## 1. Improving Governance in Argentina ## Source details **Canonical URL:** [1. Improving Governance in Argentina](https://www.imf.org/-/media/files/publications/cr/2018/cr18374.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2018/cr18374.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2018/cr18374.pdf.json) --- ### Stabilizing the Economy - Monetary stance and base money: - Shift to zero growth in base money tightened monetary conditions. - Base money in October and November was more than 1 percent below the average level in September. - The BCRA met its target of zero-growth in base money in October and November. - Short-term interest rates peaked at 73 percent in October and fell back to close to 60 percent subsequently. - Banks may fulfill reserve requirements on new term-deposits by holding LELIQs, fostering competition for term-deposits and increasing transmission from short-term rates to deposit and lending rates. - Increase in term-deposits boosted banks’ demand for LELIQs and contributed to the decline of short-term interest rates in November. - Exchange rate and real effective exchange rate: - Tighter monetary stance strengthened the peso, resulting in a 15 percent appreciation in October. - Real effective exchange rate appreciated by about 7 percent during October. - Real effective exchange rate at end-October was 31 percent more depreciated than at the end of 2017. - Peso hovered close to the lower edge of the non-intervention zone for most of November; it depreciated sharply after the increase in liquidity caused by the LEBAC auction, then appreciated again in early December. - Inflation dynamics: - The 30 percent depreciation of the peso in August and September fueled 6.5 percent m/m inflation in September and 5.4 percent in October (about 45 percent on an annual basis). - Core inflation fell from 7.6 percent m/m in September to 4.5 percent in October. - BCRA November survey points to monthly inflation falling below 3 percent by the end of the year. - Average 12-month ahead expected inflation fell in November to 29 percent, from 32.9 in September. - Sovereign debt markets and issuance: - Private sector rollover of FX bonds averaged 75 percent in September-November. - Treasury issued more than twice the maturing peso debt in October and November even as interest rates on 3-month debt fell from 60 to 50 percent. - Authorities extended maturities on peso debt: US$2.2 billion in 1-year LECAPs at 49 percent and US$740 million in 18-month LECAPs at 52 percent. - Sovereign spreads remained high with an EMBIG of 700 bps at early December. - Authorities reduced BCRA’s net credit to government by not renewing AR$25 billion of maturing Adelantos Transitorios in September and replenished treasury deposits. - Real economy and trade: - EMAE: economic activity contracted by 0.4 percent in Q3 (q/q seasonally adjusted) after falling by 4 percent in Q2. - Activity in September fell almost 2 percent (m/m seasonally adjusted); manufacturing and trade showed the largest contractions and together account for about one-third of aggregate value added. - Trade balance (seasonally adjusted) turned positive in October for the first time in almost two years. - Cumulative trade deficit June to October fell by 60 percent compared to the same period last year. - Adjustment mainly reflects lower imports due to contraction in consumption and investment; export growth picked up in October driven by manufacturing exports but agriculture weighed on results. - Current account deficit financed primarily by net official capital inflows with private capital outflows continuing. - Monetary instruments and banking sector: - November auction: AR$120 billion of AR$160 billion in LEBACs coming due were rolled off. - After November auction, AR$70 billion in LEBACs remained outstanding, mostly held by households; these will be retired in December. - Injection of liquidity from reduction in BCRA liabilities in October and November re-intermediated into bank deposits and absorbed through reserve requirements and additional issuances of LELIQs. - Banking sector metrics as of September 2018: CET1 ratio 14.4 percent; Tier 1 capital to total exposures 8.5; NPLs 2.3 percent. - Larger banks improved profitability from re-intermediation of LEBAC holdings into deposits; smaller banks more affected by the downturn. - Credit: real credit growth to private sector decelerated; credit growth to corporates and SMEs turned negative in real terms. ### Outlook and Risks - Baseline projections: - Economy expected to start recovering in the second quarter of 2019. - Economy expected to contract by 1¾ percent in 2019 and then grow in 2020 and beyond. - Inflation expected to end 2018 at around 47 percent and then fall to 20 percent by end-2019. - Current account deficit projected to close the year at 5.2 percent of GDP and fall to 1.5 percent of GDP in 2019. - Lower inflation and a slightly less restrictive monetary policy stance will allow nominal interest rates to gradually fall, supporting private sector investment alongside fiscal adjustment. - Key downside risks: - External: unanticipated tightening of global financial conditions could raise concerns about Argentina’s ability to meet large gross financing needs. - Domestic: greater-than-expected inertia in the inflation process may delay easing of monetary policy and increase economic losses during disinflation. - Political: uncertainty associated with the 2019 electoral cycle may trigger financial market turbulence and capital account pressures. - Economic: deeper recession or more persistent inflation could generate stronger opposition to program policies and hinder implementation. - Upside possibility: - Stronger demand from key trading partners (in particular Brazil) may bolster exports over the next few quarters. ### Program Implementation - Performance against targets: - End-September indicative target for the primary balance of the general government was met: AR$-73 billion against a floor of AR$-289 billion (including adjustors). - Year-to-date primary deficit of the federal government was 1.4 percent of GDP in October, about 1 percent of GDP lower than the same period last year. - Net international reserves increased by US$5.3 billion in October and are about US$1.1 billion above the adjusted NIR floor. - Net domestic assets were below the end-October target by AR$63 billion. - Stock of non-deliverable forwards reduced by US$2 billion to US$1.64 billion. - Structural benchmarks and progress: - Congress approved the 2019 budget on November 15 (end-November structural benchmark). - End-November structural benchmark for passage of the wealth tax was not met due to Senate changes; the bill was passed on December 5. - Submission of the three-year budget to Congress (end-October structural benchmark) was delayed but completed on November 21 as a prior action for the completion of the second review. - Budgetary resources provided for the newly created Congressional Budget Office; CBO activated its website, completed reports on the 2019 budget, and will complete its hiring plan by end-March 2019. - IMF technical assistance mission on tax compliance overlapped with the review mission to advise on steps to meet end-June 2019 structural benchmark on designing a tax compliance plan and risk mitigation strategy. - A debt management strategy was prepared with Fund staff input and will be published by end-December (proposed end-December 2018 structural benchmark). ### Entrenching Fiscal Discipline - End-2018 fiscal actions: - Additional spending on social assistance and wages at the end of 2018 consistent with the end-year fiscal deficit target. - Tight control of spending, strong revenue performance, and higher inflation (around 50 percent of current spending is indexed to past inflation) created additional fiscal space. - Authorities used fiscal space for an end-year bonus to federal employees and one-off payments to beneficiaries of the Universal Child Allowance (AUH) and Employment Support program (Apoyo al Empleo). - Primary federal deficit likely to close 2018 at (or slightly below) the authorities’ 2.7 percent of GDP target. - 2019 primary balance strategy (2.7 percent of GDP adjustment in 2019 split as): - Higher revenue: export taxes add about 1.3 percent of GDP; sale of the public pension fund assets account for 0.4 percent of GDP. - Lower transfers to provinces: 0.7 percent of GDP (in part via shifting responsibility for intra-provincial transport subsidies and social tariff on electricity). - Lower energy subsidies: 0.3 percent of GDP. - Cuts in capital and other current spending: 0.2 percent of GDP each. - As inflation falls, spending on pensions projected to increase 0.3 percent of GDP in 2019 (due to backward-looking indexation). - Budget buffers and changes: - Budget passed by Congress contains changes estimated to worsen the 2019 fiscal balance by 0.17 percent of GDP. - Authorities expect these changes will be absorbed by spending cuts in other areas and by under-execution of spending allocations (creating a reserve of about 0.4 percent of GDP on an annual basis). - Senate introduced a minimum nontaxable threshold for residential houses in the wealth tax expansion, which should yield about 0.08 percent of GDP (included in the baseline). ### Fiscal consolidation, energy subsidies, and wages - Reducing energy subsidies remains an important component of fiscal rebalancing. - 2019 Budget envisages reduction of electricity subsidies by raising tariffs to 90 percent of production costs by the end of 2019. - Authorities will need to apply the regulatory framework to pass through effects of the peso depreciation to electricity and gas consumers. - Decision this year to prevent that pass-through resulted in an extra cost of 0.1 percent of GDP to the federal government (to be paid to gas distributors from 2019-2021). - For gas, subsidies to consumption already eliminated; subsidies to production under latest Gas Plan will be phased off gradually (leaving only the social tariff in place in 2021). - Authorities agreed to wage increases for public sector employees in December, January, and February (effectively increasing nominal wages by 14 percent in the first half of 2019). - 2019 Budget has a 34 percent annual increase in wages; requires limiting next wage increase (June 2019 to June 2020) at no more than 25 percent. ### Medium-term budget and targets - Medium-term budget presented to Congress on November 21 foresees a primary surplus of 1 percent of GDP in 2021. - Revenues projected to decline slightly over the medium term with elimination of export taxes in 2021 partially offset by rebound in economic activity. - All adjustment in 2020-21 (1 percent of GDP) expected to come from cuts to energy and transportation subsidies, wages, goods and services, and discretionary current transfers to provinces. - The 1 percent of GDP primary surplus aligns with reaching estimated debt-stabilizing primary balance of 1.2 percent of GDP in 2023. - Recommendations: - Include description of policy measures to be implemented over the medium-term and submit it to Congress alongside the annual budget. - Budget should explicitly contain a reserve to absorb unexpected shortfalls in revenues or increases in non-discretionary spending. ### Revenue and spending reform priorities - Export tax is distortionary; authorities intend to maintain as extraordinary measure only until the end of 2020. - Deeper revenue reforms envisaged include: - expansion of the coverage of the PIT, - rationalization of VAT exemptions, - reform of the tax collection administration. - Spending reform priorities include: - reform of the pension system, - reform of public sector employment. - Prompt technical preparatory work recommended (e.g., set up pension reform commission as mandated by 2016 legislation). ### Social protection measures and poverty - About 27.3 percent of the population was living in poverty in the first half of 2018, 1.6 percent more than in 2017. - Poverty rate expected to continue rising with the downturn and high inflation. - Measures to alleviate impact: - Supplemental transfers to child allowances and Employment Support program increase annual benefit per recipient by almost 50 percent. - 2019 budget increased spending on food support and purchases of medicines under universal health coverage. - Expanded administrative services through mobile stations (Estado en Tu Barrio). - Established single-window system to access public administrative services; increased provinces automatically verifying education and health compliance for child allowances. - Recommendations: - Identify measures to protect households and individuals without children. - Revise social tariffs system to better protect bottom deciles. ### Gender equality agenda - 2019 budget expands public infant-care services to help wage-earning mothers remain employed. - Authorities developing voluntary system to score companies on gender policies and provide recommendations. - Legislation to equalize maternity and paternity leave should be debated in Congress as soon as possible. - Completion of registry of gender balance in listed companies’ executive boards and management positions by the Comision Nacional de Valores will enhance transparency. - Recommendation: Legislation to eliminate the second-earner penalty in current tax system to encourage participation of second-earners (vast majority women). ### Monetary policy, inflation, and FX framework - Monetary policy stance geared to lowering inflation and anchoring expectations. - Lower LELIQ interest rates in November contributed to slow peso appreciation pressures. - Inflation beginning to fall; inflation expectations expected to continue declining. - Ex-ante real interest rates are high (in the 20 to 30 percent range depending on measurement). - BCRA changes consistent with new framework: - Average 12-month ahead inflation expectations fell by a cumulative 4.4 percentage points in September–November surveys; BCRA eliminated the 60 percent floor on the 7-day LELIQ rate. - BCRA announced it intends to over-comply with the monetary base target for December by at least AR$16 billion (implying a 5 percent increase relative to the September average rather than the 6.2 percent announced in last September). - Staff view: Removal of interest floor and monetary base adjustment consistent with new framework and will help rebuild BCRA credibility if implemented steadfastly. - FX intervention strategy details: - If peso appreciates beyond stronger end of the non-intervention zone in December 2018, authorities would undertake limited, unsterilized, purchases of foreign currency of up to US$ 50 million per day (deviation from monthly target capped at 2 percent). - A depreciation outside upper edge of the non-intervention zone would prompt the Bank to sell up to US$ 150 million per day, as announced in September. - Authorities announced symmetric update of the non-intervention zone in 2019Q1. - BCRA announced a monthly change for 2019Q1 of 2 percent per month, below average expected inflation for the quarter based on latest bank survey. - Staff agrees the change will keep the width of the non-intervention zone at around 30 percent. - Reserve requirements overhaul: - Current system has multiple rates and exemptions, creating distortions and costs. - BCRA plans to reduce number of reserve requirement rates while keeping aggregate level of required reserves broadly unchanged in peso terms, consistent with base money target. - Provision allowing fulfillment of reserve requirements on new time deposits with LELIQs will be eliminated after last LEBAC roll off in December. - Changes expected effective on January 1, 2019. - BCRA governance and strategy: - Authorities drafting amendments to the BCRA Charter to strengthen independence and operational autonomy (end-March 2019 structural benchmark). - End of monetary financing of the fiscal deficit, normalization of utility tariffs, and full reintermediation of the LEBAC by end-2018 will facilitate transition back to inflation targeting once expectations are durably re-anchored. ### Improving Treasury debt management - Argentina’s debt stock heavily tilted towards FX debt, exposing sizable exchange rate risks. - Issues identified: - Objective of peso-denominated program (currency and maturity composition, outstanding amount, program horizon) unclear to investors. - Absence of published auction calendar reduces predictability. - Large non-competitive allocation reduces share for competitive bidders. - Secondary markets lack depth and liquidity; absence of established market-making agreements. - Strategy for 2019 aims to: - Develop a liquid market for peso instruments and a yield curve based on three maturities (3, 6, and 18 months). - Gradually lengthen maturity of peso debt as appetite increases. - Give guidance on intended currency composition objective for new issuances and rollovers, and allotment method for primary auctions. - Define benchmark objectives around size and maturity of new peso and FX debt issuance. - Increase predictability by publishing an auction calendar on a rolling basis. - Determine pricing reference for each issuance and allotment method, factoring in short-term interest rate volatility and market pricing of credit risk. - Provide standard incentives for market-making to primary dealers committing to two-way continuous quotes. - Note: Since July 2017 Treasury has introduced LECAPs; these instruments represent less than 2 percent of GDP. ### Improving governance, AML/CFT, and anti-corruption - Office of Anti-Corruption (OA) developed operational action plan (“Estrategia y Plan Nacional Anticorrupcion – 2019-2023”). - Focus: strengthen integrity, transparency, and proper management of procurement activities, including within SOEs. - Progress in AML/CFT preventive regime; collaboration agreements signed between FIU and both BCRA and OA. - FIU expanded scope of investigations abroad to identify and trace assets from criminal proceeds. - Legislative change remains necessary to prevent or void actions that could prejudice Argentina’s ability to freeze, seize or recover assets and to secure reciprocity arrangements in line with FATF standard. - Authorities committed to pushing forward necessary measures. ### Program financing, safeguards, and PFM improvements - Program remains fully financed; financing assumptions in line with those forecast at the time of the first review. - Recent financing and support: - Market rollovers higher than expected. - World Bank approved US$500 million in budget support plus US$450 million in project financing, likely to be disbursed by end-2018. - InterAmerican Development Bank approved US$900 million in support, of which US$600 million will be disbursed by end-2018. - Augmentation to currency swap with China signed end-November, bringing total line to US$18.7 billion. - Argentina’s capacity to repay the Fund is adequate, although subject to sizable risks; Fund exposure and frontloaded disbursement schedule imply considerable bunching of repurchase obligations. - Fiscal safeguards review (FSR) findings and recommendations: - Argentina has a sound PFM system with comprehensive legal framework, robust budget execution, extensive control and audit functions, and an autonomous General Audit Office (AGN). - TSA at the Banco de la Nacion Argentina (BNA) is well-managed with adequate expenditure controls, but its presence in a state-owned commercial bank presents risks. - Authorities considering moving the TSA into the BCRA as recommended by the FSR. - Other FSR recommendations include enhancing budget credibility (formal legislative procedure for modifying the budget, contingency reserve, limit emergency spending provisions), improving medium-term budget elements, strengthening oversight over entities outside the federal central administration, and increasing quality of fiscal reports through reconciliation exercises. ### Safeguards and central bank independence - A safeguards assessment of the BCRA was completed in October. - Broad agreement on importance of recapitalizing the BCRA at an early stage. - Submission of revised BCRA charter (¶27) will be a key step in strengthening independence. - Staff judges that required safeguards for Fund resources are in place. ### Debt burden, financing needs, and market confidence - Federal Government debt expected to peak at 78 percent of GDP by end-2018. - With timely implementation of agreed policies, debt expected to stabilize to below 60 percent of GDP over the medium-term. - Staff’s assessment: debt remains sustainable, but not with a high probability. - Gross financing needs in the medium-term are high but remain below the risk-threshold of 15 percent of GDP. - Higher-than-expected appreciation of the AR$/US$ since end-September, significantly higher overall rollover rates, and lower interest rates and CDS spreads point to a return of market confidence. ### Program modalities, performance criteria, and benchmarks - Prior action for submission of the medium-term budget to Congress was completed. - Modification requested for end-December performance criterion for the primary balance to align target with higher nominal GDP. - New performance criteria proposed for end-June 2019. - New structural benchmark proposed for end-December 2018 for publication of the debt management strategy. - Staff and authorities do not foresee need for Treasury to sell FX into market until, at earliest, March 2019. - Modalities and amounts of any Fund budget support FX sales to be revisited at the third review mission (expected February 2019). ### Outstanding arrears to private creditors and settlement efforts - Around US$1.2 billion in principal (or US$3.2 billion including accrued interest) remains outstanding to private creditors. - Authorities continue to make payments under agreements executed. - Authorities in final stages of approving and publishing instructions for settlement of claims under Argentine Law. - 2019 Budget law included provision expected to bring another wave of agreements for claims under Argentine Law out of about US$90 million in original principal amounts eligible. - Authorities maintain open discussions with creditors and documentation to enter into agreements available on government website. - Terms offered same as those offered to creditors who accepted in 2016. - Litigation by certain bondholders continues in several jurisdictions. - Staff view: authorities making good faith efforts as required under Fund’s Lending into Arrears policy. - As of end-September 2018, stock of federal government’s privately-held foreign currency denominated debt approximately US$120 billion, of which about one quarter expected to mature by end-2020. - Prior staff reports had used a broader definition (~$147 billion). ### Outstanding arrears to official bilateral creditors - Limited outstanding arrears of approximately US$30 million (principal) claimed by French export credit agency related to a gas pipeline in Tierra del Fuego built in late 1970s; parties currently in arbitration in ICC Court of Arbitration. ### Exceptional access criteria (summary) - Criterion 1: member experiencing or has potential to experience exceptional BoP pressures; Argentina’s sizable external financing need cannot be met within normal limits of access. - Criterion 2: rigorous analysis indicates debt is sustainable but not with high probability; exceptional access justified as non-Fund financing improves debt sustainability and safeguards. Staff judges required safeguards are in place. - Criterion 3: staff judges member has prospects of regaining access to private capital markets within a timeframe/scale enabling meeting Fund obligations. Non-residents purchased nearly US$2.3 billion of LECAPs; rollover rates improved in September–November. Average yields on Argentina’s external bonds remain high. - Criterion 4: staff judges policy program provides reasonably strong prospect of success. Passage of 2019 budget and BCRA’s tighter monetary framework contributed to stabilization. ### Staff appraisal and policy recommendations - Program redesigned has reduced financial turmoil: - New monetary policy framework helped stabilize the peso; interest rates on a downward path. - Inflation remains high but pass-through from past depreciation waning; early signs inflation diminishing. - All performance criteria and indicative targets for end-October were met. - Structural reforms progressing broadly on time (full re-intermediation of LEBACs, drafting of BCRA charter, design of new taxpayer compliance plan). - Fiscal policy and reforms: - Continued efforts to restrain primary current spending key to achieving fiscal targets. - More efforts needed to make consolidation sustainable and growth-friendly: recommend tax and pension system reforms; begin technical work soon to send legislation to Congress in late 2019. - Strengthen medium-term fiscal framework and submit multi-year budget with annual budget documents. - Monetary policy and BCRA: - Sustained implementation of monetary policy framework crucial to re-anchor expectations and rebuild BCRA credibility. - Continued commitment to tight monetary stance and market-determined exchange rates will strengthen credibility and resilience. - New charter strengthening BCRA independence and operational autonomy would contribute to objectives. - BCRA should simplify monetary framework and reform reserve requirement to make it simple, stable, and predictable. - Debt management: - Publish clear debt management strategy, auction calendar, and benchmark objectives to increase predictability and reduce exchange rate risk exposure. - Enhance secondary market liquidity and facilitate pricing to support benchmark peso yield curve. - Structural reform agenda: - Continue reforms to stabilize financial markets, restore confidence, and enable rebound in activity and lower inflation. - Priorities: less distortionary tax system, more balanced labor market regulations, greater competition in domestic product markets, fewer barriers to trade and foreign investment, continued governance and anti-corruption efforts. - Rationalize social safety net and extend coverage; increase employability, particularly for women, the young, and lower-income workers. - Conclusion: - Steadfast implementation of stabilization plan and continued political and public support essential to reassure investors and solidify Argentina’s return to macroeconomic stability. - Staff supports authorities’ request for completion of the second review under the SBA, modification of the performance criterion under the program, and completion of the financing assurances review. *Source: cr18374 - 1. Improving* ### 1. Improving ### 1. Improving Governance in Argentina ### Stabilizing the Economy - Monetary stance and base money: - The shift to zero growth in base money tightened monetary conditions. - Base money in October and November was more than 1 percent below the average level in September. - The BCRA met its target of zero-growth in base money in October and November. - Short-term interest rates peaked at 73 percent in October and fell back to close to 60 percent subsequently. - Banks may fulfill reserve requirements on new term-deposits by holding LELIQs, fostering competition for term-deposits and increasing transmission from short-term rates to deposit and lending rates. - Increase in term-deposits boosted banks’ demand for LELIQs and contributed to the decline of short-term interest rates in November. - Exchange rate and real effective exchange rate: - The tighter monetary stance strengthened the peso, resulting in a 15 percent appreciation in October. - The real effective exchange rate appreciated by about 7 percent during October. - The real effective exchange rate at end-October was 31 percent more depreciated than at the end of 2017. - The peso hovered close to the lower edge of the non-intervention zone for most of November; it depreciated sharply after the increase in liquidity caused by the LEBAC auction, then appreciated again in early December. - Inflation dynamics: - The 30 percent depreciation of the peso in August and September fueled 6.5 percent m/m inflation in September and 5.4 percent in October (about 45 percent on an annual basis). - Core inflation fell from 7.6 percent m/m in September to 4.5 percent in October. - BCRA November survey of market participants points to monthly inflation falling below 3 percent by the end of the year. - The average 12-month ahead expected inflation fell in November to 29 percent, from 32.9 in September. - Sovereign debt markets and issuance: - Private sector rollover of FX bonds averaged 75 percent in September-November. - In October and November, the Treasury issued more than twice the maturing peso debt even as interest rates on 3-month debt fell from 60 to 50 percent. - Authorities extended maturities on peso debt: US$2.2 billion in 1-year LECAPs at 49 percent and US$740 million in 18-month LECAPs at 52 percent. - Sovereign spreads remained high with an EMBIG of 700 bps at early December. - Authorities reduced BCRA’s net credit to government by not renewing AR$25 billion of maturing Adelantos Transitorios in September and replenished treasury deposits. - Real economy and trade: - Economic activity based on the monthly EMAE contracted by 0.4 percent in Q3 (q/q seasonally adjusted) after falling by 4 percent in Q2. - Activity in September fell almost 2 percent (m/m seasonally adjusted); manufacturing and trade showed the largest contractions and together account for about one-third of aggregate value added. - The trade balance in seasonally adjusted terms turned positive in October for the first time in almost two years. - The cumulative trade deficit June to October fell by 60 percent compared to the same period last year. - Adjustment mainly reflects lower imports due to contraction in consumption and investment; export growth picked up in October driven by manufacturing exports but agriculture weighed on results. - Current account deficit financed primarily by net official capital inflows with private capital outflows continuing. - Monetary instruments and banking sector: - In the November auction, AR$120 billion of the AR$160 billion in LEBACs coming due were rolled off. - After the November auction, AR$70 billion in LEBACs remained outstanding, mostly held by households; these will be retired in December. - The injection of liquidity from reduction in BCRA liabilities in October and November has been re-intermediated into bank deposits and absorbed through reserve requirements and additional issuances of LELIQs. - Banking sector metrics as of September 2018: CET1 ratio 14.4 percent; Tier 1 capital to total exposures 8.5; NPLs 2.3 percent. - Larger banks improved profitability from re-intermediation of LEBAC holdings into deposits; smaller banks more affected by the downturn. - Credit: real credit growth to private sector decelerated; credit growth to corporates and SMEs turned negative in real terms. ### Outlook and Risks - Baseline projections: - The economy is expected to start recovering in the second quarter of 2019. - The economy is expected to contract by 1¾ percent in 2019 and then grow in 2020 and beyond. - Inflation is expected to end 2018 at around 47 percent and then fall to 20 percent by end-2019. - Current account deficit is projected to close the year at 5.2 percent of GDP and fall to 1.5 percent of GDP in 2019. - Lower inflation and a slightly less restrictive monetary policy stance will allow nominal interest rates to gradually fall, supporting private sector investment alongside fiscal adjustment. - Key downside risks: - External: unanticipated tightening of global financial conditions could raise concerns about Argentina’s ability to meet large gross financing needs. - Domestic: greater-than-expected inertia in the inflation process may delay easing of monetary policy and increase economic losses during disinflation. - Political: uncertainty associated with the 2019 electoral cycle may trigger financial market turbulence and capital account pressures. - Economic: deeper recession or more persistent inflation could generate stronger opposition to program policies and hinder implementation. - Upside possibility: - Stronger demand from key trading partners (in particular Brazil) may bolster exports over the next few quarters. ### Program Implementation - Performance against targets (end-October and end-September): - End-September indicative target for the primary balance of the general government was met: AR$-73 billion against a floor of AR$-289 billion (including adjustors). - Year-to-date primary deficit of the federal government was 1.4 percent of GDP in October, about 1 percent of GDP lower than the same period last year. - Net international reserves increased by US$5.3 billion in October and are about US$1.1 billion above the adjusted NIR floor. - Net domestic assets were below the end-October target by AR$63 billion. - Stock of non-deliverable forwards reduced by US$2 billion to US$1.64 billion. - Structural benchmarks and progress: - Congress approved the 2019 budget on November 15 (end-November structural benchmark). - End-November structural benchmark for passage of the wealth tax was not met due to Senate changes; the bill was passed on December 5. - Submission of the three-year budget to Congress (end-October structural benchmark) was delayed but completed on November 21 as a prior action for the completion of the second review. - Budgetary resources provided for the newly created Congressional Budget Office to meet its mandate (end-December structural benchmark); the CBO activated its website, completed reports on the 2019 budget, and will complete its hiring plan by end-March 2019. - An IMF technical assistance mission on tax compliance overlapped with the review mission to advise on steps to meet the end-June 2019 structural benchmark on designing a tax compliance plan and risk mitigation strategy. - A debt management strategy was prepared with Fund staff input and will be published by end-December (proposed end-December 2018 structural benchmark). ### Entrenching Fiscal Discipline - End-2018 fiscal actions: - Additional spending on social assistance and wages at the end of 2018 is consistent with the end-year fiscal deficit target. - Tight control of spending (transfers to provinces, goods and services, capital spending), strong revenue performance, and higher inflation (around 50 percent of current spending is indexed to past inflation) created additional fiscal space. - Authorities used fiscal space for an end-year bonus to federal employees and one-off payments to beneficiaries of the Universal Child Allowance (AUH) and Employment Support program (Apoyo al Empleo). - Primary federal deficit likely to close 2018 at (or slightly below) the authorities’ 2.7 percent of GDP target. - 2019 primary balance strategy: - The 2.7 percent of GDP adjustment in 2019 is split as follows: - Higher revenue: export taxes add about 1.3 percent of GDP; sale of the public pension fund assets account for 0.4 percent of GDP. - Lower transfers to provinces: 0.7 percent of GDP (in part as responsibility for intra-provincial transport subsidies and social tariff on electricity is shifted to the provincial level). - Lower energy subsidies: 0.3 percent of GDP. - Cuts in capital and other current spending: 0.2 percent of GDP each. - As inflation falls, spending on pensions is projected to increase 0.3 percent of GDP in 2019 (due to backward-looking indexation of benefits). - Budget buffers and changes: - The Budget passed by Congress in November contains changes estimated to worsen the 2019 fiscal balance by 0.17 percent of GDP. - The authorities expect these changes will be absorbed by spending cuts in other areas and by the under-execution of spending allocations (creating a reserve of about 0.4 percent of GDP on an annual basis). - The Senate introduced a minimum nontaxable threshold for residential houses in the wealth tax expansion, which should yield about 0.08 percent of GDP (included in the baseline). *Source: cr18374 - 1. Improving* ### 17. It will be important to resist pressures to maintain energy subsidies and increase ### 17. It will be important to resist pressures to maintain energy subsidies and increase ### Fiscal consolidation, energy subsidies, and wages - Reducing energy subsidies remains an important component of the fiscal rebalancing. - The 2019 Budget envisages a reduction of electricity subsidies by raising tariffs to 90 percent of production costs by the end of 2019. - The authorities will need to apply the regulatory framework to pass on the effects of the peso depreciation to electricity and gas consumers. - The decision this year to prevent that pass-through resulted in an extra cost of 0.1 percent of GDP to the federal government (which will be paid to gas distributors from 2019-2021). - For gas, subsidies to consumption have been already eliminated, while subsidies to production under the latest Gas Plan (which guarantees higher-than-market prices for gas produced through new investment in the Neuquén basin) will be phased off gradually (leaving only the social tariff in place in 2021). - The authorities recently agreed to wage increases for public sector employees in December, January, and February (effectively increasing nominal wages by 14 percent in the first half of 2019). - Since the 2019 Budget has a 34 percent annual increase in wages, this will require limiting the next wage increase (from June 2019 to June 2020) at no more than 25 percent. ### Medium-term budget and targets - The medium-term budget presented to Congress on November 21 foresees a primary surplus of 1 percent of GDP in 2021. - Revenues are projected to decline slightly over the medium term with the elimination of export taxes in 2021 partially offset by the rebound in economic activity. - All the adjustment in 2020-21 (of 1 percent of GDP) is expected to come from cuts to energy and transportation subsidies, wages, goods and services, and discretionary current transfers to provinces. - The 1 percent of GDP primary surplus is in line with reaching the estimated debt-stabilizing primary balance of 1.2 percent of GDP in 2023. - Recommendation: Include a description of the policy measures to be implemented over the medium-term and submit it to Congress alongside the annual budget to strengthen credibility and predictability of the medium-term budget process. - Recommendation: The budget should explicitly contain a reserve to absorb unexpected shortfalls in revenues or increases in non-discretionary spending. ### Revenue and spending reform priorities - The tax on exports is a distortionary tax that the authorities intend to maintain as extraordinary measure only until the end of 2020. - Deeper revenue reforms envisaged include: - an expansion of the coverage of the PIT, - a rationalization of VAT exemptions, - a reform of the tax collection administration. - Spending reform priorities include: - reform of the pension system, - reform of public sector employment. - Given complexity and need for broad social consensus, prompt technical preparatory work is important (in the case of the pension reform, setting up the commission as mandated by 2016 legislation). ### Social protection measures and poverty - About 27.3 percent of the population was living in poverty in the first half of 2018, 1.6 percent more than in 2017. - With the economic downturn and high inflation, the poverty rate is expected to continue rising in the coming months. - Measures taken to alleviate impact on the most vulnerable: - Supplemental transfers to recipients of child allowances and the employment support program will increase the annual benefit per recipient by almost 50 percent (in line with the increased cost of the basic nutrition basket). - The 2019 budget increased spending on food support for the poor and on the purchases of medicines under the universal health coverage plan. - Expanded administrative services to remote and secluded areas through mobile stations (Estado en Tu Barrio). - Established a single-window system to access public administrative services and increased the number of provinces that automatically verify compliance with the education and health requirements for obtaining child allowances. - Recommendation: Identify measures to protect households and individuals that have no children, as they are insufficiently covered by the existing social safety net. - Recommendation: Revise the social tariffs system to better protect the bottom deciles of the income distribution. ### Gender equality agenda - The 2019 budget expands public infant-care services to give wage-earning mothers the possibility not to interrupt work to care for a young child. - Authorities are developing a voluntary system to score companies on their gender policies while providing recommendations to ensure equal opportunities in the workplace. - Legislation to equalize maternity and paternity leave should be put up for debate in Congress as soon as possible. - Completion of the registry of gender balance in listed companies’ executive boards and management positions by the Comision Nacional de Valores will enhance transparency and foster equity. - Recommendation: Legislation that eliminates the second-earner penalty in the current tax system will encourage participation of second-earners (the vast majority of whom are women), boosting female participation in the labor force and contributing to economic growth. ### Monetary policy, inflation, and FX framework - The monetary policy stance appears well geared to lowering inflation and anchoring inflation expectations. - Lower LELIQ interest rates in November have contributed to slow peso appreciation pressures. - Inflation is beginning to fall, and inflation expectations are expected to continue to decline in the coming months. - Ex-ante real interest rates are high (in the 20 to 30 percent range depending on how they are measured). - BCRA changes consistent with the new framework: - After the average 12-month ahead inflation expectations fell decisively (by a cumulative 4.4 percentage points) in the September, October, and November surveys, the BCRA has eliminated the 60 percent floor on the 7-day LELIQ rate. - The BCRA announced it intends to over-comply with the monetary base target for the month of December, by at least AR$16 billion (which would imply a 5 percent increase relative to the September average rather than the 6.2 percent announced in last September). - Staff view: Removal of the interest floor and the monetary base adjustment are consistent with the new framework and will help rebuild BCRA credibility if implemented steadfastly. - FX intervention strategy details: - If the peso appreciates beyond the stronger end of the non-intervention zone in December 2018, authorities would undertake limited, unsterilized, purchases of foreign currency of up to US$ 50 million per day (the deviation from the monthly target would be capped at 2 percent). - A depreciation outside the upper edge of the non-intervention zone would prompt the Bank to sell up to US$ 150 million per day, as announced in September. - The authorities announced they would maintain a symmetric update of the non-intervention zone in 2019Q1. - The BCRA announced a monthly change for 2019Q1 of 2 percent per month, below the average expected inflation for the quarter based on the latest bank survey. - Staff agrees the change will keep the width of the non-intervention zone at around 30 percent. - Reserve requirements overhaul: - The current system has multiple rates and exemptions, creating distortions and costs. - The BCRA plans to reduce the number of reserve requirement rates while keeping the aggregate level of required reserves broadly unchanged in peso terms, consistent with the base money target. - The provision allowing fulfillment of reserve requirements on new time deposits with LELIQs will be eliminated after the last LEBAC roll off in December. - These changes are expected to become effective on January 1, 2019. - BCRA governance and strategy: - Authorities are drafting amendments to the BCRA Charter to strengthen independence and operational autonomy (end-March 2019 structural benchmark). - The end of monetary financing of the fiscal deficit, normalization of utility tariffs, and full reintermediation of the LEBAC by end-2018 will facilitate a transition back to inflation targeting once inflation expectations are durably re-anchored. ### Improving Treasury debt management - Argentina’s debt stock is heavily tilted towards FX debt, exposing the country to sizable exchange rate risks. - Issues identified with debt management and market development: - The overall objective of the peso-denominated program in terms of currency and maturity composition, as well as outstanding amount and the program horizon, remains unclear to investors. - In the absence of a published auction calendar indicating size and maturities of planned issuances, debt placements lack predictability. - Large non-competitive allocation (allocated first) reduces the share allocated to competitive bidders, lowering volumes where price is market-determined. - Secondary markets lack depth and liquidity, including absence of established market-making agreements. - Strategy for 2019 (to be published in mid-December and later reframed as a medium-term debt strategy) aims to: - Develop a liquid market for peso instruments and a yield curve based on three maturities (3, 6, and 18 months). - Gradually lengthen the maturity of peso debt as appetite for duration increases. - Give guidance on intended currency composition objective for new debt issuances and rollovers, and allotment method for primary auctions. - Define benchmark objectives around the size and maturity of new peso and FX debt issuance. - Increase predictability by publishing an auction calendar that includes (on a rolling basis) information on instruments and key maturities to be sold on a given day. - Determine a pricing reference for each issuance and the allotment method for primary auctions, factoring in short-term interest rate volatility and market pricing of credit risk. - Provide standard incentives for market-making to primary dealers that commit to provide two-way quotes in the secondary market on a continuous basis. - Note: Since July 2017 the Treasury has introduced fixed rate, peso-denominated securities that capitalize interest (LECAPs); these instruments represent less than 2 percent of GDP. ### Improving governance, AML/CFT, and anti-corruption - The Office of Anti-Corruption (OA) developed an operational action plan to tackle corruption (“Estrategia y Plan Nacional Anticorrupcion – 2019-2023”). - Focus areas include strengthening integrity, transparency and proper management of procurement activities, including within state-owned enterprises. - Progress achieved in enhancing the AML/CFT preventive regime, with collaboration agreements signed between the financial information unit (FIU) and both the BCRA and the OA. - The FIU has expanded the scope and reach of investigations abroad to identify and trace assets acquired with proceeds of criminal activities. - Legislative change remains necessary to prevent or void actions that could prejudice Argentina’s ability to freeze, seize or recover assets resulting from proceeds of criminal activities, and to secure reciprocity arrangements with other jurisdictions in line with the FATF standard. - Authorities are committed to pushing forward necessary measures. ### Program financing, safeguards, and PFM improvements - The program remains fully financed. Financing assumptions remain in line with those forecast at the time of the first review. - Recent financing and support: - Market rollovers have been higher than expected. - The World Bank has approved US$500 million in budget support together with US$450 million in project financing, likely to be disbursed by end-2018. - The InterAmerican Development Bank has approved US$900 million in support, of which US$600 million will be disbursed by the end of 2018. - An augmentation to the currency swap with China was signed in end-November, bringing the total line to US$18.7 billion. - Argentina’s capacity to repay the Fund is adequate, although subject to sizable risks; Fund exposure and frontloaded disbursement schedule imply a considerable bunching of repurchase obligations. - Fiscal safeguards review (FSR) findings and recommendations: - Argentina has a sound Public Financial Management (PFM) system with a comprehensive legal framework, robust budget execution, extensive control and audit functions, and an autonomous General Audit Office (AGN). - The Treasury Single Account (TSA) at the Banco de la Nacion Argentina (BNA) is well-managed with adequate expenditure controls, but its presence in a state-owned commercial bank presents risks (credit risk to Fund resources, market distortions, quasi-fiscal expenditures). - Authorities are considering moving the TSA into the BCRA as recommended by the FSR. - Other FSR recommendations include: - Enhancing budget credibility by adopting a formal legislative procedure for modifying the budget with ex-ante Congressional approval; creating a contingency reserve in the budget; limiting use of emergency spending provisions; and developing a more comprehensive fiscal risk report. - Improving medium-term elements in the budget with the aim of developing a full Medium-Term Budget Framework. - Strengthening oversight over entities outside the federal central administration by establishing a central regulatory framework for fiscal oversight by the Ministry of Finance over transfers to provinces and other entities, and improving reporting of arrears and outstanding liabilities of all extra-budgetary entities and state-owned enterprises. - Increasing the quality of fiscal reports by carrying out reconciliation exercises, including of debt stocks and the annual outturn reports. *International Monetary Fund staff report excerpt.* ### 36. Safeguards assessment. A safeguards assessment of the BCRA was completed in October. ### 36. Safeguards assessment. A safeguards assessment of the BCRA was completed in October. ### Safeguards and central bank independence - A safeguards assessment of the BCRA was completed in October. - There was broad agreement on the importance of recapitalizing the BCRA at an early stage. - The submission of the revised BCRA charter (¶27) will be a key step at strengthening its independence. - Staff judges that the required safeguards for Fund resources are in place. ### Debt burden, financing needs, and market confidence - Federal Government debt is expected to peak at 78 percent of GDP by end-2018. - With timely implementation of agreed policies, debt is expected to stabilize to below 60 percent of GDP over the medium-term. - Staff’s assessment: debt remains sustainable, but not with a high probability. - Gross financing needs in the medium-term are high but remain below the risk-threshold of 15 percent of GDP. - Higher-than-expected appreciation of the AR$/US$ exchange rate since end-September, significantly higher overall rollover rates, and lower interest rates and CDS spreads point to a return of market confidence. ### Program modalities, performance criteria, and benchmarks - The prior action for submission of the medium-term budget to congress was completed. - A modification is requested for the end-December performance criterion for the primary balance of the federal government to align the target with the higher level of nominal GDP. - New performance criteria are proposed for end-June 2019. - A new structural benchmark is proposed for end-December 2018 for the publication of the debt management strategy. - Staff and authorities do not foresee the need for the Treasury to sell FX into the market until, at the earliest, March 2019. - Modalities and amounts of any Fund budget support FX sales will be revisited at the time of the third review mission (expected to take place in February 2019). ### Outstanding arrears to private creditors and settlement efforts - A total of around US$1.2 billion in principal (or US$3.2 billion including accrued interest) remains outstanding to private creditors. - The authorities continue to make payments under the agreements executed. - While there have been no new agreements since October, the authorities are in the final stages of approving and publishing the instructions for the procedure for settlement of claims under Argentine Law. - The 2019 Budget law included a provision that should help 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. - The authorities maintain open discussions with creditors and all documentation to enter into agreements are available on the government’s website. - The terms offered are the same as those offered to the creditors who accepted in 2016. - Litigation initiated by certain bondholders continues in several jurisdictions. - Staff view: based on the authorities’ actions, they are making good faith efforts as required under the Fund’s Lending into Arrears policy. - As of end-September 2018, the stock of the federal government’s privately-held foreign currency denominated debt is approximately US$120 billion, of which about one quarter is expected to mature by end-2020. - Prior staff reports had used a broader definition for this context (approx. $147 billion). ### Outstanding arrears to 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. - The parties are currently in arbitration in the International Chamber of Commerce International Court of Arbitration. ### Exceptional access criteria (summary) - Criterion 1: The member is experiencing or has the potential to experience exceptional balance of payments pressures; Argentina’s sizable external financing need over the arrangement cannot be met within the normal limits of access. - Criterion 2: A rigorous and systematic analysis indicates debt is sustainable but not with a high probability; exceptional access is justified as non-Fund financing improves debt sustainability and safeguards. Staff judges the required safeguards are in place. - Criterion 3: Staff judges the member has prospects of regaining access to private capital markets within a timeframe and on a scale that would enable meeting Fund obligations. Non-residents purchased nearly US$2.3 billion of peso-denominated LECAPs; rollover rates improved in September to November. Average yields on Argentina’s external bonds remain high. - Criterion 4: Staff judges the policy program provides a reasonably strong prospect of success. The passage of the 2019 budget, earlier than expected and with a wider-than-expected margin in the Senate, demonstrates strong commitment to the Stand-By Arrangement policies. The BCRA’s tighter monetary policy framework announced in late September led to an initial large spike in short-term interest rates and an appreciation of the peso. The BCRA has not intervened in FX markets since announcement of the new framework, adhering to its transparent FX intervention rule. ### Staff appraisal and policy recommendations - The redesigned program has reduced financial turmoil. - The new monetary policy framework has helped stabilize the peso and interest rates are on a downward path. - Inflation remains high but pass-through from past depreciation is waning and there are early signs inflation is diminishing. - All performance criteria and indicative targets for end-October were met. - Structural reforms are progressing broadly on time (including full re-intermediation of LEBACs, drafting of the BCRA charter, and design of a new taxpayer compliance plan). - Fiscal policy and reforms: - Continued efforts to restrain primary current spending will be key to achieving fiscal targets. - More efforts needed to make fiscal consolidation sustainable and growth-friendly: reforms of the tax system and of the pension system are recommended to strengthen confidence, remove inequalities, and lower distortions affecting competitiveness and productivity. - Given complexity, begin technical and preparatory work soon with a view to send legislation to Congress in late 2019. - Strengthening the medium-term fiscal framework and submitting the multi-year budget with the annual budget documents is crucial. - Monetary policy and BCRA: - Sustained implementation of the monetary policy framework is crucial to re-anchor inflation expectations and rebuild BCRA credibility. - Continued commitment to a tight monetary policy stance and to market-determined exchange rates will strengthen credibility and resilience to external shocks. - A new charter strengthening BCRA independence and operational autonomy would contribute to these objectives. - The BCRA should continue to simplify its monetary policy framework and reform the reserve requirement to make it simple, stable, and predictable. - Debt management: - Publishing a clear debt management strategy, an auction calendar, and benchmark objectives around size and maturity of new issuances would increase predictability and reduce exchange rate risk exposure. - Enhancing secondary market liquidity and facilitating pricing would support development of a benchmark peso yield curve. - Structural reform agenda: - Continue reforms to stabilize financial markets, restore market confidence, and enable rebound in activity and lower inflation. - Priorities: a less distortionary tax system, more balanced labor market regulations, greater competition in domestic product markets, fewer barriers to trade and foreign investment, continued efforts to improve governance and confront corruption. - Rationalize the social safety net and extend coverage; increase employability, particularly for women, the young, and lower-income workers. - Conclusion: - Steadfast implementation of the stabilization plan and continued political and public support are essential to reassure investors and solidify Argentina’s return to macroeconomic stability. - Staff supports the authorities’ request for completion of the second review under the SBA, the modification of the performance criterion under the program, and the completion of the financing assurances review. *Source: IMF staff report (cr18374).* ### 4.15 bn ### cr18374 - 4.15 bn ### Monetary developments and liquidity - Monetary base (average up to December 5 vs. monthly averages): change indicators shown as -43.34 bn, -3.4%, -9.1%, -122.58 bn. - Monetary base (eop, y/y percent change): 34.9, 31.7, 21.8, 34.8, 13.5, 34.8, 13.5, 24.5, 18.1, 13.3, 12.1 (annual series in Table 1). - Monetary base (in AR$ billions, Table 5a monthly 2018): monthly averages and eop values include 1,350 (Sep, Oct, Nov), 1,532 (Dec) and monthly average series with precise monthly changes (e.g., Monetary base (average), m/m percent change: 0.0% ... 6.2% ... 7.5%). - Change in monetary base (y/y, in AR$ billion) entries include 198, 179, 376, 182, 349, 182, 376, 346, 300, 309 (Table 5a memorandum). - Foreign exchange purchases (net) monthly series include values such as 209, 266, -163, -117, -303, -118, 162, 271, 213, 187 (Table 5a monthly). ### Interest rates and real rates - Policy interest rate (eop) series (Table 5a / Table 5c): 23.9, 28.8, 69.6, 32.0, 60.0, 30.7, 21.4, 15.3, 14.0, 13.1 (annual eop values). - Real interest rate (eop), 12-m ahead y/y inflation (eop): 3.6, 10.1, 37.2, 16.8, 29.5, 15.7, 11.4, 9.8, 8.6, 7.8 (Table 5a series). - Interest rate on wholesale deposits (BADLAR, eop): 20.0, 23.3, 64.1, 30.0, 49.7, 28.7, 19.4, 13.3, 12.0, 11.1 (Table 5b memorandum). ### Private sector deposits and credit - Private sector deposits in 2018 monthly series (chart labels): Peso Deposits and Dollar Deposits (RHS) shown across Jun-18 to Dec-18 with right-hand scale values in the thousands (1,400 to 2,000) and left-hand scale 26.0 to 29.0 (figure annotations). - Credit to the private sector (eop, y/y percent change): 35.7, 31.2, 51.3, 30.2, 14.9, 33.0, 19.5, 17.5, 17.7, 9.4, 13.9 (Table 1). - Credit to the private sector, real (eop, y/y percent change): (series includes) 21.2, -5.0, -4.4, -9.7, -0.6, 3.9, 8.0, 4.2, 8.5 (Table 1 and Table 5b memorandum). - Credit to the private sector (in AR$ billions, Table 5b): 1,125, 1,701, 2,218, 2,549, 2,266, 2,709, 3,182, 3,745, 4,096, 4,664. ### Prices, output, and labor market - GDP at constant prices (annual percent changes, Table 1): 2.7, -1.8, 2.9, -2.8, -1.7, -2.8, -1.7, 2.7, 3.1, 3.4, 3.6. - CPI inflation (eop, y/y percent change): 24.8, 43.8, 20.2, 47.4, 20.2, 13.0, 9.0, 5.0, 5.0, 5.0 (series shown with ellipses for earlier years). - GDP deflator (y/y percent change): 26.5, 40.2, 25.2, 33.4, 32.5, 37.7, 34.3, 15.5, 10.7, 6.7, 4.9. - Unemployment rate (percent): 8.5, 8.4, 9.8, 10.9, 9.8, 10.9, 10.8, 10.6, 10.3, 10.0 (Table 1). - Output gap (percent): 0.6, -1.6, -0.2, -4.8, -7.8, -4.8, -7.8, -7.1, -6.2, -4.9, -3.5. ### External sector and reserves - Exports f.o.b. (goods, US$ billions): 56.8, 57.9, 58.4, 61.6, 65.2, 61.6, 71.4, 75.6, 80.0, 84.0, 88.5 (Table 1/Table 2). - Imports f.o.b. (goods, US$ billions): 57.6, 53.5, 64.0, 58.3, 53.0, 63.1, 58.4, 65.2, 73.1, 80.6, 89.3. - Trade balance (goods, US$ billions): -0.8, 4.4, -5.5, 3.3, 12.2, -1.6, 13.0, 10.4, 6.8, 3.4, -0.9. - Current account balance (percent of GDP): -2.7, -2.7, -4.9, -4.2, -1.6, -5.2, -1.5, -2.4, -2.4, -2.6, -2.4. - Gross international reserves (US$ billions): 25.6, 39.3, 55.1, 56.4, 53.5, 57.3, 54.4, 60.4, 65.7, 70.1, 74.6 (Table 1 memorandum). - Gross international reserves (percent of ARA): 39.4, 73.0, 92.0, 89.3, 84.8, 91.0, 86.3, 93.1, 96.0, 99.0, 101.3. ### Public finances, fiscal balances, and debt - Nominal GDP (billions of Argentine pesos): 5,955; 8,189; 10,556; 13,629; 17,872; 14,054; 18,553; 21,971; 25,074; 27,649; 30,062 (Table 1). - Revenues (percent of GDP): 35.4, 35.0, 34.8, 35.7, 36.8, 35.0, 36.5, 36.7, 36.1, 35.6, 34.9. - Primary expenditure (percent of GDP): 39.8, 39.8, 39.0, 38.1, 36.7, 37.6, 36.5, 35.7, 35.0, 34.2, 33.6. - Primary balance (percent of GDP): -4.4, -4.7, -4.3, -2.5, 0.1, -2.6, -0.1, 1.0, 1.1, 1.3, 1.4. - Overall balance (percent of GDP): -6.0, -6.6, -6.8, -5.5, -4.4, -5.7, -3.7, -2.5, -2.6, -2.4, -2.6. - Total public debt (federal, % GDP): 52.6, 53.3, 57.1, 81.2, 72.2, 78.0, 67.9, 64.5, 62.4, 60.2, 59.2 (Table 1; Table 7). - Gross federal debt (billions of Argentine pesos): 3,130; 4,366; 6,025; 11,062; 12,911; 10,961; 12,606; 14,168; 15,651; 16,645; 17,803 (Table 7). - By currency (gross federal debt, percent of GDP): In domestic currency 16.1, 16.9, 17.8, 18.2, 15.3, 16.7, 15.6, 16.7, 20.2, 22.9, 26.1; In foreign currency 36.4, 36.5, 39.2, 63.0, 57.0, 61.3, 52.3, 47.7, 42.2, 37.3, 33.2. ### Central bank and banking sector operations - Central bank net foreign assets (end-period, AR$ billions, Table 5a): 199, 584, 844, 832, 900, 873, 1,181, 1,487, 1,702, 1,987 (series). - Central bank monetary base (in AR$ billions, Table 5a): 822, 1,001, 1,350, 1,532, 1,350, 1,532, 1,908, 2,255, 2,555, 2,864. - Banking sector net domestic assets (in AR$ billions, Table 5b): 1,482, 1,973, 3,176, 3,817, 2,979, 3,556, 4,569, 5,493, 6,368, 7,413. - Banking sector liabilities with the private sector (in AR$ billions): -2,043, -2,662, -3,839, -4,713, -3,667, -4,473, -5,595, -6,674, -7,647, -8,799. - Banking sector reserves at central bank (in AR$ billions): 473, 455, 1,021, 1,076, 1,012, 1,064, 1,434, 1,734, 2,044, 2,399. ### Financing needs, amortizations and external financing (selected figures) - Total needs (US$ mn, Table 8 aggregated rows): example quarterly/annual totals include Total Needs 8,317; 6,081; 12,716; 18,498; 45,612; 44,435; and aggregated 54,930; 77,430 (various columns). - Amortizations (US$ mn, selected entries): 5,766; 3,820; 10,519; 12,340; 32,445; 32,034; and aggregated totals 34,640; 55,267 (Table 8). - Total Sources (US$ mn, Table 8): 8,317; 341; 12,716; 10,798; 32,172; 30,995; and totals 51,010; 75,470 (various columns). - Total Gap (US$ mn, Table 8): entries showing gaps such as 5,740; 7,700; 13,440; and denomination-specific gaps (FX and Peso) presented (e.g., FX gaps: 5,740; 7,700; 13,440). - Quarterly/annual external needs and sources (Table 9): Total Needs 14,435; 41,593; 56,028; 54,250; and Total Sources 14,435; 28,153; 42,588; 46,133 producing Gaps such as 13,440 and 8,117. ### Program financing schedule and IMF arrangement - Schedule of Reviews and Purchases (Table 10) — amounts available on or after specific dates (SDR millions and % Quota): - June 20, 2018: 10,613.71 SDR (333%). - October 26, 2018: 4,100.00 SDR (129%). - December 15, 2018: 5,500.00 SDR (173%). - March 15, 2019: 7,800.00 SDR (245%). - June 15, 2019: 3,900.00 SDR (122%). - September 15, 2019: 3,900.00 SDR (122%). - December 15, 2019: 700.04 SDR (22%). - March 15, 2020: 700.04 SDR (22%). - June 15, 2020: 700.04 SDR (22%). - September 15, 2020: 700.04 SDR (22%). - December 15, 2020: 700.04 SDR (22%). - March 15, 2021: 700.04 SDR (22%). - June 1, 2021: 700.05 SDR (22%). - Total: 40,714 SDR (1,277%). - Notes: Schedule entries include the associated review and performance criteria (Table 10). ### Key fiscal aggregates and federal operations (levels and percent of GDP) - Consolidated public sector revenues (billions of AR$): 700.7; 891.7; 1,150.1; 1,584.4; 2,105.9; 2,868.9; 3,670.1; 4,859.0; 6,570.0; projected series 4,916.3; 6,757.8; 8,056.5; 9,056.3; 9,835.2; 10,504.3 (Table 3). - Primary expenditures (billions of AR$): 735.3; 936.4; 1,238.5; 1,744.6; 2,368.9; 3,255.5; 4,120.1; 5,197.0; 6,558.1; projected 5,278.6; 6,771.4; 7,839.5; 8,781.1; 9,463.0; 10,096.4. - Primary balance (billions of AR$): -34.6; -44.7; -88.4; -160.2; -263.0; -386.6; -450.0; -338.0; 11.9; projected -362.3; -13.7; 217.1; 275.2; 372.3; 407.9. - Federal government revenues and primary expenditures (billions of AR$, Table 4): Revenues 2,180.9; 2,754.8; 3,667.3; 5,060.8; 3,746.1; 5,216.5; 6,225.3; 7,013.5; 7,608.5; projected 8,142.7. Primary expenditures 2,524.5; 3,159.0; 4,034.0; 5,054.7; 4,123.6; 5,215.0; 6,002.6; 6,741.2; 7,285.5; projected 7,746.5. - Federal primary balance (billions of AR$): -343.5; -404.1; -366.7; 6.0; -377.5; 1.6; 222.7; 272.3; 323.0; projected 396.1. - Federal overall balance (billions of AR$): -474.8; -629.0; -728.1; -688.3; -771.3; -598.4; -470.6; -584.5; -622.9; projected -709.6. *Source: BCRA; Ministerio de Hacienda y Finanzas Públicas; Banco Central de la República Argentina (BCRA); INDEC; Fund staff estimates and projections as presented in the supplied material.* ### 2. Federal government accumulation of external debt payment arr ### 2. Federal government accumulation of external debt payment arr ### Monetary and fiscal program targets and performance criteria - Federal government accumulation of domestic arrears (ceiling) 5/: 17.0; 11.6; n.a.; n.a.; 24.4; 24.4; n.a.; n.a.; 30.0; n.a.; n.a.; 40.0. - Social assistance spending (floor) 3/: 144.0; 148.8; n.a.; n.a.; 173.0; 173.0; n.a.; n.a.; 60.0; n.a.; n.a.; 110.0. - Indicative targets — Primary balance of the general government (floor) 3/ 9/: n.a.; n .a.; n.a.; n.a.; n.a.; -370.0; -378.0; n.a.; n.a.; -14.0; n.a.; n.a.; 30.0. - Performance Criteria — Change in non-borrowed net international reserves (floor) 6/ 9/ 10/ (in billions of U.S. dollars; change measured against the value on September 28, 2018): 3.7; 4.3; 5.3; 2.1; 1.4; 2.2; 7.1; 7.1; 4.1; 2.9; 12.5; 8.0; 4.2; 5.8. - Change in stock of non-deliverable FX forwards (ceiling) 6/ 11/: 0.0; -2.0; 0.0; -2.3; 0.0; 0.0; 0.0; -0.7; -1.0; -1.2; -1.5; -1.7. - Change in central bank credit to government (ceiling) 7/: 0.0; 0 .0; 0.0; 0.0; 0.0; 0.0; 0.0; 0.0; 0.0; 0.0; 0.0; 0.0. - Central bank financing of the government (ceiling) 4/: 0.0; 0.0; 0 .0; 0.0; 0.0; 0.0; 0.0; 0.0; 0.0; 0.0; 0.0; 0.0. - Change in net domestic assets of the central bank (ceiling) 8/ 9/: 97.7; 97.7; 28.9; -55.7; -16.5; -121.6; -46.2; -46.2; -112.1; -36.0; -185.6; -300.3; -1 56.1; -101.5. - Notes from the TMU and technical footnotes: - Targets as defined in the Technical Memorandum of Understanding (TMU). - Based on program exchange rates defined in the TMU. - Cumulative flows from January 1 through December 31. - Continuous performance criterion. - The accumulation is measured against the average during Q4 2017, which stood at 45.6 billion pesos. - In billions of U.S. dollars. The change is measured against the value on September 28, 2018. - The change is measured against the value on September 28, 2018, which stood at 2,592.86 billion pesos. - The change is measured against the average value for September 2018, which was AR$ 571 billion. - Targets subject to adjustors as defined in the TMU. - Increases reflect IMF budget support disbursements, which increase NIR. - Continuous performance criterion until end-December 2018. Thereafter, this will become a quarterly performance criterion with monthly indicative targets. ### Structural benchmarks and prior actions - Present a three-year budget document to Congress with transparent medium-term objectives for the primary balance: 2nd 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 (repeat): Oct-2018 — Not met. Implemented with delay. - Congress will pass the 2019 Budget targeting a zero primary balance: Nov-2018 — Met. - Congress will pass the revenue legislation underpinning the 2019 fiscal plan, including the increase in rate and base of the wealth tax (Impuesto sobre los Bienes Personales): Nov-2018 — Not met. Implemented with delay. - Publish a debt management strategy with the goal of increasing predictability, pricing, and liquidity of treasury issuances: Dec-2018 — Proposed. - Provide sufficient resources to the newly created CBO (Oficina de Presupuesto del Congreso): Dec-2018 — Met. - Limit the BCRA’s counterparties for sale of LEBACs, open market operations and repos to domestic banks: Mar-2019 — (timing listed). - Submit to Congress a new charter for the central bank to ensure operational autonomy: Mar-2019 — (timing listed). - Design a compliance improvement plan and risk mitigation strategies around taxpayer segments and core taxes: Jun-2019 — (timing listed). - Recapitalize the central bank to ensure adequate capital as percent of the monetary base plus outstanding stock of LEBACs: Dec-2019 — (timing listed). ### Indicators of Fund credit and projected Fund debt service (Table 13) - Existing and Prospective drawings (36 month SBA): 20,214; 16,300; 2,8 00; 1,400; ...; ...; ...; ...; ... . - (in percent of quota): 634; 511; 88; 44. - Amortization 1/: 0.0; 0.0; 0.0; 2,653.4; 14,494.4; 16,128.5; 5,600.1; 1,575.1; 26; 2.5. - GRA charges and surcharges 1/: 0.0; 946.4; 1,385.1; 1,612.7; 1,569.9; 771.5; 141.2; 27.5; 2.8. - GRA service charge 1/: 27.5; 81.5; 14.0; 7.0; 0.0; 0.0; 0.0; 0.0; 0.0. - SDR assessments 1/: 0.0; 0.0; 0.0; 0.0; 0.0; 0.0; 0.0; 0.0; 0.0. - Total debt service 1/: 27.5; 1,027.9; 1,399.1; 4,273.2; 16,064.3; 16,900.0; 5 ,741.4; 1,602.6; 265.4. - (in percent of exports of G&S): 0.1; 1.7; 2.2; 6.4; 22.5; 22.0; 7.0; 1.8; 0.3. - (in percent of GDP): 0.0; 0.3; 0.4; 1.1; 3.8; 3.7; 1.2; 0.3; 0.0. - Outstanding stock 1/: 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): 5.8; 11.1; 10.9; 9.7; 5.6; 1.6; 0.4; 0.1; 0.0. - Memorandum items: - Exports of goods and services (US$ mn): 75,897; 87,710; 89,060; 95,646; 1 02,280; 109,773; 117,814; 126,444; 135,706. - Gross International Reserves (US$ mn): 57,336; 54,390; 60,438; 65,670; 70 ,141; 74,613; 81,571; 89,177; 97,493. - Quota: 3,187.3 repeated across years. ### External Debt Sustainability Framework (Table 14) — key projections and ratios - Baseline: External debt (Percent of GDP): 27.3; 30.2; 27.9; 34.2; 37.2; 54.4; 56.6; 51.2; 47.9; 44.5; 41.1. - Debt-stabilizing non-interest current account: -2.5. - Change in external debt: -1.7; 2.9; -2.4; 6.4; 3.0; 17.2; 2.2; -5.4; -3.3; -3.4; -3.4. - Identified external debt-creating flows (4+8+9): -0.9; 3.3; -2.7; 6.6; -1 .6; 5.5; 2.0; 0.2; -0.3; -0.6; -1.0. - Current account deficit, excluding interest payments: 1.5; 0.9; 2.2; 1. 8; 3.7; 2.7; -0.5; 0.8; 1.1; 1.4; 1.6. - Deficit in balance of goods and services: 0.1; -0.2; 1.0; 0.7; 2.4; 1.9; -1.9; -0.2; 0.4; 1.3; 1.2. - Exports (percent of GDP): 14.7; 14.5; 10.9; 12.8; 11.4; 15.0; 18.6; 17.1; 16.9; 16.8; 16.8. - Imports (percent of GDP): 14.8; 14.4; 11.9; 13.4; 13.8; 16.9; 16.7; 16.9; 17.3; 18.1; 18.1. - Net non-debt creating capital inflows (negative): -1.5; -0.6; -1.7; -0. 4-2.1; -1.0-0.4-0.9-1.3-1.6-1.9 (as presented in the source). - Automatic debt dynamics 1/: -0.9; 3.0; -3.1; 5.3; -3.2; 3.7; 3.0; 0.2; -0.1; -0.4; -0.6. - Contribution from nominal interest rate: 0.6; 0.7; 0.6; 0.9; 1.2; 2.4; 2.0; 1.6; 1.4; 1.2; 0.9. - Contribution from real GDP growth: -0.7; 0.7; -0.7; 0.6; -0.9; 1.3; 1.0; -1.4; -1.5; -1.5; -1.5. - Contribution from price and exchange rate changes 2/: -0.8; 1.6; -3. 0; 3.8; -3.6; ...; ...; ...; ...; ...; ... . - Residual, incl. change in gross foreign assets (2-3) 3/: -0.8; -0.4; 0.3; -0.3; 4.6; 11.7; 0.1; -5.6; -2.9; -2.8; -2.5. - External debt-to-exports ratio (in percent): 186.4; 208.2; 255.5; 268.1; 326.7; 361.7; 304.5; 299.0; 283.1; 264.9; 244.3. - Gross external financing need (in billions of US dollars) 4/: 85.8; 82.6; 81.7; 104.5; 97.4; 143.6; 106.7; 97.2; 94.2; 113.4; 113.7. - in percent of GDP: 14.0; 14.7; 12.7; 18.9; 15.3; 10-Year; 10-Year; 28.4; 22.6; 18.7; 16.7; 18.6; 17.4. - Scenario with key variables at their historical averages 5/: 54.4; 47.7; 42.1; 38.1; 33.9; 29.8; -3.4. - Key Macroeconomic Assumptions Underlying Baseline (Historical Average; Standard Deviation; and projections): - 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; -5.4; 10.9; -12.1; 1 1.7; 7.1; 10.8; -18.6; -4.9; 7.3; 5.3; 4.2; 3.5. - 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; 2.9; 2.6; 2.1. - Growth of exports (US dollar terms, in percent): -5.0; -8.7; -14.4; 1.0; 2.7; 2.0; 15.3; 4.5; 15.6; 1.5; 7.4; 6.9; 7.3. - Growth of imports (US dollar terms, in percent): 8.3; -10.4; -5.3; -2. 8; 18.2; 7.0; 20.8; -3.1; -7.9; 11.6; 11.4; 12.5; 7.2. - Current account balance, excluding interest payments: -1.5; -0.9; -2 .2; -1.8; -3.7; -0.4; 2.1; -2.7; 0.5; -0.8; -1.1; -1.4; -1.6. - 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; 1.3; 1.6; 1.9. ### Annex I — Public Debt Sustainability Analysis: Summary findings - Stock: By end-September 2018, gross federal government debt (including intra-public sector holdings) stood at US$316 billion, down from US$321 billion at end 2017. The drop was largely due to the depreciation of the peso, which was at AR$18.8/US$ at end-2017. - Currency Composition: FX-denominated portion of debt increased from around 68 percent at end-2017 to about 78 percent by end-September 2018, driven by: - the US$9 billion external bond placement in January 2018; - the US$15 billion IMF disbursement in June 2018; and - currency depreciation. - Maturity: Average maturity of total public debt at end-2017 was 7.7 years; average maturity of bonds was 9.4 years. Stock of short-term LETES in private hands is around US$24 billion, 70 percent of which are FX denominated. - Debt Holders: About 40 percent of federal government debt is held by other public-sector entities and provinces. Nearly two third of intra-public-sector debt is denominated in US$, and the majority are low-interest Letras Intransferibles held by the BCRA. Debt to IFIs and bilateral creditors increased from about 9 percent of total debt to 13 percent. - Baseline Scenario: - Debt is expected to increase to 78 Percent of GDP in 2018 and decline toward 59 percent of GDP by 2023. - Gross financing needs (GFN) are high but expected to remain below the 15 percent of GDP high-risk threshold during the projection period. - Assumptions include: growth and inflation path (growth in 2018 expected at -2.8 percent, -1.7 percent in 2019, rebound to 2.7 percent in 2020, rising to 3.6 percent by 2023); primary deficit reduction via fiscal consolidation; reversal of excess real peso depreciation during program; continued rollover of intra-public-sector financing and capitalization of interest payments; statutory advances from the BCRA set to zero from July 2018; no further international bond issuance until 2020; IMF financing for remainder of 2018 and 2019; modest LECAP issuances assumed for Nov/Dec 2018 (~US$1 billion). - Shocks and Stress Tests: - Exchange rate shock (standard DSA: 50 percent real depreciation with 0.25 pass-through) could raise debt to 95 percent of GDP. - Growth shock could raise debt to 79 percent of GDP. - If the primary balance remained unchanged at its 2018 level (–2.7 percent of GDP), debt would remain around 80 percent of GDP by 2023. - A ‘combined macro-fiscal’ shock would cause debt to peak at 116 percent of GDP and produce GFN of 32 percent of GDP. - Overall Assessment: - Debt dynamics under the baseline remain benign with fiscal adjustment, economic recovery, and lower real interest rates expected to place public debt-to-GDP on a steady downward trajectory from 2019 onwards. - Debt would fall under the planned fiscal consolidation to below 60 percent of GDP by the end of 2023. - Important downside risks remain: adverse economic and financial conditions relative to the baseline; structurally high share of foreign currency denominated debt; elevated fiscal and external financing needs; potential contingent liabilities. - The program remains fully financed. Staff’s overall assessment is that Argentina’s debt is sustainable, but not with a high probability. *Source: IMF staff calculations, estimates, and the Technical Memorandum of Understanding as presented in the provided chapter.* ### 7. There are significant risks to debt sustainability. The most evident near-term risks are ### 7. There are significant risks to debt sustainability. The most evident near-term risks are ### 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 (which makes Argentina’s 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 fact that 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. However, most provinces are running close to a balanced budget and provincial debt at end-2017 was projected to be around 6 percent of GDP; - The national government faces contingent liabilities from needing to recapitalize the central bank, from loss-making publicly-owned corporations, and from unfunded pensions. ### Mitigating factors noted - High share of federal government debt is held by other public-sector entities. - Relatively long maturity of dollar-denominated debt issued on international markets. ### Key DSA and market indicators (as presented) - Nominal gross public debt: 48.3 53.3 57.1 78.0 67.9 64.5 62.4 60.2 59.2 - EMBIG (bp): 672 - Public gross financing needs: 9.5 12.5 13.3 13.2 13.1 9.7 13.8 14.1 14.0 - 5Y CDS (bp): 611 - Real GDP growth (in percent): 2.8-1.8 2.9-2.8 -1.7 2.7 3.1 3.4 3.6 - Inflation (GDP deflator, in percent): 23.5 40.2 25.2 37.7 34.3 15.5 10.7 6.7 4.9 - Nominal GDP growth (in percent): 26.8 37.5 28.9 33.1 32.0 18.4 14.1 10.3 8.7 - Effective interest rate (in percent): 4.4 4.2 8.9 5.5 8.4 9.3 9.6 9.0 7.8 - Change in gross public sector debt: -2.0 0.8 3.8 20.9 -10.0 -3.5 -2.1 -2.2 -1.0 2.1 (cumulative) - Identified debt-creating flows: -3.4 -2.5 1.3 -9.4 -13.9 -6.4 -3.7 -1.9 -1.9 -37.2 (cumulative) - Primary deficit: 0.9 4.2 3.8 2.7 0.0 -1.0 -1.1 -1.2 -1.3 -1.9 (cumulative) - Primary (noninterest) revenue and grants: 25.3 26.6 26.1 26.7 28.1 28.3 28.0 27.5 27.1 165.7 (cumulative) - Primary (noninterest) expenditure: 26.2 30.8 29.9 29.3 28.1 27.3 26.9 26.3 25.8 163.7 (cumulative) - Automatic debt dynamics: -4.3 -6.7 -2.5 -12.1 -13.9 -5.4 -2.6 -0.8 -0.5 -35.2 (cumulative) - Interest rate/growth differential: -8.7 -12.8 -8.2 -12.1 -13.9 -5.4 -2.6 -0.8 -0.5 -35.2 (cumulative) - Of which: real interest rate: -7.5 -13.5 -7.0 -13.3 -14.9 -3.8 -0.8 1.2 1.5 -30.2 (cumulative) - Of which: real GDP growth: -1.2 0.7 -1.2 1.2 1.0 -1.6 -1.7 -1.9 -2.0 -5.1 (cumulative) - Exchange rate depreciation (selected figure listed): 4.4 6.0 5.7 - Residual, including asset changes: 1.4 3.3 2.5 30.3 3.9 2.9 1.6 -0.3 0.9 39.3 (cumulative) ### Underlying assumptions and scenarios (selected) - Baseline and alternative scenario inputs shown include sequences of: - Real GDP growth (Baseline and Historical scenarios), - Inflation path: 37.7 34.3 15.5 10.7 6.7 4.9 (as presented), - Primary Balance trajectories (Baseline: -2.7 0.0 1.0 1.1 1.2 1.3; Constant Primary Balance scenario: -2.7 repeated), - Effective interest rate paths (examples shown: 5.4 8.4 9.2 9.5 8.9 7.7 and other scenario-specific sequences). - Stress tests performed include: Primary Balance Shock, Real GDP Growth Shock, Real Interest Rate Shock, Real Exchange Rate Shock, Combined Shock, and Additional Stress Tests. Charts present impacts on: - Gross Nominal Public Debt (in percent of GDP and percent of Revenue) across 2018–2023, - Public Gross Financing Needs (in percent of GDP) across 2018–2023. ### Policy commitments excerpted from attachments (selected) - Fiscal: Commitment to reach a primary balance in 2019; Fund’s budget support to be used solely for primary balance needs and interest and amortization payments on Treasury debt; commitment not to undertake FX sales through state-owned banks; possible conversion of part of disbursements into pesos through the BCRA to build buffers during 2018. - Monetary: Maintain stock of base money unchanged in nominal terms from September 2018 to June 2019 with seasonal adjustments; removal of the 60 percent floor on the LELIQ interest rate; ensure non-sterilized FX purchases (if peso appreciates below the nonintervention zone) are calibrated to keep monetary stance conducive to rapid reduction of inflation and inflation expectations; simplify reserve requirement regulation with no impact to the overall amount of reserves; commitment to a floating exchange rate with transparent interventions outside the non-intervention zone; adjust limits of the non-intervention zone daily at a monthly rate of 2 percent during the first quarter of 2019; intention to return to an inflation targeting framework once inflation is toward single digits and expectations are well-anchored. - Central Bank governance and balance sheet: Submit a draft of a new BCRA charter to Congress by end-March 2019 to ensure operational autonomy and strengthen the monetary policy mandate; work to obtain approvals to permit injection of peso denominated, interest-bearing marketable securities onto the central bank’s balance sheet to achieve an adequate level of capital by end-December 2019; commit to opportunistically reduce the BCRA’s net credit to government, financing conditions permitting. *Source: IMF staff (Argentina Public DSA, as presented in the supplied content).* ### 11. We remain committed to take all the necessary measures to protect the most vulnerable ### 11. We remain committed to take all the necessary measures to protect the most vulnerable ### Social protection measures and recent actions - Commitment: protect the most vulnerable from effects of the current conjuncture. - Target groups: families with children and parents with informal jobs; poor people without children. - One-off income support: - One-off payments in September and December to beneficiaries of the Universal Child Allowance (AUH). - One-off payment in December to beneficiaries of the Employment Support Program (Apoyo al Empleo). - Rationale: AUH emphasizes children education and health and "plays a key role in reducing poverty among children." - Non-income measures and 2019 Budget enhancements: - Expanded by 50 percent (in nominal terms) programs that provide direct and indirect food assistance to the poor. - More than doubled the program of control and prevention of immune-preventable diseases. - Increased in real terms the provision of medicines under the universal health coverage system. - Increased tenfold spending aimed at expanding the provision of universal health coverage. - Accessibility and administrative measures: - Strengthened El Estado en Tu Barrio (mobile stations providing administrative services in remote areas). - Established a one-window system to allow the public administration to provide services more effectively by crossing information on beneficiaries. - Simplified and standardized certification of education and health requirements for the AUH to reduce exclusion errors. - International cooperation: continue to work with the World Bank, the Inter-American Development Bank, and other international and regional organizations to explore ways to strengthen social protection strategy. ### Gender equality and related commitments - Overall commitment: ensure that women have equal opportunities in the job market and society. - Actions taken or planned: - Established a national plan for equal opportunity. - Designed a voluntary system to score companies on their gender policies and recommend improvements. - Sent legislation to congress to equalize maternity and paternity leave. - Strengthened the program to provide public infant care to give mothers the possibility to remain in the labor market. - Committed to publishing by end-March 2019 a public monitoring paper of the gender balance in executive boards and management positions at listed companies. ### Debt management intentions - Recent progress: eliminated most of the BCRA’s LEBAC securities over the past six months, alleviating an important vulnerability. - Planned actions: - Strengthen debt management strategy to provide clear guidance to investors and a predictable approach to budget financing operations. - Intend to publish a comprehensive debt management strategy outlining objectives and plans for 2019 by end-December 2018 (proposed end-December structural benchmark). - Coordinate closely with local financial institutions to provide incentives for institutions to become more effective market makers to increase liquidity in local markets. ### Governance and AML/CFT strengthening - Need identified: governance regime needs to be strengthened, including more resources for anti-corruption and AML/CFT efforts. - Anti-corruption strategy: - In 2019 begin implementing an action plan addressing integrity, transparency, and proper management of procurement activities, including within State Owned Enterprises (SOEs) (“Estrategia y Plan Nacional Anticorrupcion – 2019-2023”). - In consultation with Fund staff, plan to finalize and publish the Executive’s National Anti-corruption strategy and its action plan. - AML/CFT legal amendments: - By end of February 2019, the Financial Intelligence Unit (FIU), in consultation with Fund staff, will propose amendments to the legal framework enabling the FIU, with immediate communication to a competent judge, to order the administrative freezing of funds and other assets identified in the context of money laundering suspicions, in line with international standards and best practices. - Note: "These amendments to the legal framework will be implemented accordingly at a later stage." - Company registry and declarations: - Redouble efforts to achieve operational implementation of the company registry (“Registro Nacional de Sociedades, Concursos y Quiebras”), created by Law 27.444 in 2018. - Implementation in 2019 will use the register of the AFIP, which provides information on company name, single tax payer identification code, legal address, real address and representative to AFIP; provincial registers to continue digitalization and publishing online information, focused on largest cities. - By May 2019, the Anti-Corruption Office, in collaboration with other relevant authorities and Fund staff, will pilot a new electronic system for submission of asset and interest declarations for a small number of high-level officials from the Executive (President, Vice-president, Ministers and Secretaries of State) to test the tool before finalization for full implementation. ### Program financing schedule (selected figures from Table 1) - Available on or after June 20, 2018: 10,613.71 SDR millions (333% Quota) — Approval of Arrangement. - October 26, 2018: 4,100.00 SDR millions (129% Quota) — First Review and end-September 2018 performance criteria. - December 15, 2018: 5,500.00 SDR millions (173% Quota) — Second Review and end-October 2018 performance criteria. - March 15, 2019: 7,800.00 SDR millions (245% Quota) — Third Review and end-December 2018 performance criteria. - June 15, 2019: 3,900.00 SDR millions (122% Quota) — Fourth Review and end-March 2019 performance criteria. - September 15, 2019: 3,900.00 SDR millions (122% Quota) — Fifth Review and end-June 2019 performance criteria. - December 15, 2019: 700.04 SDR millions (22% Quota) — Sixth Review and end-September 2019 performance criteria. - Subsequent scheduled purchases of 700.04 SDR millions (22% Quota) on March 15, 2020; June 15, 2020; September 15, 2020; December 15, 2020; March 15, 2021; and 700.05 SDR millions (22% Quota) on June 1, 2021. - Total: 40,714 SDR millions (1277% Quota). - Note: "Apart from periodic performance criteria, conditions also include continuous performance criteria." ### Selected quantitative and program technical details - Fiscal targets and social spending (selected program numbers from Table 2): - Performance Criteria: Primary balance of the federal government (floor) entries include values such as -290.0, -299.1, -200.1, -370.0, -378.0, 6.0, 40.0 (as shown in the table). - Social assistance spending (floor): entries include 144.0, 148.8, 173.0, 173.0, 60.0, 110.0. - Accumulation of domestic arrears (ceiling): entries include 17.0, 11.6, 24.4, 24.4, 30.0, 40.0. - Monetary targets (selected): - Change in non-borrowed net international reserves (floor) values include 3.7, 4.3, 5.3, 2.1, 1.4, 2.2, 7.1, 7.1, 4.1, 2.9, 12.5, 8.0, 4.2, 5.8 (as shown). - Change in stock of non-deliverable FX forwards (ceiling) entries include 0.0, -2.0, 0.0, -2.3, 0.0, 0.0, 0.0, -0.7, -1.0, -1.2, -1.5, -1.7. - Change in net domestic assets of the central bank (ceiling) entries include 97.7, 97.7, 28.9, -55.7, -16.5, -121.6, -46.2, -46.2, -112.1, -36.0, -185.6, -300.3, -156.1, -101.5. - Structural benchmarks and implementation status (selected): - Present a three-year budget document to Congress with transparent medium-term objectives — 2nd Review: Met. - Publish a regulation to introduce a foreign exchange auction for BCRA intervention — Jun-2018: Met. - Establish senior-level debt management coordinating committee (Treasury-Finance-BCRA) — Sep-2018: Not met. Implemented with one day delay. - Congress will pass the 2019 Budget targeting a zero primary balance — Nov-2018: Met. - Publish a debt management strategy to increase predictability, pricing, and liquidity of treasury issuances — Dec-2018: Proposed. - Provide sufficient resources to the newly created CBO (Oficina de Presupuesto del Congreso) — Dec-2018: Met. - Other benchmarks with timing through Dec-2019 include limiting BCRA counterparties for sale of LEBACs (Mar-2019), submit new BCRA charter to Congress (Mar-2019), design compliance improvement plan (Jun-2019), recapitalize central bank (Dec-2019). - Technical Memorandum of Understanding (TMU) highlights: - Program exchange rates are those that prevailed on September 28, 2018. - Program exchange rates shown: 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. - Note 1/ Rate published by the BCRA as of September 28, 2018. Note 2/ Spot price published by Bloomberg as of September 28, 2018. - Definitions and specific TMU arrangements: - Federal government for program purposes defined as central administration, social security institutions, decentralized institutions (Administración Nacional), PAMI, fiduciary funds, and other entities and enterprises of the federal government. - Primary balance of the Federal government defined in accordance with monthly and annual reporting of the “Esquema IMIG”: total revenues minus primary spending; revenues recorded on a cash basis; exclusions and specific treatment of certain transfers and items described. - Treatment of pension fund assets seized in 2008: value will be spread over time as revenue; amount divided by average life expectancy of contributors at 2018 (20 years); limit on amount to be recognized as revenue shall be 0.4 percent of GDP per year. - Government-funded public-private partnerships treated as traditional public procurements and recorded transparently in budget data on a cash basis. - All primary expenditures directly settled with bonds or other non-cash liabilities will be recorded above-the-line and contribute to a decrease in primary balance, with specified exclusions (certain pension liabilities, ICSID/arbitration arrears, and repayment of liabilities under Plan Gas as determined by Resolution 97/2018). *Source: IMF staff report text provided in the content unit.* ### 12. The Federal government’s primary balance will be measured at each test date as the ### 12. The Federal government’s primary balance will be measured at each test date as the ### Measurement and monitoring of the primary balance - The Federal government’s primary balance will be measured at each test date as the cumulative value starting from the beginning of each calendar year. - Monitoring: All fiscal data needed for program monitoring will be provided to the Fund with a lag of no more than 25 calendar days after the end of each month. ### Floor on Federal Government Spending on Social Assistance Programs — definition and monitoring - Definition: Social spending for the program is computed as the sum of all federal government spending (both recurrent and capital) on a cash basis on the specified social protection programs, including: - Asignación Universal para Protección Social (which includes Asignación Universal por Hijo, Asignación por Embarazo, and Ayuda Escolar Anual). - Asignaciones Familiares Activos (including Asignación Prenatal, por Adopción, por Hijo, por Hijo Discapacitado, por Maternidad, por Matrimonio, por Nacimiento, and Ayuda Escolar Anual). - Asignaciones Familiares Pasivos (including Asignación Prenatal, por Cónyuge, por Hijo, por Hijo Discapacitado, and Ayuda Escolar Anual). - Asignaciones Familiares Sector Público Nacional (including Asignación Prenatal, por Hijo, por Hijo Discapacitado, por Maternidad, and Ayuda Escolar Anual). - Monitoring: Data will be provided to the Fund with a lag of no more than 25 calendar days after the end of each month. - Note: The floor on social spending in end-June 2018 was met using an accrual basis; the TMU has been updated to clarify that going forward this is to be measured on a cash basis. ### Adjustor to the primary balance for social spending - The floor on the primary balance of the federal government (cumulative since the beginning of the year) will be adjusted downward by the amount that expenditures, measured on a cash basis, in the Universal Allowances for Social Protection programs exceed the programmed values defined in Table 2. - The value of the adjustor is capped at: - 14,000 million pesos in 2018, - 37,000 million pesos in 2019, - and the peso equivalent of 0.2 percent of GDP in each successive calendar year. - Table 2 (program baseline) — AR$ millions (cumulative from January 1 of each year): - 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 for external financing projects - The primary balance floor will be adjusted up (down) by the shortfall (excess) in expenditures, measured on a cash basis, financed by disbursements of external project loans by International Financial Institutions and bilateral partners, compared to capital expenditures settled in the budget (Table 3). - The value of the adjustor is capped at: - cumulative 30,000 million pesos in 2018, - 37,000 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. - Table 3 (program baseline) — AR$ millions (cumulative from January 1 of each year): - 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 ### Ceiling on Federal Government Accumulation of Domestic Arrears - Definition: Domestic arrears = floating debt = difference between primary spending recorded on an accrual basis (gasto devengado, from the SIDIF system) and primary spending recorded on a cash basis (base caja, from the Treasury). Excludes intra-public transfers (transferencias figurativas) and includes primary spending for: - personnel (gasto en personal), - acquisition of goods and services (bienes y servicios), - non-professional services (servicios no profesionales), - capital expenditures (bienes de uso), - transfers (transferencias). - Measurement: Arrears are measured daily. The 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. - Monitoring: Daily-frequency data will be provided to the Fund with a lag of no more than 25 calendar days after the end of each month. ### Federal Government Non-Accumulation of External Debt Payments Arrears - Definition of debt: External debt determined by the residency criterion; “debt” means a current, i.e., not contingent, liability created under a contractual arrangement requiring future payments of assets or services. Principal forms include: - Loans (including deposits, bonds, debentures, commercial loans, buyers’ credits, repurchase agreements, official swaps). - Suppliers’ credits. - Leases (debt equals the present value at inception of all lease payments expected during the agreement, excluding payments that cover operation, repair or maintenance). - Definition of external arrears: External debt payment arrears are external debt obligations (principal and interest) falling due after May 30, 2018 that have not been paid, considering contractual grace periods. Arrears, penalties and judicially awarded damages arising from failure to make payment under a contractual obligation that constitutes debt are debt. - Coverage: This performance criterion covers the federal government. It does not cover: - (i) arrears on trade credits, - (ii) arrears on debt subject to renegotiation or restructuring, - (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 will be monitored on a continuous basis. ### Floor on the Change in Non-Borrowed Net International Reserves (NIR) - Definitions: - Non-borrowed NIR of the BCRA = balance of payments concept of NIR = U.S. dollar value of gross official reserves of the BCRA minus gross official liabilities as defined. - Non-U.S. dollar denominated foreign assets and liabilities will be converted into U.S. dollar at the program exchange rates. - Foreign exchange auction: BCRA sells US dollars to banks in exchange for Argentine pesos; allotment based solely on rate proposed; auction weighted average rate, marginal rate, total bid amount, and final allotment are published within one hour after allotment. - Gross official reserves: Defined consistently with BPM6; include (i) monetary claims, (ii) free gold, (iii) holdings of SDRs, (iv) reserve position in the IMF, (v) holdings of fixed income instruments. Excluded: pledged/collateralized/encumbered assets, claims on residents, derivative-related FX claims 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, 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 FX liabilities on a net basis 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. - Measurement: The change in non-borrowed NIR, starting with the end-October 2018 targets, will be measured relative to the stock on September 28, 2018, which stood at US$15.788 billion. - Monitoring: Foreign exchange asset and liability data will be provided to the Fund at daily frequency within one day. ### Adjustors to NIR targets - Adjustor for Multilateral loans: - NIR targets adjusted upward (downward) by the surplus (shortfall) in program loan disbursements from the IMF and other multilateral institutions (the IBRD, IDB and CDB) and grants, relative to the baseline projection reported in Table 4. - Program loan disbursements are external loan disbursements (excluding project financing) from official creditors usable for financing the general government. - Adjustor for FX intervention: - NIR targets adjusted downward by the total amount of U.S. dollars sold via foreign exchange auctions executed per the intervention rule. - Definition of intervention: official foreign currency sales and purchases implemented only by the BCRA; state-owned banks not allowed to engage in official FX sales on behalf of the government. - Exchange rate for intervention: AR$/US$ rate of the Mercado Abierto Electrónico (MAE) (see BCRA Communication A3500). - Intervention rule: - BCRA may sell U.S. dollars only if the peso depreciates beyond the rate of 44 pesos per U.S. dollar. - BCRA may buy U.S. dollars only if the peso appreciates below the rate of 34 pesos per U.S. dollar. - The limits above will be increased each calendar day by 0.10 percent until the end of 2018. - Starting in 2019 and until end-March 2019, the limits will be adjusted daily by a 2 percent monthly growth. - Beyond these limits, the BCRA could decide (but is not obligated) to sell or buy up to US$150 million per day as long as the exchange rate remains outside this band. - All foreign exchange sales and purchases are expected to be unsterilized: decrease (increase) in NIR matched by a decrease (increase) in the monetary base equal to the peso equivalent of the foreign exchange sales, with the stock of sterilization instruments remaining unchanged. - Monitoring: Daily data on the amount and rate of transactions between the BCRA and each counterparty will be provided to the Fund at the end of each day. - Adjustor for FX debt issuance: - NIR targets adjusted upward by the surplus in total amount of proceeds from gross issuances of FX-denominated debt, relative to the baseline projection reported in Table 5. - Monitoring: Data on debt issuances and rollovers, by currency and counterparty, will be provided to the Fund after each issuance, with a lag of no more than two days. - Table 4. Argentina: External Program Disbursements (Baseline Projection) — Cumulative flows from end-September 2018 (In millions of US$): - 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 - end-April 2019: 24,412 - end-May 2019: 24,412 - end-June 2019: 29,884 - Budget support loans from other multilateral sources: - end-October 2018: 0 - end-November 2018: 950 - end-December 2018: 1,550 - end-January 2019: 1,550 - end-February 2019: 1,550 - end-March 2019: 1,550 - end-April 2019: 1,550 - end-May 2019: 1,550 - end-June 2019: 2,950 - Table 5. Argentina: Proceeds from FX Debt Issuances (Baseline Projection) — cumulative flows from end-September 2018 (In millions of US$): - end-October 2018: 1,310 - end-November 2018: 2,975 - end-December 2018: 5,001 - end-January 2019: 5,805 - end-February 2019: 6,770 - end-March 2019: 8,063 - end-April 2019: 9,716 - end-May 2019: 11,368 - end-June 2019: 13,021 ### Ceiling on the Change in the BCRA’s Stock of Non-Deliverable Forwards (NDF) - Definition: Stock of NDF = sum of the U.S. dollar notional value of all contracts entered by the BCRA involving the Argentinian peso, directly or through any financial agent. - Monitoring: Daily data 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 measured 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 at each test date (end-March 2019, with indicative targets in end-January 2019 and end-February 2019) relative to the stock on September 28, 2018 (US$3.6 billion). - Table — cumulative flows from end-September 2018 (In millions of US$): - end-October 2018: 1,310 - end-November 2018: 2,975 - end-December 2018: 5,001 - end-January 2019: 5,805 - end-February 2019: 6,770 - end-March 2019: 8,063 - end-April 2019: 9,716 - end-May 2019: 11,368 - end-June 2019: 13,021 ### Continuous stop to BCRA’s financing of the government - Definitions: BCRA financing to the government includes overdraft transfers from the BCRA to the Federal Government (line Adelantos Transitorios), advance distribution of unrealized profits, and acquisition of government debt on the primary market or by purchase from public institutions. - Commitment: 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 is monitored continuously. ### Ceiling on the Change in the BCRA’s Net Domestic Assets (NDA) - Definitions: - NDA = difference between base money and non-borrowed NIR measured at program exchange rates. - Base money = banknotes and coins issued by the BCRA + banks’ accounts at the BCRA denominated in pesos. - Reserve requirement = 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 are considered part of a sterilization security holding requirement, different from the reserve requirement. - Application: Ceiling applies to the monthly average of NDA. The change is calculated with respect to the average stock of NDA during the month of September 2018 which was AR$557 billion. - Monitoring: Data provided monthly with a lag of no more than 10 days. - Adjustor for Multilateral loans: NDA targets 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) usable for financing the general government. - Clarification: All foreign exchange sales and purchases are expected to be unsterilized, meaning 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, 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 - Definition: BCRA credit to the government = stock of government securities held by the BCRA (line Títulos Públicos) + overdraft transfers from the BCRA to the Federal Government (line Adelantos Transitorios). - Any decrease in the claim shall reflect cash payments in pesos by the Treasury to the BCRA; variation in the value of the claim due to exchange rate changes or accounting practices are excluded. *Source: https://www.imf.org/-/media/files/publications/cr/2018/cr18374.pdf* ### 32. Monitoring. Daily data will be provided to the Fund within two days. ### 32. Monitoring. Daily data will be provided to the Fund within two days. ### Monitoring requirements and timelines - Daily data will be provided to the Fund within two days. - For spot and deliverable foreign currency sales: daily data will be provided to the Fund at the end of each day. - Quarterly 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. ### Quantitative indicative targets — measurement base and variables - 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. - Cumulative Floor on Primary Balance of the General Government: - Definition: The general government is defined as the federal government plus the aggregate position of the provincial governments (the 23 provinces plus the Autonomous City of Buenos Aires). - Definition of primary balance: 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. - Provincial expenditures included: wages, goods and services, transfers and subsidies, capital spending and transfers to municipalities from the provincial government. Expenditures of municipalities and municipal revenues are excluded. - Measurement: The result of the provincial governments will be measured from above-the-line, with expenditure defined according to the information provided by the Secretaría de Hacienda. ### Adjustors to the primary balance - Adjustor to the primary balance 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. - Caps: The value of the adjustor would be capped at 14,000 million of pesos in 2018, 37,000 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). - Caps: The value of the adjustor would be capped at cumulative 30,000 million pesos in 2018, 37,000 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. ### 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. ### Spot and forward FX sales - Definitions: Spot and deliverable foreign currency sales can be carried out 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 - A. Daily - 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. - B. Weekly - 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. - C. Monthly - 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 the 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. ### Statement by Staff Representative (selected points) - The statement provides additional information available since the Staff Report (EBS/18/123) circulated on December 11, 2018; the information does not alter the thrust of the staff appraisal. - December domestic debt rollover and market spreads: - The roll-over rate on maturing domestic debt in December remained high although spreads on international law debt have increased. - For Argentina, the EMBIG spread reached 750bps in mid-December and 1-year CDS spreads are above 650bps. - The December 14 maturity of FX LETES (US$1 billion in the hands of the private sector) was 66 percent rolled over by the private sector into a June 2019 maturity, at an interest rate of 4.75 percent. - Reserves and swap line: - On December 17, gross reserves increased by US$8.7bn, reflecting the activation of the augmented BCRA swap with the People’s Bank of China. - The augmentation brings the total amount of freely available resources under the swap to US$18.7 billion. - Gross international reserves moved up to US$58.6 billion. - Monetary policy and liquidity: - LELIQ weighted average rate has been around 59 percent since the floor on LELIQ rates was eliminated on December 5. - LELIQ rates have remained at around 60 percent. - There has been relatively soft demand for LELIQs as banks appear to be building up liquidity buffers to meet their December unremunerated reserve requirement. - Base money has increased in line with the central bank’s targets; the peso remains within the non-intervention zone and authorities are on track to meet their end-December monetary base target. - Inflation and prices: - Headline inflation was 3.2 percent m/m nsa in November. - Core inflation fell from 7.6 percent in September to 2.2 percent in November. - November outcome was slightly above staff forecasts but broadly in line with the October survey of market expectations (3.1 percent median and 3.3 percent average). - On a y/y basis, the CPI rose to 48.5 percent. - 15 percentage points of this increase was accounted for by transportation and utilities reflecting tariff adjustments and pass through of the large peso depreciation. - Supreme Court ruling on pensions: - On December 18, the Supreme Court ruled in favor of pensioneers on a case about the calculation of pension benefits. - The ruling affects between 100,000 and 150,000 people that still have pending judicial claims against the Social Security Agency. - Initial estimates by authorities point to a cost of about 0.2 percent of 2020 GDP (of which about 0.15 is represented by one-off retroactive payments that will begin not before mid-2020). *Source: cr18374 - 32. Monitoring. Daily data will be provided to the Fund within two days.* --- _Source: https://www.imf.org/-/media/files/publications/cr/2018/cr18374.pdf_