exchange rate remains outside of this band.
  - The limits above will be increased each calendar day by 0.10 percent until the end of 2018.
  - All foreign exchange sales and purchases are expected to be unsterilized. As such, the decrease (increase) in NIR will be matched by a decrease (increase) in the monetary base equal to the peso equivalent of the foreign exchange sales, with the stock of sterilization instruments remaining unchanged.
- Monitoring:
  - Daily data on the amount and rate of the transactions between the BCRA and each of its counterparties will be provided to the Fund at the end of each day.

### Adjustor for FX debt issuance
- The NIR targets will be adjusted upward by the surplus in total amount of proceeds from gross issuances of FX-denominated debt, relative to the baseline projection reported in Table 5.
- Monitoring: Data on debt issuances and rollovers, by currency and counterparty, will be provided to the Fund after each issuance, with a lag of no more than two days.

### Ceiling on the change in the BCRA’s stock of Non-Deliverable Forwards (NDF)
- Definitions:
  - The stock of non-deliverable forwards (NDF) will be defined as the sum of the U.S. dollar notional value of all contracts entered by the BCRA involving the Argentinian peso, either directly or through any institution they use as their financial agent.
- Monitoring: Daily data will be provided to the Fund at the end of each day.
- Continuous Performance Criterion:
  - Until December 31, 2018, the change in the stock of NDF will be continuously measured as the change in the stock of NDF relative to the stock on September 28, 2018, which stood at US$3.6 billion.
- Quarterly Performance Criterion:
  - From January 1, 2019, the change in the stock of NDF will be measured as the change in the stock of NDF at each test date (i.e. at end-March 2019, with indicative targets in end-January 2019 and end-February 2019) relative to the stock on September 28, 2018, which stood at US$3.6 billion.

### Continuous stop to BCRA’s financing of the government
- Definitions:
  - Central bank (BCRA) financing to the government includes overdraft transfers from the BCRA to the Federal Government (line Adelantos Transitorios in the summary account of the BCRA, as published on its web site), advance distribution of unrealized profits, and the acquisition of government debt on the primary market or by purchase from public institutions.
  - The BCRA will extend zero net financing to the government for the duration of the program.
- Monitoring: Daily data will be provided to the Fund within two days. This target will be monitored on a continuous basis.
- Baseline cumulative flows from end-September 2018 (In millions of US$) for federal government BCRA financing:
  - end-October 2018: 910
  - end-November 2018: 2,588
  - end-December 2018: 4,619
  - end-January 2019: 5,485
  - end-February 2019: 6,350
  - end-March 2019: 7,216

### Ceiling on the change in the BCRA’s Net Domestic Assets (NDA)
- Definitions:
  - Net Domestic Assets (NDA) of the BCRA are defined as the difference between base money and non-borrowed NIR measured at program exchange rates.
  - Base money = banknotes and coins issued by the BCRA plus banks’ accounts at the BCRA denominated in pesos.
  - The reserve requirement is defined as the peso-denominated reserves on account at the BCRA that banks are required to keep by regulation on average each month.
  - Securities made eligible to fulfill the requirement would be considered as part of a sterilization security holding requirement, different from the reserve requirement.
- Measurement and baseline:
  - The ceiling applies to the monthly average of NDA.
  - The change will be calculated with respect to the average stock of NDA during the month of September 2018 which was AR$557 billion.
- Monitoring: Data will be provided to the Fund on a monthly basis with a lag of no more than 10 days.
- Adjustor for Multilateral loans:
  - The NDA targets will be adjusted downward (upward) by the surplus (shortfall) in program loan disbursements from multilateral institutions (the IBRD, IDB and CAF) and grants, relative to the baseline projection reported in Table 4.
  - Program loan disbursements defined as external loan disbursements (excluding project financing disbursements) from official creditors usable for financing the general government.
  - There are no other adjustors for the NDA targets.
- Clarification:
  - All foreign exchange sales and purchases are expected to be unsterilized: the decrease (increase) in NIR matched by a decrease (increase) in the monetary base equal to the peso equivalent of the foreign exchange sales, while the stock of sterilization instruments should remain unchanged.
- Change in reserve requirements:
  - The BCRA will reach agreement with IMF staff prior to making any changes to the levels or structure of reserve requirements.

### Ceiling on Central Bank credit to the government
- Definitions:
  - Central bank (BCRA) credit to the government is the sum of the stock of government securities held by the BCRA (line Títulos Públicos in the summary account of the BCRA, as published on its web site) and overdraft transfers from the BCRA to the Federal Government (line Adelantos Transitorios).
  - Any decrease in the claim shall reflect cash payments of this amount in pesos by the Treasury to the BCRA; variation in the value of the claim due to changes in exchange rates or accounting practices are excluded.
- Monitoring: Daily data will be provided to the Fund within two days.
- Baseline:
  - The change in the stock of net credit to government will be measured relative to the stock on September 28, 2018, which stood at AR$ 2,592.86 billion.

### Quantitative indicative targets: primary balance of the general government
- Definitions:
  - General government = the federal government plus the aggregate position of the provincial governments (the 23 provinces plus the Autonomous City of Buenos Aires).
  - Primary balance of the general government includes the primary balance of the federal government (including adjustors) plus revenues of the provincial governments (including transfers from the federal government) less cash expenditures of the provincial governments.
  - Total expenditures of provincial governments include wages, goods and services, transfers and subsidies, capital spending and transfers to municipalities; expenditures of municipalities and municipal revenues are excluded.
  - Provincial governments’ results measured from above-the-line, with expenditure defined according to information provided by the Secretaría de Hacienda.
- Adjustors to the primary balance:
  - Adjustor for social spending:
    - The floor on the primary balance of the general government (cumulative since the beginning of the year) would be adjusted downward by an amount equivalent to the amount that expenditures, measured on a cash basis, in the Universal Allowances for Social Protection programs (Asignación Universal para Protección Social, which includes the Asignación Universal por Hijo, the Asignación por Embarazo, and the Ayuda Escolar Anual) exceed the programmed values defined in Table 2.
    - The value of the adjustor would be capped at 13,500 million of pesos in 2018, 35,800 million pesos in 2019, and 0.2 percent of GDP in each successive calendar year.
  - Adjustor for external financing projects:
    - The floor on the primary balance of the general government (cumulative since the beginning of the year) will be adjusted up (down) by the shortfall (excess) in the expenditure, measured on a cash basis, financed by disbursements of external project loans by International Financial Institutions and bilateral partners, compared to the capital expenditures settled in the budget (Table 3).
    - The value of the adjustor would be capped at cumulative 30,000 million pesos in 2018, 35,800 million pesos in 2019, and 0.2 percent of GDP in each successive calendar year.
    - Starting in 2019 the benchmark will be the expenditure financed by disbursements of external project loans by IFIs and bilateral partners, as stated in the budget.
- Reporting:
  - Data, as available to the Consejo Federal de Responsabilidad Fiscal, will be provided to the Fund with a lag of no more than 60 calendar days after the end of each quarter.
  - Estimates will be provided for the provinces of La Pampa and San Luis.

### Performance criterion on multiple currency practices (MCP)
- The performance criterion on the introduction or modification of multiple currency practices (MCP) excludes multiple currency practices arising from any modification to the multiple-price foreign exchange auction system introduced in June 2018.

### FX intervention: BCRA’s and Federal Government’s foreign currency sales
- Definitions:
  - Foreign exchange interventions are defined as spot and deliverable foreign currency sales by the BCRA either directly or through any institution they use as their financial agent.
- Monitoring:
  - Daily data will be provided to the Fund at the end of each day.

### Other information requirements (reporting frequencies and items)
- Daily (A):
  - Nominal exchange rates; interest rates on domestic debt instruments including LETES (at different maturities), LEBAC (at different maturities), LELIQs, and BOTES; total currency issued by the BCRA; deposits held by financial institutions at the BCRA; required reserves of the banking sector in local and foreign currency; total liquidity assistance to banks through normal BCRA operations, including overdrafts; interest rates on overnight deposits and on 7-day repurchase and reverse repurchase agreements.
  - Individual banks’ gross foreign exchange positions by currencies.
  - Individual banks’ foreign currency accounts with the BCRA.
- Weekly (B):
  - BCRA balance sheet.
  - Daily balances of all bank accounts of the national treasury.
  - Analysis on the use of IMF budget support in accordance with the Memorandum of Understanding between the Treasury and the BCRA.
  - FX operations of Banco Nacion on a weekly basis.
- Monthly (C):
  - Federal government operations including monthly cash flow from the beginning to the end of the current fiscal year (and backward revisions as necessary), with a lag of no more than 25 days after the closing of each month, according to both the format of the Informe Mensual de Ingresos y Gastos (IMIG) and to the format of the Cuenta Ahorro Inversion Financiamiento (AIF).
  - Expected monthly federal government and provincial government debt amortization and repayments (local currency and FX bonds, treasury bills, Eurobonds, domestic loans, external commercial and external official loans), including both direct and guaranteed debt. In case of issuance of government guaranteed debt, include the name of the guaranteed individual/institution.
  - Federal government and provincial government debt stock by currency, as at end month, including by (i) creditor (official, commercial domestic, commercial external), (ii) instrument (local currency and FX denominated bonds, treasury bills, Eurobonds, domestic loans, external commercial and external official loans); and (iii) direct and guaranteed.
  - The balances of the (federal) government at the central bank and in the commercial banking system needed to determine the cash position of the (federal) government.
  - Deposits in the banking system: current accounts, savings and time deposits within six weeks after month end.
  - Average monthly interest rates on loans and deposits within two weeks of month end; weighted average deposit and loan rates within six weeks after month end.
  - Balance sheets of other financial corporations (non-deposit taking), including holdings of federal and provincial debt and of the BCRA instruments within one month after month end.
  - Data on the total loans value of all new federal government-funded public private partnerships.

### Assessment of risks to the Fund and Fund’s liquidity position: executive summary
- This note updates the assessment in the Supplement to the Staff Report for the program request in June, of the risks to the Fund and its liquidity position from Argentina’s Stand-By Arrangement with the Fund.
- The update reflects main economic developments since the approval of the SBA in June, including weaker-than-expected macroeconomic conditions, the larger depreciation of the peso, and the resulting worsening of Argentina’s debt and debt service indicators.
- Against this background, the authorities no longer intend to treat the arrangement as precautionary.
- Overall assessment:
  - Staff assesses that the proposed augmented arrangement will further increase the Fund’s elevated credit exposure to Argentina and continue to have a significant though manageable impact on the Fund’s liquidity.
  - These risks are significant even by the standards of other large exceptional access cases.
  - Managing these risks will crucially depend on steadfast delivery of program commitments and successful program implementation.
- Date of the update: October 19, 2018.

*International Monetary Fund — cr18297-argentinabundle, Chapter 20 (excerpt).*

### INTRODUCTION ________________________________________________________________________________ 3

### INTRODUCTION

### Overview
- This note updates the assessment of risks to the Fund arising from the Stand-By Arrangement (SBA) for Argentina and its effects on the Fund's liquidity, in light of the proposed augmentation and rephasing.
- On June 20, 2018, the Executive Board approved Argentina’s request for a 36-month SBA with access equivalent to SDR 35.379 billion (1,110 percent of quota).
- Under the arrangement, access was significantly frontloaded, with a first purchase equivalent to SDR 10.614 billion (333 percent of quota) available upon approval.
- The authorities made the first purchase using one-half of the available Fund resources (SDR 5.307 billion) for budgetary support, and intended to treat the remainder of the arrangement as precautionary, with 12 equal quarterly installments.
- Under the proposed augmentation and rephasing:
  - The first purchase would be followed by two additional purchases in 2018 for a total amount of SDR 9.6 billion (301 percent of quota).
  - Four purchases in 2019 for a total amount of SDR 16.3 billion (511 percent of quota).
  - Six equal disbursements over the remainder of the program of SDR 0.7 billion (22 percent of quota) each.
  - Total access would increase to SDR 40.714 billion (1,277 percent of quota).
  - The authorities would no longer intend to treat the arrangement as precautionary.

### Table 1 (SBA—Access and Phasing) — key schedule figures (as presented)
- 2018 June: Availability SDR 10,613.7; Purchase upon approval SDR 10,613.7; Cumulative SDR 10,613.7; Percent of quota 333.0.
- 2018 September: Availability SDR 2,063.78; Purchase SDR 2,063.78; Cumulative SDR 12,677.5; Percent of quota cumulative 397.8 (as table layout indicates).
- 2018 October: Availability SDR 4,100.00; Purchase SDR 4,100.00; Cumulative SDR 16,777.5; Percent of quota cumulative 461.6.
- 2018 December: Availability SDR 2,063.78; Purchase SDR 2,063.78; Cumulative SDR 18,841.3; Percent of quota cumulative 522.4.
- 2019 March: Availability SDR 2,063.78; Purchase SDR 2,063.78; Cumulative SDR 20,905.1; Percent of quota cumulative 585.2.
- 2019 June: Availability SDR 2,063.78; Purchase SDR 2,063.78; Cumulative SDR 22,968.9; Percent of quota cumulative 647.6.
- 2019 September: Availability SDR 2,063.78; Purchase SDR 2,063.78; Cumulative SDR 25,032.7; Percent of quota cumulative 710.0.
- 2019 December: Availability SDR 2,063.78; Purchase SDR 2,063.78; Cumulative SDR 27,096.5; Percent of quota cumulative 772.4.
- 2020 March to 2021 June: Repeated availabilities each SDR 2,063.78 with purchases of SDR 700.0 (per quarter) in many periods under the proposed augmentation; cumulative reaches SDR 40,714.0 and 1,277.4 percent of quota.
- Total original arrangement: SDR 35,379.0 (1,110.0 percent of quota).
- Total proposed augmentation and rephasing: SDR 40,714.0 (1,277.4 percent of quota).

*Note: Table as reproduced in the source shows availability, purchase, cumulative SDR millions, and percent of quota for original amounts and proposed augmentation and rephasing.*

*Source: cr18297-argentinabundle — INTRODUCTION (IMF).*

### 6.      The SBA’s significant impact on the Fund’s liquidity and credit risk exposure would be

### 6.      The SBA’s significant impact on the Fund’s liquidity and credit risk exposure would be

### Impact on Fund liquidity and forward commitment capacity (FCC)
- The initial arrangement reduced the Fund’s forward commitment capacity (FCC) by 16.0 percent from SDR 222 billion to SDR 186 billion.
- The proposed augmentation would reduce the FCC by a further 2.8 percent from the current SDR 189 billion to SDR 184 billion.
- One-year Forward Commitment Capacity (FCC) at program approval: 221,590.8 (Millions of SDR).
- Impact of the approval on the FCC: -35,379.0 (Millions of SDR) (in percent of one-year FCC at program approval) -16.0.
- Current one-year Forward Commitment Capacity (FCC): 189,161.7 (Millions of SDR).
- Impact of the augmentation under the 1st review on the FCC: -5,335.0 (Millions of SDR) (in percent of current one-year FCC) -2.8.

### Concentration of GRA credit and timing of purchases/repurchases
- After Argentina’s scheduled first-review purchase, Argentina’s share of outstanding GRA credit would increase from 21.8 percent to 27.9 percent.
- The share of the top five borrowers in total GRA credit would increase to 76.8 percent (including Argentina’s first-review purchase).
- Fund GRA credit outstanding to Argentina (projected at the time of completion of the first review, including the scheduled second purchase): 14,713.7 (Millions of SDR).
- In percent of current precautionary balances: 84.6.
- In percent of total GRA credit outstanding: 27.9.
- Fund GRA credit outstanding to top five borrowers: 74.8 percent of total GRA credit outstanding.
- After Argentina’s scheduled second-review purchase in December 2018, GRA exposure to Argentina would exceed the Fund’s precautionary balances.
- If all purchases are made as scheduled, Fund exposure to Argentina as a share of the current level of precautionary balances would rise from 84.6 percent after the first program review to 210 percent by end-2019 (compared with 132 percent previously).
- Projected peak at 234 percent in June 2021 (if all purchases are made as scheduled).
- Due to frontloading, Argentina’s repurchase obligations would be concentrated: repurchase obligations of SDR 14.5 billion in 2022 and SDR 16 billion in 2023.
- These represent more than 70 and 80 percent, respectively, of projected precautionary balances each year.

### Burden sharing, GRA charges, and prudential measures
- In the current environment of relatively low interest rates, GRA charges for Argentina are projected at SDR 127 million for the remainder of 2018.
- GRA charges are projected to average SDR 1,077 million a year over 2019–2024 if all purchases are made as scheduled.
- Argentina's annual GRA charges in percent of Fund's residual burden sharing capacity for 2018: 89.4 percent.
- Fund's precautionary balances (FY 2018): 17,400 (Millions of SDR).
- Fund's residual burden-sharing capacity: 142.1 (Millions of SDR).
- The Fund’s burden sharing mechanism would remain clearly insufficient were Argentina to accrue arrears on charges after drawings under the proposed augmented arrangement.

### Comparative indicators and peak repurchases
- Projected repurchase amounts for Argentina under the proposed augmented arrangement are well above peak repurchase obligations for other recent exceptional access cases.
- Peak repurchases projections (FY 2019 - 2023) are capped at the Board approved indicative medium-term target of SDR 20 billion for precautionary balances in the calculation.

### Staff assessment of risks and manageability
- The proposed augmented arrangement will further increase the Fund’s elevated credit exposure to Argentina and continue to have a significant though manageable impact on the Fund’s liquidity.
- The risks for the Fund and the Fund’s liquidity position are significant even by the standards of other large exceptional access cases.
- Key risk drivers identified:
  - The program faces substantial risks; gross financing needs and debt vulnerabilities are expected to remain high.
  - With the revised access and schedule of purchases/repurchases, the Fund would be highly exposed to Argentina for an extended period in terms of both outstanding credit and debt service falling due.
  - Some indicators (peak Fund exposure in percent of gross international reserves, and peak debt service to the Fund and total external debt service as a share of exports) would be the highest among recent exceptional access cases.
- Conditions for risk containment:
  - Steadfast delivery of program commitments and successful program implementation.
  - Authorities’ ability to garner broad political support and readiness to recalibrate policies in reaction to adverse shocks.
  - Stabilizing the economy and regaining sustained meaningful market access and financing from other official lenders during the program period and beyond.

### Monetary developments, inflation breach, and BCRA policy response
- End-September y/y CPI inflation: 40.5 percent (breaching the ICC outer band of 32 percent).
- The breach of the inflation consultation clause (ICC) triggered a letter from the BCRA explaining drivers and policy response.
- Monetary conditions tightened following a shift to zero growth in base money.
- The BCRA is on track to achieve zero growth in the monetary base for October.
- The weighted average 7-day LELIQ rate is now at 71.4 percent but reached 73.5 percent in mid-October, 1200 basis points higher than at end-September.
- The peso appreciated by about 10 percent since the beginning of October and has remained within the BCRA’s zone of non-intervention.
- LEBAC retirement plan: AR$150 billion of AR$255 billion in LEBACs coming due in October were rolled off with new, 1-month LEBACs issued at 57 percent.
- Treasury issued AR$75 billion in peso LECAP with maturities of 6 and 12 months.
- AR$160 billion in LEBACs, mostly held by mutual funds, will mature on November 21.

### BCRA diagnosis of inflation drivers
- Since June, headline and core inflation accelerated substantially more than anticipated, primarily reflecting pass-through from the depreciation of the peso between June and August.
- Monetary financing of the fiscal deficit was discontinued in June.
- An accelerated fiscal consolidation path towards a primary balance in 2019 is removing pressure on inflation from aggregate demand.
- Private sector inflation expectations exceeded the ICC’s outer band by over 200 bps at all horizons through December 2020 in the September central bank survey of market forecasters.

### BCRA policy measures implemented
- Aggressive tightening of policy stance including:
  - Increasing the policy interest rate by a total of 2000 bps.
  - Introducing commitments to keep the rate high until December 2018 and then until inflation expectations fell.
  - Raising reserve requirements on bank deposits.
- The BCRA sold reserves, exceeding program targets on FX intervention, to address dysfunction in the foreign exchange market; net international reserves fell well below the program floor and net domestic assets exceeded the ceiling established as part of the ICC.
- Despite efforts, inflation and inflation expectations continued to deviate farther from targets and the ICC band.

### New monetary framework centered on monetary base target
- On October 1, the BCRA implemented a new monetary framework centered on a target for the monetary base.
- The level of the monetary base will not grow from September 2018 to June 2019, besides limited corrections to accommodate seasonal demand for money in December and June.
- Given high inflation expected through the rest of 2018, meeting the monetary base target implies a strong contraction in real money balances during coming months.
- A flexible exchange rate is a crucial element; the BCRA committed not to intervene if the peso remains within the range of 34 to 44 pesos per US dollar (adjusted daily at a monthly rate of 3 percent).
- If the exchange rate exceeds (or falls below) the non-intervention zone, the BCRA will have the option to sell (purchase) up to US $150 million per day; these sales (purchases) will not be sterilized.
- Early implementation results: the policy interest rate has risen endogenously by over 1200 bps, and the peso has appreciated by about 10 percent amid healthy FX market volumes.
- The BCRA will continue to conduct policy to reach consistent, steady disinflation and will study a return to a fully-fledged inflation targeting framework once inflation is sufficiently low and stable.

/s/ Prepared by the Argentina team.  

*Source: IMF staff supplement to the Staff Report on Argentina (as of 9/27/2018 and October 24, 2018).*

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_Source: https://www.imf.org/-/media/files/publications/cr/2018/cr18297-argentinabundle.pdf_