## _cr05236 ## Source details **Canonical URL:** [_cr05236](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2005/_cr05236.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2005/_cr05236.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2005/_cr05236.pdf.json) --- ### Background and recovery - Since the last Article IV consultation in January 2003, Argentina recovered strongly from the late-2001 financial crisis. - Real GDP growth: - Real GDP grew by almost 9 percent in both 2003 and 2004. - Domestic demand and labor: - Private consumption and investment rebounded strongly from early 2003. - Real wages supported by investment turnaround. - External sector and exchange rate: - Terms of trade improved by 10 percent during 2002–04. - Currency experienced an almost 300 percent nominal depreciation. - Real exchange rate remained highly depreciated; real effective exchange rate by end-2004 still over 50 percent below its pre-crisis average. - Nominal bilateral exchange rate against the dollar remained within a 7 percent range since Q1 2003. - Inflation: - Spike in 2002; 3¾ percent in 2003 and 6 percent in 2004. - Consumer prices rose by 4.5 percent during the first four months of 2005, annual rate 8.8 percent in April 2005. - Social indicators: - Unemployment fell to about 13 percent in March 2005 from 17.8 percent in December 2002; additional 4.1 percent of labor force employed under emergency social assistance. - Extreme poverty fell to 17 percent in June 2004 (from 24.8 percent two years earlier). - Poverty declined from a peak of 58 percent to 44 percent in June 2004. ### External financing, reserves, trade balance, and capital flows - International reserves and trade: - Trade surplus estimated US$2.3 billion in Q1, 2005. - Gross international reserves rose to nearly US$22 billion; gross reserves increased over US$2.2 billion so far in 2005 despite large IFI payments. - Net reserves about US$4.8 billion under program definition (Tables 4 and 5). - External payments and arrears: - Nonpayment to private and official bilateral creditors resulted in arrears of about US$40–45 billion during 2002–04. - Export performance: - Export volume categories (selected series from Table 1): Total exports: 2.7, 4.3, 0.7, 5.0, 6.6. - Primary products: 5.3, 16.0, -11.6, 5.9, -1.4. - Agro-industry: -4.5, -6.6, 14.9, 9.4, 9.9. - Manufactures: 14.3, 4.6, -4.6, 3.0, 15.0. - Fuels: -6.3, 15.9, 1.5, -6.9, -7.2. - Competitiveness and constraints: - Current value of the Argentine Peso judged competitive; may be somewhat undervalued. - Constraints on export response: poor harvests, export taxes, constrained financing from banking crisis, government actions affecting energy exports. ### Debt, debt exchange, and IFI relations - IMF exposure and payments: - Fund increased exposure by almost SDR 8 billion during 2000–01; two arrangements in 2003 maintained exposure broadly unchanged. - Argentina made net principal payments to the Fund of SDR 2.4 billion (about US$3.7 billion) and paid charges of SDR 0.9 billion (about US$1.3 billion) since failure to complete the third review. - Debt exchange (launched January 14, 2005): - Proposed exchange of US$82 billion of eligible claims for par, quasi-par, and discount bonds plus detachable GDP-linked warrant. - At offer valuation of 32 cents per US$ principal, implied NPV reduction around 75 percent (discount rate 10 percent). - Exchange closed February 25 with participation 76.15 percent; authorities announced US$24 billion tendered domestically and US$38 billion from abroad. - Residual principal in default about US$20 billion and estimated past due interest US$6–7 billion as of May 2005. - Impact on debt metrics: - Federal government debt announced to decline from 148 percent of GDP in December 2002 to 72 percent in April 2005 (this excludes debt in default amounting to around 15 percent of GDP including past due interest). - Exchange increased share of federal government debt denominated in pesos to 37 percent (up from 3 percent pre-restructuring). - Litigation: - Around 30 pending ICSID cases; mid-May ICSID award of US$133 million plus interest to a shareholder in a gas transportation company. ### Fiscal developments, targets, and projections - Fiscal outturns and targets: - 2004 consolidated primary surplus: 5.1 percent of GDP. - Revenues rose to 29 percent of GDP in 2004 from 26 percent in 2003. - High reliance on distortive taxes: export and financial transactions taxes account for some 4 percent of GDP of revenues. - Approved 2005 consolidated primary surplus target: 3.8 percent of GDP (cash basis). - Federal primary surplus in Q1 2005: 0.8 percent of annual GDP (overperformance of 0.2 percent of GDP). - Authorities' 2005 financing projections (National Treasury) — key figures (US$ mn %GDP): - Financing needs: 14,621 8.5 - Interest: 3,255 1.9 - Amortization: 9,644 5.6 - Of which: IMF: 3,646 2.1 - Other financing needs: 1,722 1.0 - Financing sources: 3,018 1.8 - IDB: 148 0.1 - Central bank advances: 411 0.2 - Domestic debt placement: 365 0.2 - Other public sector sources: 2,093 1.2 - Use of deposits: 1,007 0.6 - Primary surplus: 4,855 2.8 - Financing gap: 6,748 3.9 - Note: Projections refer to the National Treasury. - Staff view on fiscal stance: - 3.8 percent of GDP target is well below 2004 outcome and represents a significant loosening; staff projected a consolidated primary surplus of at least 4½ percent of GDP would be needed in 2005. - Staff proposed expenditure savings examples: reduction in government subsidies (0.7 percent of GDP) and prioritization of capital spending (projected to increase by 53 percent year-on-year in 2005). ### Monetary policy, exchange rate policy, and foreign exchange intervention - Monetary tightening and interest rates: - Since January 2005 central bank increased policy rates three times by a total of 125 bps; repo rate at 3.75 percent. - BCRA increased interest rates on short-term Lebacs from very low levels. - Foreign exchange intervention: - Renewed interventions in April and May increased base money by 9 percent in April year-on-year. - Banco Nacion made significant dollar purchases on behalf of the government in first four months of 2005. - Peso traded in narrow range Arg$2.9–3.0 per U.S. dollar. - Capital control on inward investment extended from 180 to 365 days to contain speculative inflows. - Central bank vs. staff views: - Authorities expect to meet central bank’s inflation target range of 5–8 percent under current policies. - Staff believe meeting the target would require immediate tightening; absent tightening, staff expect inflation would likely reach double digits during 2005. - Staff recommended focusing on price stability, faster reduction of base money to lower band of target, greater nominal exchange rate flexibility, and moving toward inflation targeting. ### Banking sector: profitability, vulnerabilities, and recapitalization - Profitability and deposits: - Bank losses fell to Arg$0.5 billion in 2004 (from Arg$5.4 billion in 2003). - Private sector credit grew briskly from a low base; private sector deposits grew but slower than government deposits at public banks. - Legacy issues and policy priorities: - Pending compensation for asymmetric pesoization and indexation not fully completed. - Banks face losses from amparos despite Supreme Court decisions; many banks remain undercapitalized. - Staff priorities: complete compensation payments; remove regulatory forbearance; increase bank capitalization; clarify legal status of amparos. - Compensation status: - Authorities completed Arg$16 billion out of Arg$18 billion for asymmetric pesoization losses; BCRA still discussing estimated Arg$10 billion for pesoization of assets governed by foreign law. - Public banks: - Strategic review for Banco Provincia completed; review for Banco Nación underway. - Staff recommended the government urgently articulate strategy for future operations of public banks. ### Regulated utilities, concessions, and regulatory reform - Renegotiations and status: - Agreements reached with selected electricity, highway, port, and freight rail concessions; only 14 of 63 major contracts renegotiated overall. - Many long-term agreements remain unresolved; government reluctance to accept tariff increases for consumers central to disputes. - Draft public services law shortcomings: - Fails to establish predictable tariff updating; gives excessive scope to request tariff reductions; denies concessionaires right to international arbitration; prevents disconnection of nonpaying customers. - Staff recommendations: - Re-establish credible time-bound program for renegotiation with clear path for tariff adjustments. - Amend regulatory framework to balance consumer protection and investment incentives; implement transparent, targeted social tariff scheme. - International arbitration: - Significant claims pending; staff suggested early agreements with concessionaires to reduce risks and encourage withdrawal of claims. ### Structural reforms, intergovernmental fiscal relations, and tax distortions - Key vulnerabilities identified by staff: - (i) institutional structure for intergovernmental relations; (ii) distortionary taxes; (iii) lack of banking capital; (iv) weak investment environment with disputes in public services; (v) need for very large energy investments; (vi) large outstanding arrears to private creditors. - Fiscal Responsibility Law (FRL) concerns and staff recommendations: - Staff view FRL has weaknesses: fails to constrain subnational spending/borrowing, lacks specification of federal financing circumstances, and allows provinces to pledge coparticipation receipts. - Short-term proposal: widen Federal Council charter to strengthen macro-fiscal coordination and remedial authority. - Tax system distortions: - Export and financial transaction taxes comprise about 18 percent of federally collected revenues and directly support the federal budget (not shared with provinces). - Staff recommendation: phase out these taxes in a revenue-neutral way to deepen capital markets and increase export competitiveness. - FAD technical assistance (2003) recommended eliminate unwarranted income and VAT exemptions, align excises regionally, include excises in VAT base, and strengthen social security/real estate tax collection. - Authorities' stance: - Agreed on phasing out some taxes (especially financial transactions tax) but argued substituting taxes politically difficult; considered staff recommendations infeasible in the short term. ### Macroeconomic outlook, staff scenarios, and risks - Growth and inflation outlook (2005): - Growth: expected to decelerate to 6–7 percent in 2005 as capacity constraints are reached; Q1 2005 growth estimated about 9 percent year-on-year. - Inflation: authorities expect 5–8 percent target; staff expect double digits in 2005 absent immediate tightening. - Staff scenarios (key features): - Authorities' Scenario A: growth averages 3 percent medium-term; assumes IFI exposure maintained through 2014; federal primary surplus near-term 2¾ percent; debt-to-GDP declines from 79 percent in 2005 to 50 percent by 2014 and 40 percent by 2020. - Staff No-reform Scenario B: average medium-term growth closer to 2 percent; debt ratio remains around 70 percent of GDP over medium term; implied rollover rates unsustainable. - Staff Reform Scenario C: assumes consolidated primary surpluses reaching 4.5 percent of GDP next few years; sustainability achieved over medium term but near-term gross debt obligations average about 8 percent of GDP during 2005–08 and required private debt rollover rates exceed feasible levels. - Scenario D (central bank repurchases from reserves): repurchases from central bank international reserves significantly lower required market issuances, debt-to-GDP falls to 40 percent by 2016, required private sector rollover rate about 34 percent — achievable under projections; institutional change and charter amendment may be necessary. - Sensitivities and stresses: - A 1 percentage point reduction in growth in staff scenarios (C and D) implies four additional years for debt-to-GDP to decline below 50 percent. - A permanent 1 percentage point reduction in growth from 2006 would increase the 2030 debt ratio by 17 percentage points. - A 10 percent more appreciated real exchange rate would reduce the debt ratio by 8 percentage points by 2030. - Stress-test examples (federal government debt, staff scenario C baseline series shown): - Baseline federal debt series (selected): 78.2, 85.4, 93.4, 88.0, 83.8, 80.3. - Shock: Real GDP growth at historical average minus two standard deviations in 2006–2007 produces series: 78.2, 88.5, 105.4, 107.0, 109.7, 113.1. - Shock: One-time 30 percent real depreciation in 2006 produces series: 78.2, 96.4, 90.3, 85.0, 80.9, 77.5. ### Debt sustainability quantitative highlights (selected exact figures preserved) - Selected DSA items (from Annex and summary tables): - Consolidated primary surplus (percent of GDP) example series: 3.7 3.3 2.3 3.7 3.3 2.3 4.4 3.5 2.8 4.4 3.5 2.8. - Debt-to-GDP (percent of GDP) example series: 71 54 37 73 68 72 70 52 31 70 50 27. - Real GDP growth (percent) example series: 4.2 3.0 3.0 3.5 2.0 2.0 4.2 3.0 3.0 4.2 3.0 3.0. - Interest rate on new dollar market borrowing (percent) examples: 9.0 9.0 9.0 10.0 10.0 10.0 9.0 9.0 9.0 9.0 9.0 9.0. - NPV of debt stock at end-2005 by discount rate (percent of GDP): Discount rate 8 percent: NPV 70; 9 percent: NPV 65; 10 percent: NPV 61; 11 percent: NPV 58; 12 percent: NPV 55. - Under authorities’ DSA (Scenario A) federal debt projected to decline from 79 percent of GDP end-2005 to 60 percent by 2010 and 30 percent by 2030. - Under staff reform scenario (C) debt-to-GDP reaches 60 percent in 2009 (one year earlier than authorities’ scenario) and is 11 percentage points lower at end of projection than authorities’ baseline. - New market borrowing under authorities’ scenario (2005–2008): 1¾ percent of GDP (US$3.2 billion). - Additional market borrowing under staff scenario (C) relative to authorities: almost US$2 billion (2005–08). ### Social policy response and program (PJD) — key facts - Unemployed Heads of Household program (PJD): - Monthly transfer Arg$150 to unemployed heads of household with children under 18 for participation in training/community activities. - Program cost: ¾ to 1 percent of GDP per year over last 3 years. - Coverage: about 1.6 million beneficiaries (around 20 percent below May 2003 peak). - Targeting: 75 percent of beneficiaries below the 40th income percentile; 8 percent of recipients in the richest 40 percent. - World Bank assessment broadly supportive; recommends progressive transformation, strengthened monitoring/controls, and a gradual exit strategy. - Social outcomes since 2003: - About 3.5 million Argentines moved out of poverty; almost 4 million out of extreme poverty. - Heads of Household Program beneficiaries declined to 1.5 million in February 2005 from 2.1 million at end-2002. - Authorities’ medium-term social policy intentions: - Replace emergency social program with training programs and a narrowly defined unemployment subsidy. - Strengthen unemployment insurance; target education spending goal of 6 percent of GDP by 2015 (from about 4 percent in 2004). - Minimum pension and wage measures in 2005: - Minimum pension increased by Arg$48 to Arg$350 per month effective June 1, 2005; estimated annual cost 0.3 percent of GDP. - Minimum wage increased from Arg$450 to Arg$630 per month, phased through July 2005; estimated beneficiaries 900,000 private sector and 130,000 public sector workers; preliminary fiscal impact on federal budget almost neutral. ### Key balance-sheet, flow, and table highlights (selected exact figures) - National income and prices (selected series): - GDP at constant prices: -4.4 (2001), -10.9 (2002), 8.8 (2003), 9.0 (2004), 6.2 (2005), 3.8 (2006), 3.6 (2007). - Consumer prices (average): -1.1, 25.9, 13.4, 4.4, 9.0, 8.4, 7.5. - Consumer prices (end-of-period): -1.5, 41.0, 3.7, 6.1, 10.0, 8.0, 7.0. - External sector (levels in US$, billions): - Trade balance: 6.2 (2001), 16.7 (2002), 15.7 (2003), 12.1 (2004), 9.7 (2005), 7.0 (2006), 6.3 (2007). - Exports, f.o.b.: 26.5, 25.7, 29.6, 34.5, 37.0, 38.2, 39.6. - Imports, c.i.f.: 20.3, 9.0, 13.8, 22.3, 27.3, 31.2, 33.3. - Money and credit (selected): - Credit to private sector: -20.2, -12.8, -15.5, 15.4, 18.0, 16.3, 13.1. - Augmented base money: -3.0, 152.9, 26.3, 12.7, 2.2, 5.5, 6.3. - Interest rate (30-day deposit rate, percent): 15.7, 39.1, 3.9, 2.9. - Consolidated public sector (percent of GDP): - Primary balance (selected years): -1.3 (2001), 0.6 (2002), 3.0 (2003), 5.1 (2004), 3.8 (2005 target). - Revenues: 23.7, 23.0, 25.9, 28.9, 28.6 (2005 auth). - Expenditures: 29.6, 24.8, 24.8, 25.1, 26.6 (2005 auth). - External financing requirements and sources (Table 2, US$ billions, 2001–2005): - Gross financing requirements (total): 41.5 (2001), 23.4 (2002), 23.8 (2003), 20.4 (2004), 13.5 (2005). - Capital outflows: 37.6, 32.0, 31.2, 23.4, 15.1. - Available financing (total): 41.5, 23.4, 23.8, 20.4, 13.4. - Exceptional financing, arrears: 0.0, 12.5, 14.4, 15.3, 5.8. - Net debt service to IFIs (Table 4, US$ millions): - IMF net debt service (C. Net debt service (A-B)): -8,960 (2001), 1,346 (2002), 815 (2003), 2,605 (2004), 4,183 (2005), 2,028 (2006). - World Bank net debt service (C.): 606, 721, 1,385, 293, 686, 333 (2001–2006 series). - IDB net debt service (C.): -742, 938, 244, 579, 804, 399 (2001–2006 series). - Gross international reserves (US$ billions): 14.9 (2001), 10.5 (2002), 14.1 (2003), 19.6 (2004), 20.7 (2005), 22.1 (2006), 20.3 (2007). - Total debt (US$ billions, year-end): 167.0 (2001), 152.6 (2002), 184.8 (2003), 201.4 (2004). - Total debt (year-end, percent of GDP): 62.2, 164.2, 144.5, 133.9 (2001–2004). ### Staff appraisal, recommendations, and Executive Board emphasis - Staff summary: - Argentina emerged from an extraordinarily difficult period with political, social, and financial stability; two years of remarkable growth continuing into 2005. - Main near-term risk: inflation not contained, with potential wage-price spiral weakening competitiveness and hampering smooth deceleration of growth. - Fiscal policy recommendations: - Raise primary surplus-to-GDP ratio significantly closer to 2004 level and at least to 4.5 percent of GDP in 2005. - Prioritize capital spending and review rapidly rising and poorly targeted current subsidies. - Monetary policy recommendations: - Additional tightening likely needed; adjust base money down quickly; moderate foreign exchange intervention; possibly further rise in interest rates. - Clarify prime objective of monetary policy as price stability and ensure central bank operational autonomy. - Structural and institutional reforms urged: - Strengthen FRL comprehensively; overhaul revenue-sharing; phase out distortionary taxes on exports and financial transactions in revenue-neutral way; strengthen banking capital base; ensure adequate private investment in public services. - Executive Board and Directors: - Acknowledged strong recovery but stressed need for tightening fiscal and monetary policies in 2005 to contain inflation and for structural reforms to sustain medium-term growth. - Some Directors cautioned against capital controls; urged strict application of prudential banking standards and clarified central bank objectives. *Italic: Source—_cr05236 (excerpts from the IMF staff report).* ### 1. Selected Economic and Financial Indicators ...............................................................38 ### 1. Selected Economic and Financial Indicators ### Background - Since the last Article IV consultation in January 2003, Argentina has recovered strongly from the financial crisis that erupted in late 2001. - After 2½ years of vigorous growth, real output has reached the peak level achieved prior to the crisis; labor market conditions are improving; financial markets are stable; inroads have been made in reducing poverty; and the authorities have made important progress toward normalizing relations with creditors. - The 2005 Article IV consultation focuses on Argentina’s emergence from crisis and the policy choices to complete this process, with emphasis on factors underlying the recovery, key vulnerabilities, and structural reform priorities to sustain medium-term growth. - Argentina’s long-term record of economic growth has lagged behind most comparators (Text Figure). ### The Recovery Phase — key findings - Real GDP growth: - Real GDP grew by almost 9 percent in both 2003 and 2004. - More than 2 years of strong growth returned real GDP close to its pre-crisis level. - Domestic demand and components: - Private consumption and investment rebounded strongly from early 2003. - Investment experienced a strong turnaround, supporting gradual recovery in private real wages. - External sector and exchange rate: - Export receipts increased initially reflecting higher commodity prices; export volumes responded only slowly to the large depreciation. - Imports grew but remained below pre-crisis levels. - The real exchange rate remained at a highly depreciated level despite recovery in other areas. - The nominal bilateral exchange rate against the dollar remained within a 7 percent range since the first quarter of 2003. - The terms of trade improved by 10 percent during 2002–04. - The currency experienced an almost 300 percent nominal depreciation. - Inflation: - Inflation spiked in 2002 but remained moderate thereafter: 3¾ percent in 2003 and 6 percent in 2004. - A freeze on public service prices contributed to moderating inflation. - Financial and policy environment: - International reserves began to recover; bank deposit and external payments restrictions were progressively dismantled. - Robust recovery in money demand was a key aspect of the recovery. - Fiscal and monetary policies were implemented firmly, stabilizing financial markets and allowing a steady reduction of interest rates. - Social indicators: - Headline unemployment fell to about 13 percent in March 2005 from 17.8 percent in December 2002, though an additional 4.1 percent of the labor force was employed under emergency social assistance programs. - Share of population living in extreme poverty fell to 17 percent in June 2004 (from 24.8 percent two years earlier). - Share of population below the poverty line declined from a peak of 58 percent to 44 percent in June 2004. ### Cross-Country Comparison of Recoveries from Capital Account Crises (Box 1) — comparative findings - Common patterns across crises (Brazil, Korea, Russia, Thailand, Turkey, Uruguay, Argentina) include: - Large exchange rate depreciations in nominal and real effective terms; Argentina’s real effective exchange rate depreciation proved more persistent (by end-2004 still over 50 percent below its pre-crisis average). - Sharp drop in real GDP after the crisis followed by a rebound; Argentina’s initial drop was similar to Korea, Thailand, and Turkey, but its recovery was somewhat slower than those countries (except Thailand). - Sizeable current account corrections via import contraction; Argentina exhibited sluggish export volume growth despite large real depreciation and favorable terms of trade, reflecting lower openness, concentration on commodity/agricultural exports, and distortions from export taxes. - Large fiscal consolidations were required in most countries after crises. - Banking crises often accompanied currency crises due to unhedged foreign exchange exposures. - Inflation behaved differently across cases; in Argentina, inflation remained moderate after the 2002 spike despite the large nominal depreciation. - Argentina’s recovery benefited from strong terms of trade, underscoring the need for structural reforms to provide a firmer foundation for sustained macroeconomic stability and competitiveness. ### External financing, debt, and arrears — key figures - IMF involvement and payments: - After increasing exposure by almost SDR 8 billion during 2000–01, the Fund approved two arrangements in 2003 to maintain exposure broadly unchanged. - Since failure to complete the third review of the three-year Stand-By Arrangement, Argentina has made net principal payments to the Fund of SDR 2.4 billion (about US$3.7 billion) and paid charges of SDR 0.9 billion (about US$1.3 billion). - Other IFIs and creditors: - Net debt service to the World Bank and IDB amounted to US$3.1 billion since 2003. - Nonpayment to private and official bilateral creditors resulted in an accumulation of arrears of about US$40–45 billion during 2002–04, providing significant breathing room. ### Social policy response — PJD and related indicators (Box 2) - Pre-crisis trends: - Unemployment rose from 6.3 percent in 1992 to 18.3 percent in 2001. - Percentage below the official poverty line rose from 19.9 percent to 38.8 percent prior to the crisis. - Crisis impact: - Poverty peaked at 58 percent of the population and extreme poverty doubled during 2001–02. - Real household incomes contracted by 31 percent during the crisis. - Policy response — Unemployed Heads of Household program (PJD): - Provides a monthly transfer of Arg$150 to unemployed heads of household with children under 18 years in exchange for participation in training or community development activities. - Program cost: ¾ to 1 percent of GDP per year over the last 3 years. - Program coverage: serves some 1.6 million beneficiaries (around 20 percent below the peak in May 2003). - Targeting and assessment: 75 percent of beneficiaries are below the 40th income percentile; 8 percent of program recipients are in the richest 40 percent of the population. The World Bank assessment is broadly supportive and recommends progressive transformation, strengthened monitoring and controls, and a gradual exit strategy to transfer beneficiaries to other social programs while expanding training and job search support. ### Recent political and macroeconomic developments (as of early 2005) - Political: - President Kirchner retained high popularity ratings two years after election, benefiting from a tough line with foreign investors and multilateral institutions on several policy issues. - Political focus moving toward congressional elections in October 2005 and positioning for the 2007 presidential nomination. - Macroeconomic developments in early 2005: - Growth continued to be strong in the first quarter, estimated at about 9 percent year-on-year. - Consumer and business confidence indicators remained at very high levels. - Inflation accelerated amid rising demand, tighter capacity constraints, growing wage pressures and monetary accommodation: - Consumer prices rose by 4.5 percent during the first four months of 2005, bringing the annual inflation rate to 8.8 percent in April. *Source: _cr05236 - 1. Selected Economic and Financial Indicators (excerpts) from the IMF staff report.* ### 9. A strong trade balance and a significant reduction in private capital outflows ### 9. A strong trade balance and a significant reduction in private capital outflows ### International reserves, trade balance, and capital flows - A sharp rise in international reserves has been facilitated by a strong trade balance and a significant reduction in private capital outflows (Table 3 and Box 3). - Trade surplus: an estimated US$2.3 billion in Q1, 2005. - Export volume growth has begun to pick up and commodity prices generally remain favorable. - There has been a decline in private sector capital outflows and some incipient signs of recovery in net foreign direct investment. - Despite large net debt service payments to the IFIs, gross reserves have increased to nearly US$22 billion and net reserves are about US$4.8 billion under the program definition (Tables 4 and 5). - Gross international reserves have risen over US$2.2 billion so far in 2005 despite large payments to IFIs (in US$ billions). ### Export performance and competitiveness (Box 3) - Currency and real effective exchange rate: - The correction after the early 2002 floating placed the Argentine peso in a range broadly consistent with other currencies in the region. - The correction in the Argentine Peso is currently at 50 percent of its peak prior to the devaluation of the Brazilian Real; the Real and Uruguayan Peso are at 60 and 70 percent of their pre-crisis peaks respectively. - Since early 2004 the BCRA has actively intervened to maintain a stable nominal exchange rate, while both the Uruguayan Peso and Real have appreciated against the dollar. - Conclusion: the current value of the Argentine Peso is competitive, and may even be somewhat undervalued. - Factors constraining export response: - Poor harvests contributed to negative volume growth on average for 2002–04 for primary products (Table 1). - Export taxes discouraged investment and increases in production. - The banking sector crisis may have constrained financing for investment, particularly for smaller producers dependent on domestic finance. - Government actions to secure domestic energy supplies contributed to negative volume growth for energy exports, despite increases in international prices over this period. - Export volume performance by category (Table 1): - Total exports: 2.7, 4.3, 0.7, 5.0, 6.6 (periods shown in table). - Primary products: 5.3, 16.0, -11.6, 5.9, -1.4. - Agro-industry: -4.5, -6.6, 14.9, 9.4, 9.9. - Manufactures: 14.3, 4.6, -4.6, 3.0, 15.0. - Fuels: -6.3, 15.9, 1.5, -6.9, -7.2. - Manufactured exports: - Volumes of agro-industrial products grew 11 percent each year on average over 2002–04, with growth of almost 15 percent in 2002. - Volume growth of industrial exports averaged 14.5 percent each quarter from 2003-Q2 to end-2004; preliminary data for 2005 show continuation of this trend. - Export market shares: - Available data show a mixed picture; large increases of market shares in Asia and Chile were largely due to new pipelines for hydrocarbon products (Chile) and increased agricultural exports (Asia), and do not necessarily reflect improved competitiveness. - Policy implication: - Because total exports are still relatively small (23 percent of GDP), sustained and stable contribution of net exports to real GDP growth will depend on continued high volume growth rates. - Measures required include phasing out of export taxes to entrench a supportive climate for exports and investment in the export sector. ### Monetary policy and foreign exchange intervention - Monetary tightening and interest rates: - Since January 2005 the central bank increased policy interest rates on three occasions by a total of 125 bps, bringing the repo rate to 3.75 percent. - The BCRA has increased steadily the interest rates it pays on short-term Lebacs, albeit from very low levels. - Foreign exchange intervention and base money: - Renewed foreign exchange interventions in April and May led to an increase in base money by 9 percent in April year-on-year. - Significant purchases of dollars by Banco Nacion on behalf of the government occurred during the first four months of 2005. - The peso has continued trading in a narrow range of Arg$2.9–3.0 per U.S. dollar. - To contain speculative inflows, the Central Bank extended the existing capital control on inward investment from 180 to 365 days. - Central bank view vs. staff: - The authorities expect to meet the central bank’s inflation target range of 5–8 percent under current policies. - Staff believe meeting the target would require an immediate tightening of macroeconomic policies; absent such tightening, staff expect inflation would likely reach double digits during 2005. ### Banking sector and financial indicators - Banking profitability and deposits: - Bank losses fell to Arg$0.5 billion in 2004 (from Arg$5.4 billion in 2003). - Private sector credit grew briskly (albeit from a low base) and interest rates remained low. - Private sector deposits have grown, though at a slower pace than government deposits held at the public banks. - Central Bank intervention in FX market is rising again (in US$ millions) — charted data indicate rising intervention through Jan-05 to May-05. ### Fiscal policy developments - 2004 fiscal outcome and revenue: - A record 5.1 percent of GDP consolidated primary surplus was achieved in 2004. - Revenues rose to 29 percent of GDP, from 26 percent in 2003. - High reliance on distortive taxes: export and financial transactions taxes account for some 4 percent of GDP of revenues. - Primary surplus would have been higher but for an acceleration in social and capital spending toward the end of the year; end-year expenditures exceeded original budget targets by considerable margins. - 2005 budget target: - Approved budget for 2005 aims for a consolidated primary surplus of 3.8 percent of GDP on a cash basis. - During Q1 2005, the federal primary surplus was 0.8 percent of annual GDP, representing an overperformance of 0.2 percent of GDP compared with the authorities’ program. ### Sovereign debt restructuring (Box 4 and related text) - Debt exchange offer: - Launched January 14, 2005, proposing exchange of US$82 billion of eligible claims for three types of bonds (par, quasi-par, and discount) and a detachable GDP-linked warrant. - At the time of exchange, the offer was valued at 32 cents per US$ of principal claims, implying an NPV reduction (including past due interest) of around 75 percent (using a discount rate of 10 percent). - Congress passed legislation on February 9 prohibiting the executive branch from reopening the current debt offer or reaching private settlements with nonparticipating creditors. - Exchange offer period closed February 25 with a participation level of 76.15 percent. - Authorities announced US$24 billion were tendered within Argentina and US$38 billion from abroad. - Residual principal in default of US$20 billion and estimated past due interest of US$6–7 billion as of May 2005 remain unresolved. - Impact on debt metrics: - Authorities announced federal government debt declined from 148 percent of GDP in December 2002 to 72 percent in April 2005 (this figure does not take account of debt in default amounting to around 15 percent of GDP, including past due interest). - The exchange leaves 37 percent of the federal government debt stock (excluding unrestructured debt in default) denominated in pesos, up from 3 percent before the restructuring. - Settlement status: - Settlement was delayed by court actions seeking attachment of tendered bonds; Court of Appeals ruled in favor of Argentina on May 13, and settlement is now moving ahead. - Remaining litigation: - Around 30 pending cases brought against Argentina by foreign investors, mainly in the utilities sector, under ICSID arbitration rules. - An ICSID tribunal awarded damages in mid-May amounting to US$133 million, plus interest, in favor of a shareholder in an Argentine privatized gas transportation company; the Tribunal found violations related to pesoization and freeze on gas tariffs under the U.S./Argentina bilateral investment treaty. ### Structural reforms and implementation (Box 5 and paragraph 14) - Overall assessment: little progress on structural reforms committed under the SBA-supported program. - Fiscal structural reforms: - Fiscal responsibility law approved in August 2004, but staff believe the law has several weaknesses. - Some progress in modernizing tax administration. - Two tax amnesties were approved despite explicit program commitments to the contrary. - Export tax on oil products increased; export and financial transaction taxes remain significant revenue sources. - Banking reforms: - Compensation payments for asymmetric pesoization and indexation issues are being gradually effected; disputes remain over methodology and amounts. - Strategic review and due diligence of Banco Provincia completed; no progress on the largest public bank. - Utility sector reform: - Regulatory framework draft law submitted to congress contains important shortcomings. - Wholesale gas and electricity prices have only been partially adjusted. - Difficulties persist in reaching long-term agreements with concessionaires, particularly in electricity, gas, and water sectors (only 14 contracts of 63 have been renegotiated). - Government reluctance to accept tariff increases for consumers. - Debt restructuring process shortcomings: - Negotiations with private creditors were largely unconstructive; authorities did not take some precautions recommended in the March 2004 Letter of Intent to avoid a piecemeal approach. - Recent legislation prohibiting reopening of the exchange by the executive branch could hinder resolution of remaining arrears. ### Macroeconomic outlook and risks (Section IV) - Staff and authorities broadly agree on 2005 macro outlook, but differ on inflation prospects: - Growth: - Expected to decelerate to 6–7 percent in 2005 as capacity constraints are reached. - There is upward potential given high carryover from 2004; authorities note strong consumption, rising export volumes, and recent investments in machinery and equipment. - Inflation: - Authorities expect to meet central bank target range of 5–8 percent under current policies. - Staff view: meeting the target would require immediate policy tightening; absent that, inflation would likely reach double digits during 2005. - External position: - External position expected to remain strong; further accumulation of international reserves may be possible in 2005. - Not assured: current account surplus expected to gradually decline due to higher imports and interest payments; scheduled IFI amortization payments are substantial for the remainder of the year. - Main near-term risk: - Inflation not contained, with potential for a wage-price spiral that could weaken competitiveness and undermine a smooth deceleration from recent high growth rates. - Capacity constraints notably in energy and manufacturing sectors heighten this risk. - Medium-term outlook: - With appropriate policy framework, growth could potentially average 3 percent, with inflation gradually declining, and the real exchange rate appreciating (Table 12). - Staff emphasize that achieving the baseline growth forecast requires a sizable contribution from private investment, including foreign sources, which is unlikely under current policies. - Staff identify significant policy differences and risks underlying the medium-term scenario. *Source: _cr05236 - 9. A strong trade balance and a significant reduction in private capital outflows* ### Section VI below) are: (i) macroeconomic stability could be undermined by lack of progress ### _cr05236 - Section VI below) are: (i) macroeconomic stability could be undermined by lack of progress ### Risks to Growth and Key Vulnerabilities - Identified risks if reforms do not progress: - (i) macroeconomic stability could be undermined by lack of progress in institutional structural reforms, especially in the area of intergovernmental relations. - (ii) competitiveness could be weakened without productivity-enhancing structural reforms, necessary tax policy changes, and a strengthening of the financial system. - (iii) investor confidence could be undermined by concerns over the business environment, legal uncertainty, and state intervention. - (iv) capacity constraints could develop in certain sectors, particularly in the energy sector if there is insufficient private sector investment in gas and electricity distribution and generation. - Staff warned that without adequate policies, growth could decline over the next few years to return to the low levels associated with Argentina’s past history. - Authorities claimed investment remained buoyant and dismissed imminent energy shortages while acknowledging the need for substantial new investment. ### Authorities' Financing Projections for 2005 (National Treasury) — key figures (US$ mn %GDP) - Financing needs: 14,621 8.5 - Interest: 3,255 1.9 - Amortization: 9,644 5.6 - Of which: IMF: 3,646 2.1 - Other financing needs: 1,722 1.0 - Financing sources: 3,018 1.8 - IDB: 148 0.1 - Central bank advances: 411 0.2 - Domestic debt placement: 365 0.2 - Other public sector sources: 2,093 1.2 - Use of deposits: 1,007 0.6 - Primary surplus: 4,855 2.8 - Financing gap: 6,748 3.9 - Note: Projections refer to the National Treasury. ### Fiscal Policy Issues and Targets - Authorities’ 2005 consolidated public sector primary surplus target: 3.8 percent of GDP. - Staff view: - 3.8 percent of GDP is well below the 2004 outcome and represents a significant loosening of the fiscal stance. - In absence of significant overperformance, the budget would be procyclical, add to inflationary concerns, and create a financing gap that could impede meeting post-restructuring debt service obligations. - Authorities’ stance: - Reluctant to commit to any primary surplus beyond the budget target; some overperformance might be possible given early-year tax buoyancy. - No reductions in current or capital expenditures were foreseen; no new spending initiatives before late-October congressional elections. - Authorities estimate before market borrowing (and without Fund disbursements) the financing gap for the remainder of 2005 would be about US$6.7 billion (3.9 percent of GDP). - In authorities’ debt sustainability analysis the 2005 gap would be reduced to US$4.4 billion (2½ percent of GDP) if Fund repurchases were offset by Fund disbursements from June 2005 through the end of the year. - Staff projected a consolidated primary surplus of at least 4½ percent of GDP would be needed in 2005 to ensure government market borrowing requirement would be at a feasible level. - Staff proposed expenditure savings examples: - Reduction in government subsidies (which have increased to 0.7 percent of GDP). - Prioritization of capital spending (projected to increase by 53 percent year-on-year in 2005). - Authorities considered these options not feasible. ### Box 6 — Assessment of Fiscal Policy Stance (selected points and exact figures) - Primary balance evolution: - 2001: primary balance was a deficit of 1.3 percent of GDP. - 2004: primary surplus of 5.1 percent of GDP. - Authorities’ 2005 target: primary balance 3.8 percent of GDP. - Cyclically-adjusted (structural) primary balance pattern mirrors actual primary balance. - If authorities’ targets were realized, cyclically-adjusted fiscal relaxation would be around 2 percent of GDP. - Sensitivity example: If potential output growth in 2005 is 2 percentage points above current estimates, the expansionary fiscal impulse would be 1.6 percent of GDP (rather than 2.1 percent) and the cyclically adjusted primary balance would be 4.3 percent of GDP (rather than 3.8 percent). - Consolidated public sector balances, selected values (in percent of GDP; based on authorities' projections for 2005): - Primary Balance (Avrg.1991-99 / 2000 / 2001 / 2002 / 2003 / 2004 / 2005): 0.1 0.4 -1.3 0.6 3.0 5.1 3.8 - Revenues: 23.3 24.6 23.7 22.9 25.9 28.9 28.6 - Primary spending: 23.2 24.2 25.0 22.3 22.8 23.8 24.9 - Cyclically Adjusted Primary Balance: -0.5 -0.2 -0.6 4.6 5.6 6.0 3.8 - Fiscal impulse 2/: 0.3 -1.6 0.5 -5.1 -0.8 -0.6 2.1 - Revenue impulse: -0.5 -0.3 1.0 0.7 -2.9 -3.0 0.2 - Primary spending impulse: 0.9 -1.4 -0.4 -5.8 2.2 2.4 1.8 - Output gap (in percent) (Memorandum item): 2.8 2.7 -3.1 -14.9 -9.1 -3.1 0.0 - Footnotes: - 1/ Based on authorities' projections for 2005. - 2/ Change in the fiscal stance, defined as the difference between the actual primary and the primary balance calculated under the 1992 tax and expenditure ratios. ### Monetary Policy - Authorities view recent inflation increases as mainly transitory, seasonal, and relative price changes; they believed interest rates had been increased sufficiently and inflation expectations had stabilized. - Staff view: - Balance of inflation risks has moved to the upside; recent inflation appears related to rising demand, higher capacity utilization, and monetary and fiscal stimulus. - Administrative controls and moral suasion would dampen growth and not curb underlying inflationary pressures, risking a subsequent burst of price increases. - Monetary conditions remain very accommodative; further policy tightening would be appropriate. - Key policy rates have lagged increases in inflation expectations and are heavily negative in real terms. - Recommended: bring trajectory of base money down quickly to the lower band of the central bank’s target range. - Concern: increased foreign exchange intervention during April–May 2005 made this task more difficult. - Money multiplier had sharply risen as banks increased lending. - On central bank credibility: - Staff cautioned that insufficient clarity on monetary policy objectives could damage credibility. - Recent foreign exchange purchases appeared driven by avoiding nominal exchange rate appreciation, risking inflation target achievement. - Staff recommended focusing on price stability and moving toward an inflation targeting framework as envisaged under the SBA-supported program. - Authorities: reviewing appropriateness of inflation targeting institutionally; affirmed inflation control would be the prime objective. Authorities do not have an implicit exchange rate or reserve accumulation target but intend to build reserves when foreign exchange inflows are seasonally strong. - Note: Under current practice, the BCRA onlends Fund financing to the federal government in domestic currency with the same maturity profile. ### Exchange Rate Policy - Authorities view maintaining a competitive exchange rate as central to development strategy and expect real exchange rate appreciation over time as recovery deepens. - Staff recommendation: - Greater nominal exchange rate flexibility is needed. - Central bank should augment reserves but intervene in a manner that does not effectively peg the exchange rate. - Although de jure floating, the exchange rate had been confined within a very narrow range and could be classified empirically as a currency peg. - Continuing such a policy risks real appreciation pressures materializing in domestic price inflation. - External competitiveness ultimately depends on structural reforms to improve productivity and efficiency. - Exchange restriction under Article VIII (corralón): - As of end-February, 2005, about Arg$1.3 billion remained subject to the restriction. - Freeze scheduled to expire by end-September 2005; staff recommends temporary approval extension until that date. ### Structural Reforms for Sustaining Growth (Section VI) — priorities identified by staff - Key areas of vulnerability to address: - (i) the institutional structure for intergovernmental relations; - (ii) the continued presence of highly distortionary taxes; - (iii) the lack of capital in the banking system; - (iv) the weak investment environment highlighted by continuing disputes with regulated public service companies; - (v) the need for very large investments in the energy sector in the near future; - (vi) the large outstanding arrears to private sector creditors. - Fiscal structural reforms — Intergovernmental reforms: - Staff view: volatility of fiscal policy has been important in explaining Argentina’s growth history; institutional changes are needed to entrench fiscal discipline when financing is more freely available. - Staff recommendation: comprehensive reform of the Fiscal Responsibility Law (FRL) and the Law on Revenue Sharing as key conditions for lasting growth. - Staff concerns about FRL: - Legislation fails to provide hard constraints on subnational spending and borrowing. - Does not specify circumstances under which the federal government may provide financing to provinces. - Does not contain a mechanism ensuring subnational budgets are consistent with aggregate fiscal objectives. - Continues to allow provinces to pledge coparticipation receipts for future debt service. - Penalties for noncompliance are vaguely defined; federal government has considerable discretion to waive limits. - Short-term staff proposal: widen the charter for the Federal Council to give it a stronger mandate to coordinate macro-fiscal policy, authorize intergovernmental financing operations, and recommend remedial actions when provinces violate FRL limits. - Authorities’ position: - More confident the FRL would entrench fiscal discipline; law ratified by 17 of 24 provinces, representing about 77 percent of total provincial spending. - Federal Council for Fiscal Responsibility had just begun its work. - Considered amending the law or the council’s charter premature; suggested only possible expanded monitoring of provincial finances. - Revenue sharing reform: - Staff suggested simplifying the intergovernmental transfer system, increasing transparency, reducing reliance on discretionary transfers, and increasing objective criteria weight in allocations. - Staff argued for greater devolution of revenue-raising responsibilities to provinces and reducing procyclicality of federal transfers. - Acknowledged reform would change resource distribution and should be phased in gradually. - Authorities viewed these reforms as politically infeasible in the short term, citing the 2004 experience and conditionality in the Fund-supported program. *Source: IMF Country Report (excerpts provided in the supplied content).* ### 32. The tax system still contains important distortions, introduced in the wake of the ### 32. The tax system still contains important distortions, introduced in the wake of the ### Tax system distortions and recommendations - Export and financial transaction taxes comprise about 18 percent of federally collected revenues and directly support the federal budget as they are not shared with the provinces. - Staff recommendation: phase out these taxes in a revenue-neutral way to: - deepen domestic capital markets—providing financing for productive investment; - increase the competitiveness of Argentina’s key exports. - Authorities' position: - Agreed on the need to phase out some taxes—especially the financial transactions tax—but argued substituting these taxes would be politically difficult. - Felt staff’s specific recommendations could not be implemented during the current year. - Pointed out new taxes would need to be shared with provinces and would therefore weaken the federal budget. - Staff suggested considering a reduction in discretionary federal transfers so as to protect the federal budget. - FAD technical assistance (2003) recommended options including: - eliminate unwarranted income and VAT exemptions and cross-crediting; - align excises to their regional level; - include excises in the VAT base; - strengthen the collection of social security and real estate taxes. ### The banking sector: legacy effects and policy priorities - Remaining crisis-related problems: - Compensation to banks for asymmetric pesoization and indexation of bank assets and liabilities not yet completed. - Many banks still face significant losses from court injunctions (amparos) despite Supreme Court decisions confirming the legality of pesoization of deposits. - Increased share of the banking system in the hands of the state. - Substantial rise in the share of public securities in banks’ portfolios. - Increased exposure to interest rate risk. - Banks are severely undercapitalized even though they meet current regulatory standards that extend temporary forbearance. - Staff policy priorities going forward: - (i) complete the compensation payments; - (ii) steadily remove the regulatory forbearance; - (iii) increase bank capitalization; - (iv) clarify the legal status of amparos. - Compensation status and issues: - Staff noted compensation for asymmetric pesoization and indexation was expected to have been completed by end-June 2004. - Authorities stated the bulk of compensation for asymmetric pesoization would be fully completed in June, 2005, and claimed compensation for asymmetric indexation was no longer an issue as banks had not put forward any final claims. - Staff noted several banks continue to dispute the methodology adopted by the government to calculate compensation. - Regulatory forbearance: - Authorities reiterated intention to adhere to current schedule for phasing out regulatory forbearance and agreed to be ready to take prompt corrective actions to ensure banks meet prudential standards. - Forbearance measures noted in Box 7: temporary valuation mechanism for government bonds and loans, temporary decrease in capital charge on interest rate risk (scheduled to be phased out by end-2006), and allowing losses from amparos to be booked as assets to be amortized over 60 months. - Compensation amounts in latest staff information: - Authorities completed payments for asymmetric pesoization of Arg$16 billion out of Arg$18 billion for the losses due to asymmetric pesoization. - BCRA still discussing compensation for losses arising from pesoization of assets relative to other liabilities governed by foreign law (estimated at Arg$10 billion). - Authorities weighing incentives for early recapitalization but had no specific proposal at that time. - Legal clarity on amparos: - Authorities acknowledged importance but insisted it was an issue for the judiciary, not the executive. - Public banks strategic review: - Review for Banco Provincia completed; consultants contracted for review of Banco Nación. - Staff stressed the review is only an initial step and that a medium-term action plan should be established to improve operational performance and define future roles. ### Business climate, utilities concessions, and regulatory framework - Lack of progress in reaching agreement with utility company concessionaires undermines provision of public services and the business climate. - Priority recommended by staff: - Re-establish a credible time-bound program for renegotiation of long-term contracts with concessionaires that would include a clear path for tariff adjustments—critical in gas and electricity sectors. - Status and implications (Box 8): - Government committed to reach long-term concession agreements with 63 regulated utility companies by end-2004 and put in place a new regulatory framework. - Progress: agreements reached with four electricity companies, four highway concessions, four port concessions, and two freight railways operators; most still require congressional approval and do not, by and large, involve tariff increases for household consumers. - Thirteen road-related contracts rescinded and reauctioned; postal services concession taken under government control and announced not to be reprivatized. - Little progress on systemically important gas, electricity, water and telecommunications companies, which account for about 85 percent of total public service revenues. - Government launched public hearings for energy companies that rejected the unilateral offer as insufficient. - Draft public services law shortcomings (assessment shared by World Bank and others): - (i) fails to establish a regular and predictable process for updating tariffs to reflect changing economic conditions; - (ii) provides excessive scope for the Government and consumer groups to request tariff reductions on grounds of efficiency gains; - (iii) denies concessionaires the right to apply for international arbitration; - (iv) prevents the disconnection of service to nonpaying customers. - Discussion in Congress delayed and unlikely in the near term. - Staff urged amendments to strike adequate balance between consumer protection and concessions' economic viability and contractual certainty; encouraged a transparent and well-targeted social tariff scheme. - International arbitration claims: - Significant number of claims pending in international arbitration tribunals. - Authorities questioned validity and argued no discriminatory treatment occurred. - Staff suggested early agreements with concessionaires to reduce risks by achieving voluntary withdrawal of claims. - Authorities emphasized companies must withdraw legal claims before signing new contracts and noted any negative international tribunal decision would have to be reviewed by Argentine courts before enforcement. ### Social policy and infrastructure priorities - Social outcomes since 2003: - About 3.5 million Argentines moved out of poverty. - Almost 4 million moved out of extreme poverty (Box 2). - Unemployment has fallen with job creation in both formal and informal markets. - Heads of Household Program beneficiaries declined to 1.5 million in February 2005 from 2.1 million at end-2002. - Authorities' medium-term social policy intentions: - Replace emergency social program with a training program and a more narrowly defined and well-targeted unemployment subsidy plan. - Strengthen unemployment insurance system to improve safety net for transitional unemployment. - Announced goal of 6 percent of GDP in education expenditures by 2015 (from about 4 percent in 2004). - Infrastructure spending: - Consensus on prioritizing government capital expenditure for higher and more efficient infrastructure spending. - Authorities increased investment spending in the 2005 budget by 1.3 percent of GDP. - Staff view: mobilize and provide incentives for private sector investment in infrastructure to avoid crowding out government spending in other areas. ### Medium-term outlook and debt sustainability - Authorities' debt sustainability analysis (Scenario A) principal assumptions (detailed in Annex I): - All defaulted debt restructured during 2005 on the same terms as the recent debt exchange. - Growth averages 3 percent over the medium term. - The real exchange rate gradually appreciates. - Borrowing costs on new debt are 9 percent in dollar terms. - Exposure to IFIs remains constant through 2014 and declines slowly thereafter. - Central bank advances to the government are not used to finance debt service. - Federal primary surplus is maintained at 3 percent of GDP in the near term. - Provincial governments generate sufficient primary surpluses to cover their own debt service. - Under these assumptions, authorities project: - Debt-to-GDP ratio declines from 79 percent in 2005 to 50 percent by 2014 and to 40 percent by 2020. - Note on NPV: Given the back-loaded nature of obligations on restructured debt, the NPV of the debt stock in 2005 is about 19 percentage points less than the face value at a 10 percent discount rate. - Selected numeric items from the DSA summary table (preserved exactly as presented): - Consolidated primary surplus (percent of GDP): 3.7 3.3 2.3 3.7 3.3 2.3 4.4 3.5 2.8 4.4 3.5 2.8 - Debt-to-GDP (percent of GDP): 71 54 37 73 68 72 70 52 31 70 50 27 - Real GDP growth (percent): 4.2 3.0 3.0 3.5 2.0 2.0 4.2 3.0 3.0 4.2 3.0 3.0 - IMF rollover assumption (percent): 86 97 80 0 0 0 0 0 0 0 0 0 - Interest rate on new dollar market borrowing (percent): 9.0 9.0 9.0 10.0 10.0 10.0 9.0 9.0 9.0 9.0 9.0 9.0 - Required private debt rollover rate (percent): 68 87 71 60 13 51 65 23 11 99 38 53 47 0 49 - Possible private debt rollover rate (percent) 2/: ......... 50 75 90 56 93 10 06 09 81 00 - Financing capacity (- surplus) (percent of GDP) 3/: ......... 2.1 1.6 4.5 1.3 0.0 0.0 -0.6 -0.6 -0.4 - Authorities assume market access allowing near 70 percent rollover of private sector debt in 2005–08, rising thereafter. *Source: IMF staff report content provided in the supplied PDF excerpt.* ### 42. The scenario presented by the authorities is based on several key unrealistic ### _cr05236 - 42. The scenario presented by the authorities is based on several key unrealistic ### Alternative assumptions and Scenario B (staff view of current policies) - Staff judged the authorities’ scenario as based on several key unrealistic assumptions and proposed more realistic assumptions under current policies: - Average medium-term growth is likely to be closer to 2 percent than the 3 percent assumed by the authorities. - The debt sustainability analysis should not assume access to Fund financial support; the authorities’ assumption of constant exposure to the Fund for an extended period is neither realistic nor necessary. - Under current policies, inflation and borrowing costs, at least in the near term, are likely to be at higher levels than assumed by the authorities. - Under these alternative assumptions (Scenario B): - The debt ratio follows an unsustainable path, remaining around 70 percent of GDP over the medium term. - The implied rollover rate for private sector borrowing rises to unsustainable levels. - Compared with the staff estimate of possible market access, this scenario gives rise to significant financing gaps both in the near and medium term. ### Staff reform scenario (Scenario C) — assumptions and near-term pressures - Scenario C assumptions and fiscal stance: - Based on a reform scenario underpinning higher growth, lower inflation, and lower borrowing costs than in Scenario B. - Assumes an increased fiscal effort with consolidated primary surpluses reaching 4.5 percent of GDP over the next few years and declining gradually thereafter. - Projections and near-term financing requirements: - Scenario indicates sustainability over the medium term, with a downward trajectory of the overall debt-to-GDP ratio similar to Scenario A, though at a slightly faster pace. - In the near-term, large gross debt obligations average about 8 percent of GDP during 2005–08, including substantial debt service to the Fund averaging almost 2 percent of GDP per year. - In the absence of direct recourse to central bank reserves, a rollover rate of private sector debt of more than 100 percent is required during 2005–08. - The required market access is higher than the possible access estimated by staff, giving rise to financing gaps during 2005–08 even though adequate market access is projected over the medium term. - Staff cautioned that borrowing costs may be higher than assumed, which would significantly increase the exposure of domestic financial institutions to the public sector. ### Central bank repurchases from international reserves and Scenario D - Staff suggestion: - Fund repurchases could be made by the central bank from international reserves, rather than financed by the federal budget; this would follow practice in many other countries. - Since the currency board regime, the central bank has onlent Fund resources to the federal government to help finance its budget deficit; the central bank’s claim on government matches exactly the terms of its obligations to the Fund. - To allow international reserves to be used directly to finance Fund repurchases, changes in the central bank’s charter may be necessary. - Scenario D outcomes if central bank repurchases from reserves are used: - Financing payments to the Fund directly from the central bank’s international reserves would significantly lower required market issuances and allow a more rapid reduction in the debt ratio. - The medium-term debt path is sustainable—the debt-to-GDP ratio would fall to 40 percent by 2016. - In the near term, the required private sector rollover rate (34 percent) should be easily achievable during the projection period. - Under these conditions, there are financing surpluses in each period; Argentina’s capacity to pay is higher than the projected debt obligations provided the assumed fiscal effort and market access are achieved. - The extent of the excess capacity is about ½ percent of GDP per year over the projection period. - Institutional and political requirement: - Changing practice would require a decision at the highest political level and, according to central bank officials, would necessitate an amendment of the central bank’s charter requiring congressional approval. - Any amendment should not weaken the central bank’s balance sheet or income position, and should maintain its independence from government. ### Sensitivity of debt sustainability and key risk parameters - Robustness and sensitivities: - Staff results are generally robust but sensitive to growth assumptions. - A 1 percentage point reduction in growth in staff scenarios (C and D) would imply four additional years for the debt-to-GDP ratio to decline below 50 percent. - The projection of the real exchange rate is critical: staff assume the current rate is close to its long-term equilibrium and expect gradual appreciation. - If the real exchange rate were to be 10 percent more appreciated than under the baseline, then the debt stock would decrease by 8 percentage points of GDP. - Changes to the level of borrowing costs and repayment terms would affect conclusions only if there are extreme changes. - Sensitivity tests for these and other variables are included in Annex I. ### Normalization of debt service arrears and creditor relations - Private creditor arrears and debt exchange: - Staff stressed the adverse impact on debt sustainability from continued arrears to private creditors. - Staff regretted that the authorities’ approach to the debt exchange was not consistent with the commitments included in the Letter of Intent of March 2004 which would have allowed Argentina to comply with the Fund’s lending into arrears policy. - For remaining debt in default, litigation risks and associated costs could disrupt Argentina’s future market access. - Authorities were considering modalities to normalize the situation with private creditors that did not participate in the debt exchange but were not prepared to elaborate at that stage. - The debt exchange law passed by congress limited the power of the executive to effect judicial or nonjudicial settlements with nonparticipating creditors or to re-open the debt exchange; an amendment or repeal of the law would appear necessary to effectively address arrears to nonparticipating creditors. - Authorities indicated intention to formulate a forward-looking strategy in due course but considered it premature to announce specifics. - Official creditors: - Authorities and staff agreed it would be important for Argentina to proceed to negotiations with the Paris Club. - Terms of restructuring for official bilateral debt used in the debt sustainability analysis were an example and should not prejudice future Paris Club negotiations. - Multilaterals and EIB arrears: - Staff urged authorities to remain current with all multilaterals, including the European Investment Bank (EIB). - Argentina had accumulated arrears with the EIB, causing nonobservance of a continuous performance criterion on the nonaccumulation of arrears to bilateral and multilateral creditors (noted in July 2004 and August 30, 2004 sessions). - Argentina cleared all arrears on principal and past due interest with the EIB in December 2004, but penalty interest on the cleared arrears remained under discussion between Argentine authorities and the EIB. - Staff recommended the Board return to the issue following the outcome of discussions between the authorities and the EIB; a paper on this issue would be issued ahead of the Article IV consultation. ### Staff appraisal — macroeconomic achievements, risks, and policy recommendations - Recent achievements and remaining challenges: - Argentina is emerging from an extraordinarily difficult period and has achieved political, social, and financial stability. - Since 2003, confidence has returned, with two years of remarkable growth continuing into 2005: real wages recovering, output close to its pre-1998 peak, investment and exports at record levels, financial markets relatively stable, and improving unemployment and poverty indicators. - Challenges remain to convert recovery into long-lasting and equitable growth; policy action is required to avoid repeating historical cycles of high growth followed by crises linked to fiscal volatility. - Fiscal policy recommendations: - The 2005 primary surplus target of 3.8 percent of GDP is well below the outcome for 2004 and represents a sizeable injection of fiscal stimulus as the output gap closes and inflationary pressures mount. - Staff urged specific measures to raise the primary surplus-to-GDP ratio significantly closer to the level achieved in 2004, and at least 4.5 percent of GDP, to minimize procyclical impact. - Achieving this will likely require prioritization of capital spending and a review of poorly targeted and rapidly rising current subsidies. - Further fiscal consolidation compared with the budget is called for to help facilitate—in a noninflationary and nondebt creating manner—the closing of a projected budgetary financing gap in the second half of 2005. - Monetary policy recommendations: - Additional tightening of monetary policy is likely to be needed in the short term. - Nominal interest rates have risen more slowly than inflation expectations and real rates remain in negative territory. - Given the stronger-than-expected recovery of the money multiplier, the central bank should take measures to ensure the path of base money is quickly adjusted to the lower end of the authorities’ target range. - This will likely require moderation of foreign exchange intervention and possibly a further rise in interest rates. - To enhance credibility, the objectives of monetary policy need to be clarified: staff recommend publicly clarifying that the prime objective of monetary policy is the maintenance of price stability and that the central bank has the necessary operational autonomy to combat inflation. - A shift toward this objective will require acceptance of a greater degree of nominal exchange rate flexibility and transparent, well-coordinated intervention. - Structural and institutional reforms: - Little progress had been made on the reform agenda under the stand-by arrangement; critical reforms include: - Reduction of distortions in tax policy. - Strengthening the institutional framework of intergovernmental fiscal relations. - Policies to strengthen the capital base of the banking system. - A strategy to ensure adequate investment and incentives for private sector participation in public services. - Staff urged authorities to use the favorable situation to announce a coherent action plan, including upfront actions to provide credibility. - Structural fiscal reforms recommended to sustain budgetary performance and enhance growth prospects: - Strengthen the approved Fiscal Responsibility Law comprehensively to place more binding constraints on provincial spending and borrowing, limit circumstances under which the federal government may provide financing to the provinces, and provide mechanisms to better harmonize provincial and federal fiscal policies. - Overhaul the regime for intragovernmental revenue sharing to reduce vertical imbalance, lessen subnational vulnerability to cyclical movements, and promote horizontal equity among provinces. - Phase out distortionary taxes on exports and financial transactions and introduce substitute revenue measures to promote greater intermediation and export-led growth. - These reforms are politically complex but necessary to redirect public spending to improve infrastructure support while assuring debt sustainability. *Source: IMF staff report excerpt.* ### 61. While the banking system has returned to overall profitability, the sector still ### _cr05236 - 61. While the banking system has returned to overall profitability, the sector still ### Banking system: profitability, vulnerabilities, and recapitalization - Findings: - "While the banking system has returned to overall profitability, the sector still remains vulnerable and undercapitalized." - Authorities have maintained their supervisory and regulatory framework "under very difficult circumstances." - Remaining issues and actions: - "Pending compensation for policy–induced losses should be quickly completed." - "All efforts should be made to obtain a further judicial clarification on the issue of amparo-induced losses." - Authorities should "strictly adhere to the announced phase-in schedule of prudential regulations on the valuation of government bonds and on limits on bank exposure to the public sector." - Capital needs and incentives: - "The accompanying need to augment capital will not only be met through the inflow of future profits but will also need an injection of new capital." - "A strengthening of incentives for early recapitalization may be helpful," though recapitalization decisions "will depend on the prevailing business environment and the overall economic prospects." - "Through this process, the central bank should continue to ensure prudential standards are applied strictly." ### Public banks: role and strategic clarity - Findings: - "The public banks have emerged from the crisis playing a much larger role." - Recommendation: - "The government should urgently articulate a strategy for their future operations." - On the basis of reviews (completed for Banco Provincia and planned for Banco Nación), "the authorities should be prepared to clarify the strategic role of these public banks going forward." ### Regulated utilities: tariff disputes, renegotiation, and regulatory reform - Findings: - "The situation in the regulated utilities sector is not sustainable and failure to resolve outstanding issues will have damaging consequences for macroeconomic stability and future growth." - "Despite commitments under the Stand-By Arrangement to complete renegotiations with concessionaires during 2004, little progress has been achieved." - Authorities' reluctance to raise end-consumer tariffs or agree on long-term phased increases is central to disputes with energy-related concession owners. - Authorities' insistence on retaining the Emergency Law procedures and recent unilateral contract attempts have been "strongly opposed by the companies, some of whom have withdrawn or are threatening withdrawal from the country." - "This issue has thus become an important litmus test of the overall investment climate." - Recommendation: - Staff advises proceeding along twin tracks: - Continue to try to reach collaborative long-term agreements with utility concessionaires. - Put in place an updated regulatory framework that "should provide regulatory certainty and find an appropriate balance between protection of consumers and provision of necessary investment incentives." ### Debt exchange, arrears, and normalization of creditor relations - Findings: - "The recent debt exchange marked an important step, but addressing remaining arrears is essential for Argentina to fully emerge from the financial crisis." - Staff regrets "that the authorities’ approach to the debt exchange was not consistent with the commitments made in the letter of intent of March 2004." - Recommendations and requirements: - Once the exchange is formally completed, Argentina should "formulate a forward-looking strategy to resolve the remaining arrears outstanding to private creditors consistent with the Fund’s Lending into Arrears policy." - Argentina should "normalize relations with bilateral official creditors through a Paris Club agreement." - Debt sustainability presentation and staff views: - Authorities' presentation shows "the debt-to-GDP ratio falling to relatively comfortable levels by 2015." - Staff believes the medium-term macroeconomic framework underlying the authorities’ analysis "is feasible, though not on the basis of current policies." - Attainment of "an average real growth of 3 percent per year can be achieved only with proactive structural policies to encourage investment, both domestic and foreign." - Staff rejects the authorities’ assumption of "full and partial rollovers of obligations to the Fund for the next 15–20 years" as "unacceptable" and "not only inconsistent with the revolving nature of Fund resources, but also unnecessary." - A "more realistic assumption, in line with the balance of payments outlook, would be an exit from the use of Fund resources at a much earlier stage." - Authorities’ debt sustainability analysis "contains large financing gaps, particularly through 2012, that would need to be financed through market borrowing." ### Staff medium-term debt sustainability analysis and financing options - Scenario and fiscal assumptions: - Analysis is "based on a proactive reform scenario and higher fiscal effort." - Assumes "a level of consolidated primary surplus of at least 4½ percent of GDP in the next few years." - Outcomes under assumptions: - Under these assumptions "the debt-to-GDP ratio could be brought down to sustainable levels over the next decade." - In the near term, authorities face "significant levels of debt service, including repurchases to the Fund." - Financing considerations: - "Consideration should be given to financing payments to the Fund directly from international reserves in a manner that does not weaken the financial position of the central bank." - Under assumed fiscal effort and market access, "there would be financing surpluses, indicating that Argentina’s capacity to pay is higher than the projected debt obligations." - Use of reserves "would require a decision at the highest political level, and would need to be made without impairing the autonomy of the central bank." ### Exchange restriction subject to Fund approval - Recommendation: - On the exchange restriction under Article VIII related to the "freeze on reprogrammed deposits (the corralón)," staff recommends "the Executive Board approve the exchange restriction ... until September 30, 2005 (a proposed decision is contained in Section X)." ### Concluding assessment - Forward-looking judgement: - "Argentina’s sharp recovery from the crisis signals its potential to rebuild sustainable medium-term growth and entrench growing prosperity." - Staff is "convinced that, with a strong policy framework, Argentina will be able to attract the necessary domestic and foreign resources that will be needed to make this a reality." *Source: _cr05236 - 61. While the banking system has returned to overall profitability, the sector still* ### 68. The next Article IV consultation will take place in accordance with the July 15, ### _cr05236 - 68. The next Article IV consultation will take place in accordance with the July 15, ### National income and prices - GDP at constant prices: -4.4 (2001), -10.9 (2002), 8.8 (2003), 9.0 (2004), 6.2 (2005), 3.8 (2006), 3.6 (2007) - Domestic demand (contribution to growth): -6.5, -16.9, 10.4, 11.0, 6.5, 4.5, 3.5 - Net exports (contribution to growth): 2.1, 6.0, -1.5, -2.0, -0.3, -0.7, 0.1 - Per capita GDP (U.S. dollars, thousands): 7.4, 2.8, 3.4, 4.1, 4.6, 4.9, 5.3 - Consumer prices (average): -1.1, 25.9, 13.4, 4.4, 9.0, 8.4, 7.5 - Consumer prices (end-of-period): -1.5, 41.0, 3.7, 6.1, 10.0, 8.0, 7.0 ### Social indicators - Population (millions): 36.3, 36.6, 37.0, 37.4, 37.8, 38.2, 38.6 - Population below poverty line (in percent): 35.4, 53.0, 47.8, 44.3 (2004 Q1) - Population below extreme poverty line (in percent): 12.2, 24.8, 20.5, 17.0 (2004 Q1) - Unemployment rate: 18.3, 20.8, 14.5, 12.1 ### External sector (levels in U.S. dollars, billions unless otherwise indicated) - Trade balance: 6.2 (2001), 16.7 (2002), 15.7 (2003), 12.1 (2004), 9.7 (2005), 7.0 (2006), 6.3 (2007) - Exports, f.o.b.: 26.5, 25.7, 29.6, 34.5, 37.0, 38.2, 39.6 - of which: net exports of hydrocarbons: 3.9, 4.1, 4.5, 4.1 - Imports, c.i.f.: 20.3, 9.0, 13.8, 22.3, 27.3, 31.2, 33.3 - Export growth (in U.S. dollar terms): 0.8, -3.4, 15.3, 16.5, 7.3, 3.5, 3.6 - Import growth (in U.S. dollar terms): -19.6, -55.8, 53.9, 61.3, 22.3, 14.3, 6.8 - Export volume: 4.3, 0.7, 5.0, 6.6, 10.7, 5.8, 5.8 - Import volume: -17.4, -54.1, 53.2, 47.0, 17.4, 13.3, 5.8 - Terms of trade (deterioration -): -0.6, -1.8, 8.9, -0.6, -6.8, -3.0, -3.1 ### Money and credit - Net domestic assets of the financial system: 14.9, 57.3, 46.2, -5.3, -3.2, 4.9, 4.9 - Credit to the private sector: -20.2, -12.8, -15.5, 15.4, 18.0, 16.3, 13.1 - Augmented base money (includes quasi-monies in circulation): -3.0, 152.9, 26.3, 12.7, 2.2, 5.5, 6.3 - Augmented broad money: -16.5, 24.7, 15.8, 12.7, 11.1, 11.2, 10.3 - Interest rate (30-day deposit rate, in percent): 15.7, 39.1, 3.9, 2.9 ### Consolidated public sector (percent of GDP) - Primary balance: -1.3, 0.6, 3.0, 5.1, 4.5, 4.5, 4.5 - of which: Federal government: 0.2, 0.9, 2.3, 3.9, 3.7, 3.7, 3.7 - Overall balance: -5.9, -1.8, 1.1, 3.7, 2.0, 2.1, 2.0 - Revenues: 23.7, 23.0, 25.9, 28.9, 28.6, 28.4, 28.2 - Expenditures 3/: 29.6, 24.8, 24.8, 25.1, 26.6, 26.3, 26.2 - Total debt (U.S. dollars billions, year-end): 167.0 (2001), 152.6 (2002), 184.8 (2003), 201.4 (2004) - Total debt (year-end, percent of GDP): 62.2, 164.2, 144.5, 133.9 ### Savings-investment balance - Gross domestic investment: 14.2, 12.0, 15.1, 19.1, 19.9, 21.5, 21.3 - of which: Public sector: 1.5, 0.9, 1.5, 2.5, 3.3, 3.4, 3.3 - Gross national savings: 12.7, 20.4, 20.9, 21.1, 20.8, 21.3, 20.7 - of which: Public sector: -4.5, -0.9, 3.1, 6.2, 5.4, 5.7, 5.5 - Current account balance: -1.4, 8.5, 5.8, 2.0, 1.0, -0.2, -0.6 ### Fund-related and reserves - Outstanding use of Fund resources (in percent of quota at end-of-period): 525.3, 498.2, 493.4, 428.9 - Gross international reserves (U.S. dollars, billions): 14.9, 10.5, 14.1, 19.6, 20.7, 22.1, 20.3 - In months of imports of goods and services: 6.5, 9.5, 9.1, 8.5, 7.1, 6.4, 6.1 - Nominal GDP (in billions of Arg $): 268.7, 312.6, 375.9, 447.3, 507.4, 567.8, 623.7 ### External Financing Requirements and Sources (Table 2, in billions of U.S. dollars, 2001-2005) - Gross financing requirements (total): 41.5 (2001), 23.4 (2002), 23.8 (2003), 20.4 (2004), 13.5 (2005) - Current account deficit 1/: 3.9, -8.6, -7.4, -3.0, -1.7 - Capital outflows: 37.6, 32.0, 31.2, 23.4, 15.1 - Public sector amortization: 17.9, 7.8, 19.4, 18.1, 8.2 - IMF: 1.2, 0.7, 5.7, 5.5, 3.7 - Multilateral loans: 0.9, 2.6, 5.3, 1.3, 1.4 - Official bilateral creditors: 0.4, 0.3, 0.7, 1.1, 0.9 - Bonds and notes 1/: 7.2, 3.1, 6.5, 9.3, 2.1 - Other: 8.3, 1.1, 1.3, 0.9, 0.1 - Private sector amortization, MLT: 3.7, 3.3, 3.8, 3.8, 4.0 - Other private sector flows, net (+outflows) 2/: 16.0, 20.8, 8.0, 1.5, 3.0 - Available financing (total): 41.5, 23.4, 23.8, 20.4, 13.4 - Capital inflows: 29.5, 6.4, 13.1, 10.5, 8.7 - Foreign direct investment: 2.0, 2.8, 1.1, 3.9, 3.2 - Disbursements to public sector: 25.2, 0.8, 10.2, 4.6, 1.4 - IMF: 10.6, 0.0, 5.6, 3.5, 0.0 - World Bank and IDB: 1.8, 0.8, 4.6, 1.1, 1.4 - Other: 12.9, 0.0, 0.0, 0.0, 0.0 - Private sector borrowing: 2.2, 2.8, 1.8, 2.0, 4.0 - Exceptional financing, arrears: 0.0, 12.5, 14.4, 15.3, 5.8 - Public sector arrears accumulation: 0.0, 8.2, 11.3, 15.0, 4.8 - Private sector arrears accumulation: 0.0, 4.3, 3.0, 0.2, 1.0 - Gross reserves accumulation (- increase): 12.0, 4.4, -3.6, -5.4, -1.1 - Residual financing gap: 0.00, 0.00, 0.00, 0.00, 0.0 ### Summary Balance of Payments (Table 3, percent of GDP and billions of U.S. dollars) - Current account (percent of GDP): -3.9 (2001), 8.6 (2002), 7.4 (2003), 3.0 (2004), 1.7 (2005), -0.4 (2006), -1.1 (2007) - Trade balance (percent of GDP): 2.3, 16.4, 12.4, 8.0, 5.6, 3.8, 3.1 - Exports f.o.b. (percent of GDP): 9.9, 25.3, 23.2, 22.7, 21.5, 20.4, 19.7 - Of which: oil products (net): 1.8, 4.6, 4.1, 2.9, 2.7, 2.6, 2.5 - Imports c.i.f. (percent of GDP): -7.6, -8.9, -10.9, -14.7, -15.9, -16.7, -16.6 - Services and transfers: -10.1, -8.1, -8.4, -9.1, -8.0, -7.4, -7.4 - Of which: net interest payments 1/: -7.5, -7.7, -7.3, -6.8, -5.4, -4.1, -3.9 - Capital and Financial Account: -17.5, -24.8, -18.0, -10.9, -2.8, -0.9, -0.1 - Net public sector capital 1/: -2.0, -5.8, -9.1, -11.5, -3.0, -2.0, -2.2 - Direct investment: 2.0, 2.8, 1.1, 3.9, 3.2, 3.6, 3.9 - Other net private sector capital 2/: -17.5, -21.8, -10.0, -3.3, -2.9, -2.6, -1.7 - Overall balance: -21.4, -16.2, -10.6, -7.8, -1.1, -1.3, -1.2 - Financing: 21.4, 16.2, 10.6, 7.8, 1.1, 1.3, 1.2 - Net international reserves (increase -) 3/: 21.4, 3.7, -3.7, -7.5, -4.8, -3.0, -2.6 - Change in gross reserves: 12.0, 4.4, -3.6, -5.4, -1.1, -1.4, 1.8 - Change in reserve liabilities (IMF): -9.4, 0.7, 0.1, 2.0, 3.7, 1.6, 4.4 - Purchases: 10.6, 0.0, 5.6, 3.5, 0.0, 0.0, 0.0 - Repurchases: 1.2, 0.7, 5.7, 5.5, 3.7, 1.6, 4.4 - Exceptional financing 4/: 0.0, 12.5, 14.4, 15.3, 5.8, 4.3, 3.8 - Memorandum items: - Current account excluding interest payments on nonperforming debt (in percent of GDP): -1.4, 13.2, 9.8, 5.6, 2.3, 1.0, 0.5 - Exports volumes, percent change: 4.3, 0.7, 5.0, 6.6, 10.7, 5.8, 5.8 - Imports volumes, percent change: -17.4, -54.1, 53.2, 47.0, 17.4, 13.3, 5.8 - Gross international reserves (in billions of US$): 14.9, 10.5, 14.1, 19.6, 20.7, 22.1, 20.3 - Net international reserves (in billions of US$) 3/: 0.9, -3.9, -1.4, 5.6, 10.4, 13.5, 16.1 - Net international reserves (in months of imports of goods and services): 0.4, -3.5, -0.9, 2.4, 3.8, 4.3, 4.8 ### Net Debt Service to the IFIs (Table 4, in millions of US dollars) - IMF (A. Debt service): 1,603 (2001), 1,346 (2002), 6,441 (2003), 6,071 (2004), 4,183 (2005), 2,028 (2006) - Principal: 1,187, 746, 5,796, 5,515, 3,674, 1,647 - Interest: 416, 600, 646, 556, 509, 381 - IMF (B. Disbursements): 10,563 (2001), 0 (2002), 5,626 (2003), 3,466 (2004), 0 (2005), 0 (2006) - IMF (C. Net debt service (A-B)): -8,960, 1,346, 815, 2,605, 4,183, 2,028 - IMF (D. Fund credit outstanding): 13,976, 14,339, 15,523, 14,091, 10,126, 8,481 - World Bank (A. Debt service): 1,388, 1,096, 3,350, 1,064, 1,219, 1,389 - Principal: 676, 1,353, 2,968, 832, 929, 1,056 - Interest: 713, 517, 382, 232, 290, 333 - Arrears clearance: 0, -774, 774, 0, 0, 0 - World Bank (B. Disbursements): 1,329, 424, 1,965, 770, 533, 1,056 - World Bank (C. Net debt service (A-B)): 606, 721, 1,385, 293, 686, 333 - World Bank (D. WB credit outstanding): 9,439, 8,511, 7,508, 7,447, 7,050, 7,050 - IDB (A. Debt service): 728, 1,345, 2,884, 911, 952, 1,573 - Principal: 258, 1,596, 1,591, 482, 512, 1,174 - Interest: 470, 466, 575, 428, 440, 399 - Arrears clearance: 0, -717, 717, 0, 0, 0 - IDB (B. Disbursements): 1,470, 407, 2,640, 332, 148, 1,174 - IDB (C. Net debt service (A-B)): -742, 938, 244, 579, 804, 399 - IDB (D. IDB credit outstanding): 8,175, 7,950, 7,982, 7,831, 7,467, 7,467 ### Projected Payments to the IMF (Table 5, in millions of SDRs) - Net Payments and Credit Outstanding shown by month for 2005 and 2006 with detailed Obligation and Expectation rows. - Total for 2005: Net Payments Obligation 2,133; Expectation 285; Credit Outstanding Obligation 2,467; Expectation 2,751; Obligation 6,940; Expectation 6,656 - Total for 2006: Net Payments Obligation 1,082; Expectation 2,162; Credit Outstanding Obligation 1,333; Expectation -101; Obligation 3,485; Expectation 5,858; Obligation 3,411 - Table notes: - Assumes no Fund disbursements. Repurchase expectations from May 2005 to April 2006 are extended to an obligation basis. Repurchase expectations are assumed from May 2006 on. - Interest savings if payments made on an expectation basis. ### Consolidated Public Sector Operations (Table 6, in billions of pesos and percent of GDP) - Revenues (in billions of pesos): 63.6 (2001), 71.8 (2002), 97.2 (2003), 105.4 (2004), 129.1 (2005 auth.), 145.2 (2006 proj. auth.), 145.0 (2006 staff proj.), 161.3 (2007 auth.), 161.5 (2007 proj.) - Tax revenues (in billions of pesos): 47.2, 52.4, 57.2, 81.7, 101.6, 115.1, 114.4, 127.7, 126.5 - Primary expenditures (in billions of pesos): 67.2, 69.9, 85.8, 92.8, 106.3, 126.1, 122.4, 139.9, 136.1 - Primary balance (in billions of pesos): -3.6, 1.8, 11.4, 12.5, 22.8, 19.1, 22.6, 21.4, 25.4 - Interest cash (in billions of pesos): 12.4, 7.5, 7.3, 8.8, 6.2, 12.7, 12.7, 11.0, 13.5 - Overall balance (in billions of pesos): -16.0, -5.7, 4.1, 3.7, 16.7, 6.4, 9.9, 10.4, 11.9 - Augmented overall balance 4/: -19.3, -102.8, -21.5, -22.0, -19.7, ... , 3.1, ... , 5.8, ... , 8.3 - Revenues (percent of GDP): 23.7, 23.0, 25.9, 25.3, 28.9, 28.6, 28.6, 28.4, 28.4 - Primary balance (percent of GDP): -1.3, 0.6, 3.0, 3.0, 5.1, 3.8, 4.5, 3.8, 4.5 - Overall balance (percent of GDP): -5.9, -1.8, 1.1, 0.9, 3.7, 1.3, 2.0, 1.8, 2.1 - Memorandum item: Nominal GDP (Arg$ bn): 268.7, 312.6, 375.9, 416.9, 447.3, 507.4, 507.4, 567.8, 567.8, 623.7, 623.7 ### Federal Government Operations (Table 7, in billions of pesos and percent of GDP) - Revenues (in billions of pesos): 50.6 (2001), 56.8 (2002), 77.2 (2003), 84.8 (2004), 104.9 (2005 auth.), 118.4 (2006 auth.), 117.8 (2006 staff proj.), 131.3 (2007 auth.), 131.0 (2007 proj.) - Tax revenues (in billions of pesos): 37.4, 41.8, 60.7, 64.8, 83.6, 95.1, 94.0, 105.4, 103.6 - Social security contributions (in billions of pesos): 9.6, 9.7, 11.7, 13.0, 14.6, 17.3, 17.2, 19.3, 20.2 - Primary expenditures (in billions of pesos): 50.0, 53.8, 68.5, 74.7, 87.6, 103.1, 99.0, 114.1, 110.0 - Transfers to provinces (in billions of pesos): 17.0, 17.5, 22.7, 24.7, 33.2, 39.9, 37.6, 43.1, 42.2 - Automatic: 11.6, 11.6, 17.2, ..., 25.3, 29.4, 27.9, 31.4, 34.6, 34.4, 39.1 - Discretionary: 5.4, 5.9, 5.4, ..., 7.8, 10.5, 9.7, 11.8, 7.6, 12.9, 7.2 - Primary cash balance (percent of GDP): 0.2, 0.9, 2.3, 2.4, 3.9, 3.0, 3.7, 3.0, 3.7 - Interest cash (percent of GDP): 3.8, 2.2, 1.8, 1.6, 1.3, 2.4, 2.4, 2.1, 2.3 - Overall cash balance (percent of GDP): -3.6, -1.2, 0.5, 0.8, 2.6, 0.6, 1.3, 1.0, 1.4 - Augmented overall balance 4/: -13.0, -101.1, -23.5, -20.2, -22.7, ... , 0.5, ... , 2.7, ... , 5.3 - Memorandum: Nominal GDP (Arg$ billion): 268.7, 312.6, 375.9, 416.9, 447.3, 507.4, 507.4, 567.8, 567.8, 623.7, 623.7 ### Provincial Government Operations (Table 8, in billions of pesos and percent of GDP) - Revenue (in billions of pesos): 29.9 (2001), 32.5 (2002), 42.7 (2003), 45.3 (2004), 57.4 (2005 auth.), 66.7 (2006 auth.), 64.8 (2006 staff proj.), 73.1 (2007 auth.), 72.8 (2007 proj.) - Tax: 9.8, 10.6, 14.3, 15.3, 18.0, 20.0, 20.5, 22.4, 22.9 - Non tax: 3.2, 4.4, 5.7, 5.2, 6.2, 6.8, 6.7, 7.6, 7.6 - Transfers from federal government: 17.0, 17.5, 22.7, 24.7, 33.2, 39.9, 37.6, 43.1, 42.2 - Primary spending (in billions of pesos): 34.1, 32.6, 39.3, 42.8, 51.3, 63.0, 61.0, 68.9, 68.3 - Wages: 18.8, 18.8, 19.1, 21.1, 23.0, 26.7, 26.7, 29.9, 29.9 - Goods and services: 4.1, 3.8, 5.3, 5.3, 6.7, 6.9, 6.9, 7.4, 7.4 - Capital: 3.3, 2.4, 4.4, 4.5, 7.9, 14.2, 12.2, 14.8, 14.1 - Primary balance (in billions of pesos): -4.2, -0.2, 3.4, 2.5, 6.1, 3.7, 3.8, 4.2, 4.4 - Primary balance (cash basis): -4.2, -1.1, 2.7, 2.2, 5.5, 3.1, 3.2, 4.2, 4.4 - Overall cash balance (in billions of pesos): -6.6, -2.6, 1.0, 0.2, 3.8, 1.0, 1.1, 2.2, 2.4 - Augmented balance (percent of GDP): -2.5, -3.8, -0.2, -1.1, 0.0, ... , -0.4, ... , 0.0, ... , 0.3 - Memorandum: Provincial financing (net): 2.6, 0.7, -0.4, 0.0, -1.3, -0.2, -0.2, -0.4, -0.4, -0.4, -0.4 - Amortization: -0.8, -0.6, -2.0, -0.6, -0.8, -1.0, -1.0, -1.0, -1.0, -1.4, -1.4 - Gross financing: 3.4, 1.3, 1.5, 0.6, -0.5, 0.9, 0.8, 0.6, 0.5, 1.0, 1.0 - Nominal GDP (Arg$ billion): 268.7, 312.6, 375.9, 416.9, 447.3, 507.4, 507.4, 567.8, 567.8, 623.7, 623.7 ### Debt composition (selected items) - Total debt (I+II): 167.0 (2001), 152.6 (2002), 184.8 (2003), 201.4 (2004) - In percent of GDP: 62.2, 164.2, 144.5, 133.9 - I. Federal government: 143.7, 137.0, 177.8, 193.9 - A. Official debt: 36.1, 35.7, 37.5, 36.0 - 1. Multilaterals: 31.6, 30.8, 31.0, 29.4 - IMF: 14.0, 14.3, 15.5, 14.1 - World Bank: 9.4, 8.5, 7.5, 7.4 - IADB: 8.2, 8.0, 8.0, 7.8 - 2. Bilateral: 4.5, 4.9, 6.5, 6.6 - B. Private creditors: 42.3, 98.4, 134.2, 149.6 - 1. Performing debt: 42.3, 37.0, 39.0, 43.1 - a. Banks (Bodens), compensation for: - Asymmetric pesoization: 0.0, 6.5, 5.9, 6.2 - Cobertura bonds - asymmetric indexation: 0.0, 2.4, 2.4, 2.4 - b. Depositors (Bodens): 0.0, 5.3, 6.1, 7.5 - c. Civil servants (compensation for 2001 wage cut): 0.0, 0.0, 0.9, 0.8 - d. Phase 1 debt 1/: 42.3, 22.8, 23.8, 26.3 *Source: Ministry of Economy; Central Bank of the Republic of Argentina; and Fund staff estimates.* ### 2. Nonperforming (Phase 2) debt 2/...61.495.2106.5 ### 2. Nonperforming (Phase 2) debt 2/...61.495.2106.5 ### Consolidated public and financial sector indicators (selected figures) - Nonperforming debt (memorandum): 3/...92.4106.3118.0 - Performing debt: 167.060.278.583.4 - Multilaterals (memorandum): 4/31.614.331.029.4 - Private creditors, BCRA, and other: 135.438.143.950.2 - of which: Bodens: 0.014.217.619.4 - Net international reserves (projections, in US$ billions): 2/-7.1-20.7-11.94.321.029.737.2 - (in billions of US dollars row): -7.1-6.2-4.11.47.210.212.7 - Gross international reserves (US$ billion): 14.910.514.119.620.722.120.4 - Monetary base (end period, pesos): 11.929.246.452.553.656.760.3 - Private sector deposits (broad money, end period): 60.065.476.883.093.6106.2118.5 - Local currency: 15.963.271.775.685.497.4109.1 - Foreign currency: 44.12.25.27.48.28.89.4 ### Table 11 — Selected vulnerability indicators (latest observations and projections) - Real GDP growth (in percent): -4.4-10.98.89.06.2Proj - CPI inflation (period average, in percent): -1.125.913.44.49.0Proj - Short-term (ST) interest rate (in percent): ...22.23.73.73.7May-05 - EMBI secondary market spread (bps, end of period): 4,3726,3915,6324,7036,060May-05 - Exchange rate NC/US$ (end of period): 1.003.362.942.972.90May-05 - Current account balance (percent of GDP): -1.49.06.12.11.0Proj - Net FDI inflows (percent of GDP): 0.71.70.22.11.9Proj - Gross international reserves (GIR) in US$ billion: 14.910.514.119.620.7Proj - GIR in percent of ST debt at remaining maturity (RM): 59.479.064.279.889.9Proj - Net international reserves (NIR) in US$ billion: 0.9-3.9-1.45.610.4Proj - Total gross external debt (ED) in percent of GDP: 52.1133.7115.4170.5...Dec-04 - Gross external financing requirement (in US$ billion) 2/: 28.923.423.820.413.5Proj - Public sector overall balance (percent of GDP): -5.9-1.81.13.71.4Proj - Public sector primary balance (percent of GDP): -1.30.63.05.13.8Proj - Debt-stabilizing primary balance (percent of GDP) 4/: 2.55.09.51.5-4.3Proj - Public sector gross debt (PSGD, in percent of GDP): 62.2164.2144.5133.9..2004 (est.) - Exposed to external rollover risk (percent of total PSGD): 630.734.836.335.4..Dec-04 - Exposed to exchange rate risk (percent of total PSGD): 7/...71.169.166.8..Dec-04 - Financial sector capital adequacy ratio (in percent): 13.313.911.710.7...Dec-04 - NPLs in percent of total loans: 19.138.631.118.8...Dec-04 - Provisions in percent of NPLs: 67.576.082.2100.5...Dec-04 - Return on average assets (in percent): 0.0-8.9-2.6-0.3...Dec-04 - FX deposits held by residents (percent of total deposits): 71.54.26.710.7...Dec-04 - FX loans to residents (percent of total loans): 80.07.27.114.1...Dec-04 - Net open forex position (percent of capital): 76.135.853.536.3...Dec-04 - Government debt held by FS (percent of total FS assets): 22.949.546.142.0...Dec-04 - Credit to private sector (percent change): -17.6-14.4-15.623.1...Dec-04 - Memorandum: Nominal GDP in billions of U.S. dollars: 268.7101.5127.3151.9...... ### Table 12 — Medium-term macroeconomic framework (selected projections) - Real GDP (1993 Arg$): -4.4-10.98.89.06.23.83.63.43.23.0 (2001–2010) - Consumption (shares of GDP, percent): 84.573.174.173.775.976.177.077.476.977.2 - Investment (shares of GDP, percent): 14.212.015.119.119.020.720.420.421.221.1 - Gross domestic investment (percent of GDP): 14.212.015.119.119.921.521.321.222.021.9 - Gross national savings (percent of GDP): 12.720.420.921.120.821.320.720.621.121.0 - Current account balance (percent of GDP): -1.48.55.82.01.0-0.2-0.6-0.6-0.9-0.9 - CPI inflation (average): -1.125.913.44.49.08.47.56.56.06.0 - Nominal GDP (Arg$ billion, memorandum): 269313376447507568624684747814 ### Debt Sustainability Analysis — Authorities’ Scenario (Scenario A): assumptions and implications Assumptions - Macroeconomic framework: - Real growth declines from above 6 percent in 2005 to 3 percent in the medium term. - Average inflation falls from 7¾ percent in the near term to 3 percent in the medium term. - Real peso-dollar exchange rate gradually appreciates over time but remains more than 40 percent below its 2001 level. - Interest rates on new dollar borrowing remain constant at 9 percent. - Coverage: Only the federal government; provinces assumed to make net transfers ("recoveries") to federal government for debt service on their behalf. - Official debt: IFIs maintain exposure at current levels until 2014; after 2014, 80 percent of principal obligations to the Fund are rolled over through 2030, leaving Fund exposure at US$8 billion in 2030. Other multilaterals' amortizations also 80 percent rolled over starting 2015. - Bilateral debt: Authorities assume forgiveness of interest arrears and a stock rescheduling with a ten-year principal grace period from mid-2005 and ten-year repayment; interest rate Libor plus 250 basis points with interest capitalized during first two years. - Fiscal effort: Appropriable federal primary surplus of 2¾ percent in the near term and 2 percent in the long term. - Financing: In 2005, drawdown of government deposits of US$1 billion; residual financed by a generic ten-year U.S. dollar bullet bond at 9 percent. - Restructured debt: Assumes full creditor participation from 2005. Implications (Annex Table 1 highlights) - Federal debt stock path: - Declines from 79 percent of GDP at end-2005 to 60 percent by 2010 and 30 percent by 2030 (newly issued debt represents ⅔ of outstanding debt in 2030). - Gross debt service obligations: - Remain around 8 percent of GDP from 2005–08, mainly due to official creditors and post-crisis performing debt. - Overall debt service obligations average about 5 percent of GDP later in the projection as coupon rates rise and amortizations begin. - Market financing needs: - After assumed full rollover of principal repayments to IFIs, new market borrowing averages 1¾ percent of GDP from 2005–2008 (US$3.2 billion). ### Staff assessment — No-reform scenario (Scenario B): assumptions and outcomes Assumptions (Scenario B) - Weaker macro outlook: productivity growth sluggish; growth closer to 2 percent over medium term. - Real exchange rate fails to appreciate above current levels. - Inflation averages 10 percent in the medium term. - Interest rate on new market borrowing higher by 100 basis points than authorities’ assumption. - No rollover of Fund resources assumed; no Fund disbursements. Outcomes and findings - Debt-to-GDP: Significantly higher and does not converge on a clear downward path. - Market borrowing needs: - Market placements almost 3½ percent of GDP in 2005 and remain around that level until 2010. - Rollover feasibility: - Required rollover rates on privately held debt would need to be 129 percent in 2005 and average 150 percent in 2006–15 — deemed unlikely to be mobilized from private sources. ### Staff scenario with reforms (Scenario C): assumptions and outcomes Assumptions (Scenario C) - No further Fund disbursements; Fund exposure reduced to zero by 2009. - Flow rescheduling of bilateral claims on classic terms at end-2005. - Active tax reform: financial transaction and export taxes gradually phased out starting in 2006 with compensatory measures; prudent expenditure policies. - Fiscal effort: primary surplus averages at least 4½ percent of GDP from 2005–07; 3½ percent from 2008–15; stabilizes at 2¾ percent in outer years. - Provinces assumed to generate primary surpluses to cover provincial debt service on restructured 2002 debt, quasi-money withdrawal debt, and non-intergovernmental debt. Outcomes (Annex Table 3) - Debt-to-GDP (convergence): Declines faster than under authorities’ scenario; reaches 60 percent in 2009 (one year earlier than authorities’ scenario) and is 11 percentage points lower at the end of the projection period compared to authorities’ baseline. - Market financing requirements: - Despite higher fiscal effort, market financing needs are higher by almost 1 percent of GDP from 2005–08 compared to authorities’ scenario, implying additional market borrowing averaging almost US$2 billion. - Rollover rate remains elevated: average of 109 percent from 2005–08 (versus 68 percent under the authorities’ scenario). ### Staff scenario with use of central bank credit (Scenario D) - Modification: Allow use of central bank credit to meet net amortizations to the Fund by relaxing current limits on central bank lending to government to allow payments to the Fund from international reserves. - Detailed quantitative outcomes are not provided in the supplied text excerpt. ### Key quantitative policy and risk notes (selected) - Interest rate on new dollar borrowing used in projections (authorities): 9.09.09.09.09.09.09.09.09.09.09.09.09.09.0 (periodic assumption shown in Text Table). - Real peso-U.S. dollar exchange rate (2001=100, sample values): 49.651.352.954.555.856.557.057.157.157.157.152.156.857.1 - Average CPI inflation in authorities’ scenario (percent): 7.77.77.26.86.46.15.85.24.43.53.57.45.03.5 - Authorities’ appropriable primary surplus assumption: 2¾ percent (near term) and 2 percent (long term). - Staff reform scenario primary surplus path: at least 4½ percent of GDP (2005–07); 3½ percent (2008–15); 2¾ percent (outer years). - New market borrowing under authorities’ scenario (2005–2008): 1¾ percent of GDP (US$3.2 billion). - Additional market borrowing under staff scenario (C) relative to authorities: almost US$2 billion (2005–08). *Source: Argentine authorities; and staff projections (IMF staff estimates and annex tables).* ### 9. The reduction in the required market borrowing would be substantial and ### 9. The reduction in the required market borrowing would be substantial and ### Impact of reduced market borrowing - Under the described scenario, market borrowing would be about ¾ percent of GDP. - This is 1¾ percentage points of GDP lower than in the staff’s baseline scenario (C). - The reduction would lower required rollover rates to an average of only 34 percent in the near term. - Annex Table 4 is cited as showing a substantial reduction in required market borrowing and rollover risk. ### Sensitivity of debt dynamics (Section E) - The debt dynamics of the staff’s scenario (C) are highly sensitive to underlying macroeconomic assumptions. - Near-term risks: - Short-lived but large shocks to output growth, the exchange rate, or fiscal policy slippages can generate significant increases in the debt-to-GDP ratio (Annex Table 5). - The average long maturity of the debt structure should provide cushion against real interest rate shocks. - Long-term sensitivities (comparisons to the baseline scenario): - A permanent increase in interest rates by one percentage point would increase the 2030 debt ratio by 5 percentage points. - A permanent 1 percentage point reduction in the growth rate from 2006 would increase the 2030 debt ratio by 17 percentage points. - A 10 percentage point more depreciated level for the real exchange rate from 2006 would raise the 2030 debt ratio by 8 percentage points. - If combined, the above shocks would lead to unsustainable debt dynamics, with the debt ratio falling only very gradually until 2015 and remaining at high levels afterwards. - Conversely, a 10 percent more appreciated exchange rate would reduce the debt ratio by 8 percentage points by 2030. - A one-time increase in the debt stock of 10 percent of GDP (for example from liabilities in the banking and utility sectors) would not generate explosive dynamics but would significantly delay the transition to sustainable indebtedness. ### Robustness to alternative assumptions on new market borrowing - Near-term debt dynamics are robust to alternative assumptions on terms of new market borrowing; differences mostly affect 2016–30. - An assumption of gradually declining spreads would reduce the debt-to-GDP ratio by 1½ percentage points by 2030 compared to staff scenario C. - Using bonds with a five-year grace period and a 15-year amortization for new borrowing: - Would raise average amortizations by 0.1 percent of GDP in 2009–2015. - Would reduce average amortizations by ⅓ percent of GDP in the outer years (2016–30). - Would not affect the debt stock. ### Net-present-value (NPV) burden of debt service - Long maturities and below-market interest rates on a large part of the debt imply the average carrying cost (cash basis) rises gradually from low levels. - For discount rates between 8 and 12 percent, the net present value of outstanding debt service obligations at end-2005 is lower than the face value of debt by between 8 to 23 percentage points of GDP. - The largest NPV relief is from the restructured debt; existing performing debt and debt to official creditors also contribute to NPV relief. - Table excerpt (Debt Stock at End-2005, in percent of GDP by discount rate): - Discount rate 8 percent: NPV 70 - Discount rate 9 percent: NPV 65 - Discount rate 10 percent: NPV 61 - Discount rate 11 percent: NPV 58 - Discount rate 12 percent: NPV 55 - Footnote on declining spreads exercise: - Assumes spreads over US government bonds decline from 490 basis points in 2005 to 400 in 2015 and 150 by end of projection period (corresponding to interest rates of 8.4 percent and 6.4 percent, respectively). ### Selected financing and projection highlights (as presented in Annex tables) - Uses of funds (example rows from multiple scenarios; in percent of GDP unless noted): - Total cash interest payments around 2.1–2.6 in various scenarios (tables show values such as 2.4, 2.2, 2.5). - Amortizations typically around 5.6 in 2005 with varying paths (examples: 5.6, 4.8, 5.8, 4.9 across scenarios). - New borrowing varies by scenario (examples: 4.3; 3.7; 4.8; 1.4; 2.2; 2.0; 1.8 in different tables/sequences). - Federal debt stock (selected year-end levels, percent of GDP and US$ bn as shown): - Federal debt stock (percent of GDP) examples: 79, 73, 69, 65, 62, 59, 55, 51, 49, 47, 45 (varies by scenario and year). - Federal debt in U$ dollars (bn) examples: 134, 136, 138, 141, 143, 146, 145, 146, 148, 149, 150 (table entries). - Restructured Debt (US$ bn) examples: 27, 26, 25, 24, 24, 23, 22, 22, 22, 21, 20. - Newly issued debt sequences displayed in tables (numeric strings shown in original tables). - Memorandum and other items (selected values preserved exactly as in source): - Outstanding Fund credit (US$ billion): examples include 11.7, 11.2, 11.6, 9.7, 10.1, 8.5, 4.1, 0.4, 0.0 (varies across scenarios and years). - Consolidated primary surplus (program definition): examples 3.8, 3.7, 3.3, 2.3 across periods. - Implied rollover rates (in percent of debt falling due) for private sector debt: examples include 95, 61, 58, 59, 82, 74, 80, 79, 69, 110, 116, 68, 87, 160 in one table; other tables present different series (e.g., 129, 93, 157, 162, ...). - Real GDP growth (percent) example series: 6.2, 3.8, 3.6, 3.4, 3.2, 3.0, 3.0, 3.0, 3.0, 3.0, 3.0, 4.2, 3.0, 3.0. - Real peso-U.S. dollar exchange rate (2001=100) example: 49.6, 51.3, 52.9, 54.5, 55.8, 56.5, 57.0, 57.1, 57.1, 57.1, 57.1, 52.1, 56.8, 57.1. - Average inflation rate (percent) example: 7.7, 7.7, 7.2, 6.8, 6.4, 6.1, 5.8, 5.2, 4.4, 3.5, 3.5, 7.4, 5.0, 3.5. - Effective interest rate (in percent) examples: 2.2, 2.9, 3.2, 3.5, 4.0, 4.4, 4.5, 4.8, 4.9, 5.7, 5.8, 2.9, 4.9, 6.7 (varies by table and scenario). - Interest rate on new dollar borrowing (percent) shown as 9.0 or 10.0 in different tables. - Capitalized interest example series: 3.2, 2.7, 2.4, 2.2, 1.8, 1.6, 1.4, 1.1, 1.0, 0.5, 0.5, 2.6, 1.1, 0.3. - Inflation adjustment example series: 2.3, 2.1, 1.8, 1.6, 1.4, 1.2, 1.1, 0.8, 0.7, 0.5, 0.5, 2.0, 0.9, 0.3. - Coupon (mainly on restructured debt) example series: 0.8, 0.7, 0.6, 0.5, 0.4, 0.3, 0.3, 0.3, 0.3, 0.0, 0.0, 0.6, 0.2, 0.0. - Possible market access (in percent of private debt falling due) example entries: 1.2, 1.3, 1.3, 1.2, 2.3, 1.7, 1.9, 1.4, 0.7, 0.8, 2.9, 1.2, 1.7, 2.7 and other scenario-specific series. ### Historical and projection framework (selected items) - Federal debt (percent of GDP) historical and projection samples: - 2000: 51.1 - 2001: 53.8 - 2002: 147.7 - 2003: 139.8 - 2004: 129.4 - 2005: 78.2 - 2006: 71.8 - 2007: 67.0 - 2008: 62.9 - 2009: 59.7 - 2010: 56.9 - Identified debt-creating flows and components (selected entries): - Change in debt 2005: -51.2 (and subsequent year changes such as -6.4, -4.8, -4.2, -3.2, -2.8) - Primary balance (- surplus) examples: -1.0, -0.2, -0.9, -2.3, -3.9, -3.7, -3.7, -3.7, -3.3, -3.3, -3.3 - Automatic debt dynamics examples: 3.3, 6.9, 137.2, -32.8, -18.2, -13.5, -5.2, -3.4, -3.0, -2.1, -1.4 - Contribution from interest rate/growth differential examples: 3.3, 6.9, 5.1, -20.8, -19.5, -13.2, -6.0, -4.1, -3.6, -2.8, -2.4 - Contribution from exchange rate depreciation examples: 0.0, 0.0, 132.1, -12.0, 1.2, -0.4, 0.9, 0.7, 0.6, 0.7, 1.0 - Key macro/fiscal assumptions (selected historical averages and projections): - Real GDP growth (percent) examples: -0.8, -4.4, -10.9, 8.8, 9.0, 1.3, 6.8, 6.2, 3.8, 3.6, 3.4, 3.2, 3.0. - Average nominal interest rate on public debt (percent) examples: 7.2, 7.3, 27.3, 3.3, 2.2, 7.5, 7.2, 2.1, 3.3, 3.5, 3.7, 4.3, 4.6. - Average real interest rate (percent) examples: 6.1, 8.4, -3.2, -7.2, -6.7, 2.6, 6.1, -5.0, -4.5, -2.5, -2.3, -1.5. _Italic: Source—_cr05236 - 9. The reduction in the required market borrowing would be substantial and (IMF PDF chapter content provided) ### 2. Real interest rate is at historical average plus two standard deviations in 2006 and 2007 ### _cr05236 - 2. Real interest rate is at historical average plus two standard deviations in 2006 and 2007 ### II. Stress Tests for Public Debt Ratio — Scenario Results (federal government debt) - Baseline (implicit starting point shown as 78.2 then projections): - 78.2 - 85.4 - 93.4 - 88.0 - 83.8 - 80.3 - 2. Real interest rate is at historical average plus two standard deviations in 2006 and 2007 - 78.2 - 85.4 - 93.4 - 88.0 - 83.8 - 80.3 - 3. Real GDP growth is at historical average minus two standard deviations in 2006 and 2007 - 78.2 - 88.5 - 105.4 - 107.0 - 109.7 - 113.1 - 4. Primary balance is at historical average minus two standard deviations in 2006 and 2007 - 78.2 - 77.0 - 77.1 - 72.3 - 68.7 - 65.5 - 5. Combination of 2-4 using one standard deviation shocks - 78.2 - 93.1 - 110.1 - 103.8 - 99.2 - 95.4 - 6. One time 30 percent real depreciation in 2006 8/ - 78.2 - 96.4 - 90.3 - 85.0 - 80.9 - 77.5 - 7. 10 percent of GDP increase in other debt-creating flows in 2006 - 78.2 - 81.7 - 76.3 - 71.6 - 67.9 - 64.8 Notes on definitions and derivations (as provided) - Federal government debt (excludes public deposits). Based on staff scenario C. - Debt dynamics formula (footnote 2): Derived as [(r - π(1+g) - g + αε(1+r))/(1+g+π+gπ)] times previous period debt ratio, with r = interest rate; π = growth rate of GDP deflator; g = real GDP growth rate; α = share of foreign-currency denominated debt; ε = nominal exchange rate depreciation (measured by increase in local currency value of U.S. dollar). - Real interest rate contribution: derived from the numerator in footnote 2 as r - π(1+g). - Real growth contribution: -g. - Exchange rate contribution: derived from the numerator in footnote 2 as αε(1+r). - Real depreciation definition (footnote 8/): nominal depreciation (measured by percentage fall in dollar value of local currency) minus domestic inflation (based on GDP deflator). ### I. Baseline Projections — Federal/external debt and flows (selected series, 2000–2010) - External debt (in percent of GDP), 2000–2010: - 2000: 51.6 - 2001: 61.8 - 2002: 154.6 - 2003: 129.6 - 2004: 116.7 - 2005: 65.3 - 2006: 58.6 - 2007: 52.2 - 2008: 46.7 - 2009: 42.8 - 2010: 39.2 - Change in external debt (2000–2010): - 0.3, 10.3, 92.8, -25.0, -12.9, -51.4, -6.7, -6.4, -5.5, -3.9, -3.6 - Identified external debt-creating flows (4+8+9), 2000–2010: - 1.3, 3.6, 91.5, -38.3, -25.3, -11.1, -5.5, -4.8, -4.4, -3.9, -3.7 - Current account deficit, excluding interest payments, 2000–2010: - -1.2, -3.1, -15.0, -9.6, -4.6, -5.9, -4.4, -3.7, -3.2, -2.5, -2.3 - Deficit in balance of goods and services, 2000–2010: - 0.7, -1.3, -15.3, -11.7, -7.4, -5.2, -2.8, -2.2, -2.0, -2.0, -2.1 - Exports (percent of GDP), 2000–2010: - 11.0, 11.5, 28.3, 26.3, 25.8, 24.6, 22.9, 22.0, 21.6, 21.5, 21.6 - Imports (percent of GDP), 2000–2010: - 11.6, 10.3, 13.0, 14.6, 18.4, 19.5, 20.1, 19.8, 19.6, 19.5, 19.5 - Net non-debt creating capital inflows (negative), 2000–2010: - -1.8, -0.8, -2.0, -1.1, -2.2, -2.0, -2.1, -2.0, -2.2, -2.2, -2.1 - Automatic debt dynamics 2/ (contribution, 2000–2010): - 4.2, 7.5, 108.4, -27.6, -18.4, -3.3, 1.0, 1.0, 0.9, 0.7, 0.8 - Contribution from nominal interest rate (2000–2010): - 4.3, 4.5, 6.5, 3.8, 2.6, 3.2, 3.2, 2.9, 2.6, 2.1, 2.0 - Contribution from real GDP growth (2000–2010): - 0.4, 2.4, 17.8, -10.9, -9.8, -6.4, -2.3, -2.0, -1.6, -1.4, -1.2 - Contribution from price and exchange rate changes 3/ (2000–2010): - -0.5, 0.6, 84.1, -20.5, -11.3, ... - Residual, incl. change in gross foreign assets (2-3) 4/ (2000–2010): - -1.0, 6.7, 1.3, 13.3, 12.3, -40.3, -1.2, -1.7, -1.0, 0.0, 0.1 - External debt-to-exports ratio (in percent), 2000–2010: - 470.6, 536.4, 546.5, 492.4, 452.5, 264.9, 256.3, 236.8, 216.1, 199.3, 181.6 - Gross external financing need (in billions of US dollars) 5/, 2000–2010: - 49.0, 48.1, 26.4, 29.3, 32.4, 17.9, 19.2, 24.2, 23.7, 21.2, 21.9 - Gross external financing need (in percent of GDP), 2000–2010: - 17.2, 17.9, 26.1, 23.1, 21.3, ... ### Key Macroeconomic Assumptions (selected averages and period values) - Real GDP growth (in percent): - -0.8, -4.4, -10.9, 8.8, 9.0, 1.3, 6.8, 6.2, 3.8, 3.6, 3.4, 3.2, 3.0 - GDP deflator in US dollars (change in percent): - 1.0, -1.1, -57.6, 15.3, 9.5, -3.4, 19.9, 6.1, 5.6, 4.1, 4.3, 3.8, 2.9 - Nominal external interest rate (in percent): - 8.5, 8.2, 4.0, 3.1, 2.4, 6.5, 2.4, 3.1, 5.4, 5.4, 5.3, 4.9, 4.9 - Growth of exports (US dollar terms, in percent): - 11.5, -0.5, -7.3, 16.7, 16.9, 7.9, 12.2, 7.7, 1.7, 3.9, 5.8, 6.3, 6.5 - Growth of imports (US dollar terms, in percent): - 0.5, -16.6, -52.1, 41.1, 50.4, 4.7, 30.0, 19.1, 13.0, 6.5, 6.5, 6.5, 6.0 - Current account balance, excluding interest payments: - 1.2, 3.1, 15.0, 9.6, 4.6, 3.1, 5.3, 5.9, 4.4, 3.7, 3.2, 2.5, 2.3 - Net non-debt creating capital inflows: - 1.8, 0.8, 2.0, 1.1, 2.2, 1.8, 1.1, 2.0, 2.1, 2.0, 2.2, 2.2, 2.1 ### II. Stress Tests for External Debt Ratio — Alternative Assumptions (B scenarios) - B1. Nominal interest rate is at historical average plus two standard deviations in 2005 and 2006 - 65.3, 62.1, 59.0, 53.4, 49.3, 45.6 - B2. Real GDP growth is at historical average minus two standard deviations in 2005 and 2006 - 65.3, 70.1, 75.2, 68.8, 64.2, 60.0 - B3. Change in US dollar GDP deflator is at historical average minus two standard deviations in 2005 and 2006 - 65.3, 112.4, 192.2, 180.9, 173.2, 166.1 - B4. Non-interest current account is at historical average minus two standard deviations in 2005 and 2006 - 65.3, 70.5, 75.0, 69.0, 64.6, 60.8 - B5. Combination of B1-B4 using one standard deviation shocks - 65.3, 100.5, 149.9, 136.9, 127.4, 118.9 - B6. One time 30 percent nominal depreciation in 2005 - 65.3, 83.7, 76.1, 69.7, 65.1, 60.9 Notes on alternative definitions (as provided) - External debt dynamics formula (footnote 1): Derived as [r - g - ρ(1+g) + εα(1+r)]/(1+g+ρ+gρ) times previous period debt stock, with r = nominal effective interest rate on external debt; ρ = change in domestic GDP deflator in US dollar terms; g = real GDP growth rate; ε = nominal appreciation (increase in dollar value of domestic currency); α = share of domestic-currency denominated debt in total external debt. - Contribution from price and exchange rate changes (footnote 3): defined as [-ρ(1+g) + εα(1+r)]/(1+g+ρ+gρ) times previous period debt stock. - Gross external financing need defined (footnote 5) as current account deficit, plus amortization on medium- and long-term debt, plus short-term debt at end of previous period. *Source: Table 5 and Table 6 excerpts and accompanying notes from the IMF staff report (annex tables and footnotes as provided in the source content).* ### 6. IDB disbursements for 2004 totaled US$341.0 million. As the country moves away ### _cr05236 - 6. IDB disbursements for 2004 totaled US$341.0 million. As the country moves away ### Recent developments and indicators - Economic activity: - Real GDP increased 0.5 percent from the previous quarter (seasonally adjusted) in Q1 2005 and was up 8 percent year-on-year. - Staff projection for real GDP in 2005: 6–7 percent growth. - Inflation and prices: - Consumer prices increased by 0.6 percent in May 2005. - Inflation in the first five months of 2005: 5.2 percent. - 12-month inflation rate as of May 2005: 8.6 percent. - External and financial: - Gross international reserves rose to US$22.4 billion, surpassing the end-year forecast of US$20.7 billion. - Central bank president stated gross international reserves could rise to US$24 billion by end-2005. - Debt exchange settlement concluded on June 10, 2005; Standard & Poor’s assigned a B- rating to the new bonds; new bonds trade at a spread of 500–600bps over U.S.-Treasuries. - Longer-run context (IMF PIN summary): - Real GDP grew close to 9 percent in both 2003 and 2004. - Inflation reached 3¾ percent in 2003 and 6 percent in 2004. - Consolidated primary surplus: 3.0 percent of GDP in 2003 and 5.1 percent of GDP in 2004. - Total revenues rose from 23 percent of GDP in 2002 to 29 percent of GDP in 2004. - Poverty and labor: - Unemployment fell to about 13 percent in March 2005 from 17.8 percent in December 2002. - Additional 4.1 percent of labor force employed under emergency social assistance programs. - Extreme poverty fell to 17 percent in June 2004 (from 24.8 percent two years earlier). - Poverty rate declined to 44 percent in June 2004 (from a peak of 58 percent). ### Policy implementation and fiscal/monetary performance - Central bank and monetary policy: - Central bank foreign exchange purchases in the first two weeks of June 2005: over US$0.6 billion. - Total intervention since end-April 2005: over US$2.1 billion. - Interest rates on Lebacs increased slightly since mid-May 2005; base money remains close to the upper bound of the authorities’ monetary program. - Since January 2005, policy interest rates raised three times by a total of 125 basis points; repo rate at 3.75 percent. - Staff recommendation: bring base money to the lower end of the authorities’ target range, potentially requiring reduced foreign exchange intervention and further interest rate increases. - Fiscal performance: - Federal cash primary surplus in first five months of 2005: Arg$9.8 billion (1.9 percent of annual GDP), exceeding projections by about 0.7 percent of annual GDP. - Consolidated primary surplus in Q1 2005: Arg$6.3 billion (1.2 percent of GDP). - Provinces contributed 0.4 percent of GDP to the surplus in Q1 2005. - Approved 2005 budget target: consolidated primary surplus of 3.8 percent of GDP (cash basis). - Directors urged fiscal consolidation to avoid a budgetary financing gap in H2 2005 and recommended maintaining tight expenditure for the rest of the year. - Recent expenditure and labor measures: - Minimum pension increased by 16 percent: from Arg$302? to Arg$350 per month (text states raised by Arg$48 to Arg$350), effective June 1, 2005; authorities estimate annual cost of the measure: 0.3 percent of GDP. - Minimum wage increased from Arg$450 to Arg$630 per month, phased in through July 2005; estimated beneficiaries: 900,000 private sector workers and 130,000 public sector workers; preliminary fiscal impact on federal budget: almost neutral, with additional provincial burden. - Tax and capital flow measures: - Congress approved a tax administration law expanding inspection and enforcement powers, electronic communications to taxpayers, and higher penalties for tax irregularities. - Government introduced a 30 percent non-remunerated reserve requirement on capital inflows; exclusion: current account transactions, foreign direct investments, and primary issuances of bonds and shares. - Minimum stay of capital inflows extended from 180 to 365 days in late May 2005. - Staff expressed doubts about effectiveness of these controls and concern they may raise government financing costs. - Banking sector measures and supervision: - An earlier central bank regulation effectively weakens the targeted reduction in bank exposure to the public sector: the 40 percent limit by end-2005 excludes government securities maturing up to six months ahead. - Staff and Directors called for strict application of prudential standards, regulatory phase-in of market valuation of government bonds, limits on bank exposure to the public sector, and stronger incentives for early recapitalization. - Directors noted the banking system remains vulnerable and undercapitalized relative to international standards. - Public services and concessions: - New public services contracts agreed with 5 privatized companies, raising total renegotiated agreements to 19; Congress approved 8 of these agreements. - New agreements cover mainly companies with relatively low sales volume and do not establish tariff adjustment paths beyond 2005. - Table 1 highlights sectoral renegotiation progress (selected figures preserved): - Regulated concessions: 63 - Concessions with ongoing negotiations: 19 - Congressional approvals: 8 - Approximate share in total sales (all regulated concessions): 13.5 - Energy concessions: 22 - Electricity (transport and Distribution): Numbers in table: 11 concessions, 7 letters of intention signed, 1 contract canceled; tariffs adjusted/approximate revenues enhanced: yes; share in total sales: 7.0 - Urban Access roads: 4 concessions, 4 letters of intention signed, 3 contracts ongoing; tariffs adjusted: yes; tariffs 14-18 percent; share in total sales: 4.0 - Ports: 4 concessions, 4 letters of intention signed, 4 contracts ongoing; share in total sales: 0.8 - Fright railways: 5 concessions, 3 letters of intention signed; share in total sales: 1.5 - Inter-Urban roads: 15 concessions, 12 letters of intention signed, 1 contract canceled; tariffs adjusted: yes; share in total sales: 0.2 - Other entries noted (airports, river toll, passenger railways, bus terminal, postal services) with limited details. - Agreements include an average 15 percent price adjustment (electricity tariff increases exclude households). - 2004 interim contracts ended in December 2004 and were under new negotiations; public hearings for ports, urban access roads, and electricity took place between January and May 2005. - Debt restructuring and reserves use: - Argentina’s global debt exchange: 76 percent participation; debt burden declined to 72 percent of GDP (from 147 percent of GDP in 2002). - Approximately US$20 billion in principal in default remains outstanding. - Settlement of the debt exchange completed on June 2, 2005 after delays due to legal actions. - Directors considered appropriate that authorities may have flexibility to draw on reserves to finance near-term debt service, including repurchases to the Fund, while noting importance of preserving central bank financial soundness and autonomy. - European Investment Bank (EIB) arrears: - Issue of arrears to the EIB arose in 2003, caused nonobservance of continuous performance criteria under the standby arrangements, misreporting gave rise to five noncomplying purchases, and breaches of obligation under Article VIII. ### Executive Board assessment, key recommendations, and risks - Overall assessment: - Directors acknowledged Argentina’s strong recovery from the 2001 crisis but stressed many challenges remain. - The current growth momentum and political stability provide a window to implement policies committed under the 2003 stand-by arrangement. - Policy recommendations: - Continue responsible macroeconomic policies and guard against inflation. - Tighten both fiscal and monetary policies in 2005 to contain inflation as the output gap closes. - Clarify commitment to price stability as the prime objective of monetary policy and ensure central bank operational autonomy. - Reduce reliance on administrative price controls and moral suasion; avoid measures that could harm the investment climate. - Implement structural reforms to boost factor productivity, raise potential growth, strengthen the financial system, normalize creditor relations, and protect vulnerable populations. - Strengthen the institutional fiscal framework, including the Fiscal Responsibility Law; increase budgetary transparency and consistent provincial accounting; impose more binding constraints on provincial spending and borrowing; improve revenue-sharing arrangements. - Phase out distortionary taxes on exports and financial transactions in a revenue-neutral manner where feasible. - Reach collaborative long-term agreements with utility concessionaires and update the regulatory framework to ensure adequate investment incentives and consumer protection. - Develop a forward-looking strategy to resolve remaining arrears to private creditors and normalize relations with bilateral official creditors (Paris Club) and the EIB. - Risks and cautions: - Macro policy stance could weaken in 2005 relative to 2004, risking higher inflation. - Use of capital controls and foreign exchange intervention may have adverse effects on market deepening and government financing costs; some Directors cautioned against capital controls. - Banking system vulnerabilities, incomplete resolution of policy-induced losses, and judicial uncertainty over amparos pose risks to financial stability. - Debt sustainability requires a high and sustained fiscal effort under a proactive reform scenario to reduce debt-to-GDP to more comfortable levels. *Prepared by Staff Representative for the 2005 Consultation with Argentina; Approved June 17, 2005.* ### Section 5 of the Fund’s Articles of Agreement. On December 10, 2004 Argentina cleared these ### _cr05236 - Section 5 of the Fund’s Articles of Agreement. On December 10, 2004 Argentina cleared these ### Executive Board action and Article VIII, Section 5 - On December 10, 2004 Argentina cleared arrears to the EIB. - On the basis of this corrective measure, the Executive Board granted waivers of the nonobservances of the performance criteria underlying the misreporting and agreed that no further remedial action was warranted with respect to the breaches of Article VIII, Section 5. ### Public Information Notices (PINs) - PINs are issued: - (i) at the request of a member country, following the conclusion of the Article IV consultation for countries seeking to make known the views of the IMF to the public; and - (ii) following policy discussions in the Executive Board at the decision of the Board. - This action is intended to strengthen IMF surveillance over the economic policies of member countries by increasing the transparency of the IMF's assessment of these policies. ### Argentina: Selected Economic and Financial Indicators (2000–2004) — key figures - GDP at constant prices (annual percentage changes): 2000: -0.8; 2001: -4.4; 2002: -10.9; 2003: 8.8; 2004 (Est.): 9.0. - Domestic demand (contribution to growth): 2000: -1.1; 2001: -6.5; 2002: -16.9; 2003: 10.4; 2004 (Est.): 11.0. - Net exports (contribution to growth): 2000: 0.3; 2001: 2.1; 2002: 6.0; 2003: -1.5; 2004 (Est.): -2.0. - Per capita GDP (U.S. dollars, thousands): 2000: 7.9; 2001: 7.4; 2002: 2.8; 2003: 3.4; 2004 (Est.): 4.1. - Consumer prices (average): 2000: -0.9; 2001: -1.1; 2002: 25.9; 2003: 13.4; 2004 (Est.): 4.4. - Consumer prices (end-of-period): 2000: -0.7; 2001: -1.5; 2002: 41.0; 2003: 3.7; 2004 (Est.): 6.1. - Population (millions): 2000: 35.9; 2001: 36.3; 2002: 36.6; 2003: 37.0; 2004 (Est.): 37.4. - Population below poverty line (in percent): 2000: 29.7; 2001: 35.4; 2002: 53.0; 2003: 47.8; 2004 (Est.): 44.3. - Population below extreme poverty line (in percent): 2000: 7.5; 2001: 12.2; 2002: 24.8; 2003: 20.5; 2004 (Est.): 17.0. - Unemployment rate: 2000: 14.7; 2001: 18.3; 2002: 20.8; 2003: 14.5; 2004 (Est.): 12.1. - Trade balance (U.S. dollars, billions): 2000: 1.1; 2001: 6.2; 2002: 16.7; 2003: 15.7; 2004 (Est.): 12.1. - Exports, f.o.b. (U.S. dollars, billions): 2000: 26.3; 2001: 26.5; 2002: 25.7; 2003: 29.6; 2004 (Est.): 34.5. - of which: net exports of hydrocarbons: 2000: 3.9; 2001: 3.9; 2002: 4.1; 2003: 4.5; 2004 (Est.): 4.1. - Imports, c.i.f. (U.S. dollars, billions): 2000: 25.3; 2001: 20.3; 2002: 9.0; 2003: 13.8; 2004 (Est.): 22.3. - Export growth (in U.S. dollar terms): 2000: 13.0; 2001: 0.8; 2002: -3.4; 2003: 15.3; 2004 (Est.): 16.5. - Import growth (in U.S. dollar terms): 2000: -0.9; 2001: -19.6; 2002: -55.8; 2003: 53.9; 2004 (Est.): 61.3. - Export volume (annual %): 2000: 2.7; 2001: 4.3; 2002: 0.7; 2003: 5.0; 2004 (Est.): 6.6. - Import volume (annual %): 2000: -0.9; 2001: -17.4; 2002: -54.1; 2003: 53.2; 2004 (Est.): 47.0. - Terms of trade (deterioration -): 2000: 9.6; 2001: -0.6; 2002: -1.8; 2003: 8.9; 2004 (Est.): -0.6. - Net domestic assets of the financial system: 2000: -0.9; 2001: 14.9; 2002: 57.3; 2003: 46.2; 2004 (Est.): -5.3. - Credit to the private sector: 2000: -3.8; 2001: -20.2; 2002: -12.8; 2003: -15.5; 2004 (Est.): 15.4. - Augmented base money 2/: 2000: -8.8; 2001: -3.0; 2002: 152.9; 2003: 26.3; 2004 (Est.): 12.7. - Augmented broad money 2/: 2000: 3.2; 2001: -16.5; 2002: 24.7; 2003: 15.8; 2004 (Est.): 12.7. - Interest rate (30-day deposit rate, in percent): 2000: 11.3; 2001: 15.7; 2002: 39.1; 2003: 3.9; 2004 (Est.): 2.9. - Consolidated public sector primary balance (in percent of GDP): 2000: 0.4; 2001: -1.3; 2002: 0.6; 2003: 3.0; 2004 (Est.): 5.1. - of which: Federal government: 2000: 1.0; 2001: 0.2; 2002: 0.9; 2003: 2.3; 2004 (Est.): 3.9. - Overall balance (in percent of GDP): 2000: -3.6; 2001: -5.9; 2002: -1.8; 2003: 1.1; 2004 (Est.): 3.7. - Revenues (in percent of GDP): 2000: 24.6; 2001: 23.7; 2002: 23.0; 2003: 25.9; 2004 (Est.): 28.9. - Expenditures 3/ (in percent of GDP): 2000: 28.2; 2001: 29.6; 2002: 24.8; 2003: 24.8; 2004 (Est.): 25.1. - Total debt (U.S. dollars billions, year-end): 2000: 145.1; 2001: 167.0; 2002: 152.6; 2003: 184.8; 2004 (Est.): 201.4. - Total debt (year-end, in percent of GDP): 2000: 51.1; 2001: 62.2; 2002: 164.2; 2003: 144.5; 2004 (Est.): 133.9. - Gross domestic investment (in percent of GDP): 2000: 16.2; 2001: 14.2; 2002: 12.0; 2003: 15.1; 2004 (Est.): 19.1. - of which: Public sector: 2000: 1.5; 2001: 1.5; 2002: 0.9; 2003: 1.5; 2004 (Est.): 2.5. - Gross national savings (in percent of GDP): 2000: 13.0; 2001: 12.7; 2002: 20.4; 2003: 20.9; 2004 (Est.): 21.1. - of which: Public sector: 2000: -2.1; 2001: -4.5; 2002: -0.9; 2003: 3.1; 2004 (Est.): 6.2. - Current account balance (in percent of GDP): 2000: -3.2; 2001: -1.4; 2002: 8.5; 2003: 5.8; 2004 (Est.): 2.0. - Outstanding use of Fund resources (in percent of quota at end-of-period): 2000: 183.2; 2001: 525.3; 2002: 498.2; 2003: 493.4; 2004 (Est.): 428.9. - Gross international reserves (U.S. dollars, billions) /4: 2000: 26.9; 2001: 14.9; 2002: 10.5; 2003: 14.1; 2004 (Est.): 19.6. - Gross international reserves (in months of imports of goods and services): 2000: 9.8; 2001: 6.5; 2002: 9.5; 2003: 9.1; 2004 (Est.): 8.5. - Nominal GDP (in billions of Arg $): 2000: 284.2; 2001: 268.7; 2002: 312.6; 2003: 375.9; 2004 (Est.): 447.3. Notes: Sources cited in the table include Ministry of Economy; Central Bank of the Republic of Argentina; and Fund staff estimates. 1/ Poverty data for 2004 Q1. 2/ Includes quasi-monies in circulation. 3/ Excludes interest due on nonperforming debt. 4/ Assumes no disbursements from the Fund in 2005 and 2006. ### Statement by Hector Torres, Executive Director for Argentina (June 20, 2005) — main findings and policy points - Economic performance since April 2002: - Real GDP grew by 28 percent over three years following the crisis peak in April 2002. - Industrial production increased 50 percent. - Investment reached 21 percent of GDP in current prices in Q4 2004 (described as a historical record). - Exports at historical record growing at 20 percent annual rate; industrial goods exports showing an annual growth rate of 43 percent. - Consolidated primary surplus reached over 5 percent of GDP in 2004. - 2.5 million new jobs were created during this period, with more than 80 percent by the private sector. - Poverty substantially reduced but “hovering the 40 percent level.” - Claim: GDP stands at a level similar to the record reached in the second semester of 1998. - External financing and IFI repayments: - Argentina’s expansion occurred in a context of lack of external financing, substantial net repayments to the IFIs and a significant build up in international reserves. - From January 2002 up to date (as stated in the statement), Argentina made net principal payments to the Fund of SDR 3 billion (about US$ 4.4 billion) and paid charges of SDR 1.4 billion (about US$ 2.1 billion), adding to total net payments to the Fund of SDR 4.4 billion (around US$ 6.5 billion). - For the same period, net debt payments to all the IFIs amounted to more than US$ 12 billion. - Political developments, privatized utilities, and investor climate: - The statement rejects the portrayal that government actions reflect antagonism toward foreign investors; emphasizes concrete commitments by several foreign companies. - Characterizes the government’s approach to utility renegotiations as a response to companies’ underperformance, over-indebtedness, and inherited unsound regulations (including US dollar-denominated utility rates indexed to U.S. inflation). - Notes that many companies have remained in Argentina despite difficulties; departures are sometimes part of regional strategies. - Macroeconomic policy issues and authorities’ positions: - Primary surplus: - Staff recommended a considerably higher primary surplus in the short- and long-term; authorities argue their budgeted stance and recent outturn mitigate procyclicality risks. - During the first five months of the year the primary surplus reached already 60 percent of the budgeted amount for the year as a whole. - Authorities note apparent inconsistency in staff advice to sustain a permanently high primary surplus while calling for elimination of distortive taxes that provide for some 4 percent of GDP in fiscal revenue and approval of a new revenue sharing law that would reduce the central government’s share of fiscal revenue. - Authorities highlight that overall public balance has been in permanent surplus since 2003, reaching 3.7 percent of GDP in 2004 and projected (under authorities scenarios) to be 1.3%, 1.8% and 1.9% in 2005, 2006 and 2007 respectively. - Authorities caution against cutting capital spending broadly; they argue prioritizing capital spending at the expense of infrastructure risks harming growth and agricultural efficiency. - Inflation containment: - Authorities state full commitment to containing inflation and have taken fiscal and monetary measures; further tightening will be taken if needed. - Central Bank sterilization of monetary consequences from reserve replenishment is highlighted; 90-day bill rates rose from 3.5 early in the year to 6.2 in the latest public offering (figures cited to illustrate sterilization effects). - Central Bank increased its benchmark rate for short-term loans to banks several times. - A program offering incentives to banks to make anticipated cancellations of rediscounts (granted during the crisis at relatively high interest rates) is another instrument to contract money supply. - Exports and growth: - Authorities stress exports and investment have driven strong growth; they contest staff emphasis on external support and argue Argentina’s growth began mid-2002, not early 2003. - Note that terms of trade improvement was positive in 2003 but slightly negative in 2004; projected impact for the current year is substantially negative (as described in the statement). ### Policy emphases and recommendations (authorities’ positions) - Maintain fiscal discipline while avoiding procyclical tightening that undermines growth; rely on actual fiscal performance comparisons rather than budgeted targets. - Preserve and prioritize infrastructure investment; avoid across-the-board cuts to capital spending. - Continue sterilized reserve accumulation and monetary tightening as needed to contain inflation. - Seek realistic, focused approaches to debt restructuring and renegotiation of privatized contracts that reflect firms’ historical performance and contractual features. - Support measures to maintain a favorable environment for foreign and domestic investment, recognizing differentiated treatment of problematic utility contracts. *Source: Statement by Hector Torres, Executive Director for Argentina; Table 1 and accompanying IMF staff text as provided in the source content.* ### 13. The increase in money demand derived from the larger than expected growth of ### _cr05236 - 13. The increase in money demand derived from the larger than expected growth of ### Money demand, money multiplier, and credit - The increase in money demand derived from the larger than expected growth of economic activity should be factored when assessing the risk of persistent monetary pressures. - The rise in the money multiplier is welcomed to the extent it comes with a revitalization of bank credit to support investment and economic activity, particularly for small and medium sized companies. - Credit indicators: - Ratio of credit to GDP is now only at 9 percent, compared to 23 percent during the late 1990s. - Administrative controls and moral suasion affect only a limited subset of goods pertaining to low-income consumption baskets; the majority of goods remain fully free. ### Exports, exchange rate policy, and export taxes - Export volumes in general and manufactured goods in particular are growing steadily; maintaining a competitive foreign exchange rate appears to be working. - Adjustment of exchange rates and changes in relative prices require time to transform the productive structure to generate more exports. - Staff assertions that export taxes damage export performance are presented without supporting evidence in the staff report. - Export taxes are argued to: - Contain the increase in prices of basic consumer products. - Provide revenue to finance social programs necessary to address the social consequences of the crisis. ### Productivity, investment climate, and currency valuation - Authorities agree that increasing productivity and efficiency is key to sustaining exports over the medium term. - Authorities commit to creating a favorable investment climate through market confidence in sound macroeconomic and structural policies. - Authorities view an appreciated currency as a hindrance to sustainable growth based on 1990s experience. - Present nominal value of the currency represents a real appreciation rate for the peso of 16 percent vis a vis the US dollar since early 2003. ### Unemployment and labor market participation - The staff’s Box 2 links the increase in Argentina’s unemployment rate to higher female labor market participation; authorities reject this as an inadequate explanation. - Historical context offered: - Unemployment increased by 12 percentage points between 1992 and 2001. - Authorities assert unemployment in the 90s was generated by the economic model in place, aligned with the Washington Consensus. ### Intergovernmental fiscal relations and the Fiscal Responsibility Law (FRL) - Staff argue post-crisis fiscal discipline occurred in a context of a lack of available financing and might not persist if financing constraints disappear unless institutional changes are introduced. - Authorities respond that: - Provincial financial administration discipline efforts resulted in substantial provincial savings for the first time in decades. - The recently approved Fiscal Responsibility Law contains key improvements compared to the past and increases transparency. - FRL implementation: - Ratified by 18 of the 24 provinces, representing more than 80 percent of total provincial spending. - A comprehensive reform as requested by staff is considered politically and constitutionally infeasible in current circumstances. - Suggested reforms of the intergovernmental tax revenue sharing system have low short-term prospects of agreement; a new coparticipation law would likely imply a revenue loss for the Central Government, conflicting with the need to sustain a high fiscal primary surplus. ### Banking system soundness, public banks, and public sector deposits - The strategic role of public banks increased after the crisis due to depositor preference for perceived safety, not administrative takeover. - Clarifications to paragraph 33: - Since 2002 public banks have increased their share in total deposits marginally, mainly explained by a strong increase in public deposits. - From December 2003 to March 2005, the share of public banks in total deposits decreased from 47 percent to 46 percent. - Deposits of the public sector in these banks increased by 11 percentage points. - Authorities’ view: - Public banks should help reach areas, population segments, and business communities that private banks do not naturally reach, while maintaining efficiency, profitability, and close regulatory oversight. - Strategic reviews: - Banco Provincia review completed and showed encouraging results; Banco Nación review to be initiated. - Banco Provincia is implementing a medium-term action plan to improve operational performance. ### Public securities in bank portfolios and regulatory limits - Paragraph 33’s claim that “the share of public securities in bank’s portfolios has risen substantially” is countered: - Even considering BCRA bills, the share of public securities in bank portfolios was slightly reduced from 50 percent by the end of 2003 to 47 percent in April, 2005. - BCRA bills are not counted as part of the regulatory government bonds limit of 40 percent of assets. - Considering the regulatory definition, government bonds in banks’ portfolios represent on average 38 percent of assets, and their share has been reduced since the beginning of the year. - Authorities are not retracting from regulatory norms that allow temporary forbearance until international standards are fully applied. ### Bank profitability, capital strengthening, and pesoization adjustments - Banking system performance: - The system reduced its losses during 2004 and obtained operational profits during the first quarter of 2005 amid continued increases in total deposits and rapid growth of private sector credit. - Profits are identified as the key variable to progressively strengthen the capital base via capitalization and incentives for voluntary recapitalization. - Balance-sheet improvements have occurred through reduction of external debt in many banks, including debt capitalization and early repayment of rediscounts. - Fresh capitalization has taken place in recent months; all banks have completed business plans incorporating important capital base improvements. - Compensation for asymmetric pesoization and indexation of bank assets and liabilities is largely done; remaining differences concern a small proportion of claims (around 10 percent of total claims). - Court injunctions (“amparos”): - Authorities stated the problem falls under judicial competence and the government would not compensate banks for this reason. - Favorable Supreme Court decisions upholding “pesoisation” contributed to a dramatic halt of further judicial claims, sharply reducing the amount of “amparos”. - Banks have been allowed to amortize the losses generated by “amparos” during a five year period. ### Renegotiation of contracts with privatized utilities - Progress noted in ports and highway concessions, freight railways’ operators, and electricity companies. - Analysis often simplified to tariff questions; authorities emphasize balance sheet positions and high hard-currency indebtedness requiring restructuring. - Government efforts focus on facilitating restructurings and addressing investment commitments. - Government implementing a progressive adjustment of tariffs that are progressively starting to impact family units, aiming to ensure profitability while addressing needs of vulnerable social groups. ### ICSID decision and investment claims - Recent ICSID decision favored a company owning a minority stake in one gas transportation company seeking compensation for losses originating in pesoification and tariff freezing since 2002. - Authorities question the legitimacy of those claims and argue international investment protection agreements guarantee protection against discriminatory treatment, which they contend did not occur. - Noted that the decision recognized no expropriation occurred as a result of pesoization and tariff freeze; the finding in favor of the claimant is characterized as inconsistent. - The majority-stake company withdrew its claims with ICSID and recent public announcements indicated an agreement is soon to be reached. ### Debt restructuring, LIA policy, and negotiations with creditors - Staff characterize Argentina as not complying with the lending into arrears policy (LIA) in Box 5 and paragraph 48; authorities dispute this as unsupported and assert the matter should be considered by the Board in due course. - Authorities’ position: - The main purpose of the LIA policy is to normalize relations with creditors, a result they say has been advanced and recently ratified by rating agencies. - Argentina states it fully complied with the LOI dated March 10, 2004, having "endeavour[ed] to avoid a piecemeal approach to the debt restructuring". - Argentina did not include a nominal minimum participation threshold in the prospectus after deciding it could hinder the overarching objective of achieving a broadly supported restructuring; the debt offer was accepted by a vast majority of creditors. - Box 5’s claim that “negotiations with private creditors were not constructive for the most part” is contested: - Authorities traveled extensively to meet creditors, shaped the final exchange offer with suggestions from meetings (e.g., incorporation of GDP-linked bonds, the Most Favored Lender Clause, and Law 26.017 precluding executive re-opening of the debt exchange offer). - The LIA policy does not demand negotiations with creditors in all cases. - Debt sustainability and fiscal effort: - Both authorities’ and Staff’s DSA analyses show that even with the substantial hair cut obtained, the fiscal effort required over the medium-term will be totally unprecedented for the Argentine economy. - The Argentine exchange offer is described as embedding the maximum effort the economy could make without jeopardizing growth prospects. ### Treatment of holdout creditors - Holdout creditors chose to reject the offer by free choice; authorities portrayed the decision as potentially ill-advised. - Government communicated clearly that the exchange offer was the only one to be put forward and that no sweeteners were to be expected. - Authorities acknowledge the existence of a contingent liability from holdouts and intend to formulate a forward-looking strategy, within the legal framework and consistent with the prospectus, to address any remaining arrears with private creditors. *Source: IMF content unit _cr05236 - 13. The increase in money demand derived from the larger than expected growth of (PDF).* ### 29. In discussing the Argentine debt sustainability analysis, the staff characterize as ### _cr05236 - 29. In discussing the Argentine debt sustainability analysis, the staff characterize as ### Critique of staff DSA and growth assumptions - Staff characterize the authorities' scenario A as unrealistic despite assuming current policies are maintained. - Staff assumption: growth will decline to 2 percent a year while inflation and borrowing costs increase. - Authorities' view: - Scenario A is consistent with actual developments and government objectives: sustainable output growth, employment creation and poverty reduction. - The main variable to achieve these objectives is a strong macroeconomic framework; structural reforms are effective only within that context. - During the 1990s Argentina was regarded as a star performer because of structural reforms, while a consistent macroeconomic framework was downplayed. - Post-crisis developments include: an impressive fiscal primary surplus, trade and current account surpluses, a competitive exchange rate, and “dedollarization” of financial assets and liabilities within a flexible and stable macroeconomic framework. - Authorities’ conservative assumptions: - GDP growth will converge to 3 percent. - Investment to GDP ratio assumed: 21 percent (noted as higher than the maximum ratio achieved during the Convertibility period, 20.4 percent in 1998 at current prices). - Investment ratio described as just enough to sustain 3 to 3.5 percent GDP growth. ### Staff logic on structural reforms and primary surpluses - Authorities assert the staff draws a simplistic implication that implementing structural reforms plus an unrealistic primary surplus alone will produce higher growth. - Authorities assume modest long-run real exchange rate appreciation and prudent interest rates consistent with their growth, employment, and poverty targets. ### Fund financing, budgetary financing, and historical practice - Staff statement (paragraph 42): “Fund purchases should not be relied upon as a source of budgetary financing.” - Authorities: maintaining the stock of debt to the Fund constant should not be construed as budgetary financing but as covering the overall financing gap, not supporting current or capital expenditures. - Staff assertion (paragraph 44): “since the currency board regime, the central bank has onlent Fund resources to the federal government to help finance its budget deficit.” - Authorities note this occurred only up until 2001 (the demise of the currency board); since 2002 onwards, budget accounts began rendering an overall surplus used to substantially reduce exposure of the Fund and other IFIs. ### Debt sustainability scenarios B, C, and D — staff findings and authorities' objections - Excluding Fund financing altogether (scenario B) leads to an unsustainable debt ratio per staff analysis. - Rosier staff scenario C (no Fund financing, higher primary surplus plus structural reforms) would require a rollover rate of private sector debt during 2005-2008 higher than the possible market access estimated by staff. - Scenario D yields a sustainable debt profile and a financing surplus, implying higher capacity to pay than projected obligations. - Scenario D assumptions highlighted by staff include maintaining over the medium-term a primary surplus of 4.5 percent a year and appropriating Central Bank reserves equivalent to 6.9 percent of GDP between 2005 and 2008 to pay the Fund. - Authorities’ critique: - Scenario D appears unconvincing given prior characterization of Argentina’s external position as vulnerable. - Staff previously noted Argentina’s balance of payments outlook “remains vulnerable” due to: relatively low reserve coverage, unclear prospects for reaccessing international capital markets, and large debt service payments over the next 12 months — including US$8.1 billion to the IFIs. - Authorities view the exercise as suggesting Argentina does not need assistance and as prioritizing rapid Fund repayment at risk to growth and social needs. ### Use of Central Bank reserves and implications for BCRA independence - Scenario D predicates repurchases to the Fund financed by foreign exchange reserves of the Central Bank. - Staff claim this is common practice among membership; authorities dispute this for their constituency and request evidence. - Authorities’ position: - Reducing debt to the Fund should not undermine Central Bank independence or its capacity to conduct effective monetary policy and defend the national currency. - Repurchases to the Fund should be based on fiscal surpluses or, when reasonable interest rates justify it, on market-based financing. - Staff suggestion in Annex 1: government should give the Central Bank 15-year bonds, with a five-year grace period, to preserve the financial integrity of the BCRA. - Authorities argue foreign exchange reserves support the money supply and government bonds cannot substitute; using reserves in this way would weaken monetary support and could intensify inflationary pressures. ### Footnote 9 and relevance of Fund purchases to government financing - Authorities contest footnote 9 assertion that “Fund purchases and repurchases were not generally relevant to the government financing framework.” - They argue this contradicts paragraph 42 which states Fund purchases “have been the practice in Argentina” and justifies excluding Fund support in the DSA. - Authorities reiterate they are not envisaging budgetary financing from the Fund and that past onlending (notably in the 1990s) had irresponsible consequences they are now trying to overcome. *Source: _cr05236 - 29. In discussing the Argentine debt sustainability analysis, the staff characterize as* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2005/_cr05236.pdf_