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Argentina: Staff Report for the 2016 Article IV Consultation—Debt Sustainability Analysis

Author(s):
International Monetary Fund. Western Hemisphere Dept.
Published Date:
November 2016
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Public Debt Sustainability Analysis

Federal government gross debt is 52 percent of GDP and is expected to decline slightly in the medium term, as the improvement in the primary balance is largely offset by higher interest payments. Risks to solvency are modest but there are vulnerabilities from the high share of external debt and sizable gross public gross financing needs. In particular, given that more than two-thirds of public debt is foreign currency denominated, the headline debt-to-GDP ratio is understated by the current overvaluation of the exchange rate. Provincial debt was at around 5 percent of GDP in 2015, but most of provincial debt is concentrated in few provinces with large deficits.

A. Background

At end-2015, the federal government gross debt stood at about AR$3,000 billion, amounting to 52.1 percent of GDP.1 Reported financial assets of the federal government amount to AR$22 billion, implying a net debt measure that is very close to the gross level.

  • Currency composition. 72 percent of federal debt is either denominated in foreign currency or is FX-linked (mostly U.S. dollars). About 20 percent this FX debt is owed to the official sector (the IADB, the World Bank, and the Paris Club creditors) with virtually all of the remainder in the form of FX bonds. Around one-third of peso-denominated debt are bonds linked to inflation or the U.S. dollar (with contractual obligations settled in pesos).
    Debt Composition, End of 2015
    Peso, billionPercent of GDPPercent of total
    Total public debt3,04652.1100.0
    FX denominated2,10836.169.2
    Peso denominated93916.130.8
    Unindexed65211.221.4
    Inflation indexed2033.56.7
    FX indexed851.52.8
    Sources: Ministerio de Hacienda and Fund staff calculations.
    Sources: Ministerio de Hacienda and Fund staff calculations.
  • Holdings. It is estimated that 35 percent of total debt was held by external creditors in 2015; and three-quarters of the debt were issued under the Argentine law. About 60 percent of federal debt (equivalent to 21 percent of GDP) is held by intra-public sector entities, predominantly the central bank and social security fund (ANSES). The majority of intra-public sector debt is either non-interest bearing or earns interest that is netted out from the overall balance (as in the case of ANSES). This significantly reduces the headline effective interest rate paid by the federal government.

    Federal Government Gross Debt by Creditor

    (Billions of U.S. dollars, end-March, 2016)

    Sources: Ministerio de Hacienda, BCRA, and ANSES.

  • Maturity. The average residual maturity of debt is 9.1 years, split between long maturity FX debt (10.5 years) and short maturity peso debt (4 years).2 This high average maturity partly reflects the long maturity debt issued in the 2005 and 2010 debt exchanges.
Federal Government Debt Service Schedule(Percent of GDP)
2015201620172018201920202021
Total7.69.17.36.56.05.06.4
FX denominated4.96.63.63.03.22.43.9
Amortization4.15.32.41.61.70.92.4
Interest0.81.31.31.41.51.51.5
Peso denominated2.72.53.73.52.82.62.5
Amortization1.51.42.42.11.71 61.6
Interest1.31.11.31 41.21.00.9
Sources: Ministerio de Hacienda and Fund staff estimates.
Sources: Ministerio de Hacienda and Fund staff estimates.

B. Baseline Scenario

Staff’s baseline outlook is as follows:

  • Primary deficit. Staff’s baseline assumes current policies for 2016 and 2017. The expected expansion of spending on pensions, together with the increased co-participation transfers to provinces, will largely be offset by a reduction in subsidies and discretionary transfers to provinces. The federal government primary deficit is expected to decrease to about 4.5 percent of GDP in 2017 from 4.8 percent in the previous year. From 2018 onwards, staff’s baseline assumes a fiscal consolidation of about ¾–1 percent of GDP per year, to a primary deficit of 1.3 percent of GDP in 2021. This pace of fiscal consolidation is consistent with staff’s estimates of the amount of new financing that will realistically be available over the medium term (see Table 1) and with a slightly slower pace of medium-term fiscal rebalancing than announced by the authorities earlier in 2016. Finally, the pace of fiscal consolidation is within the inter-quartile range of past consolidation episodes in other countries. For these reasons, it is assessed to be realistic.

    Federal Government Primary Balance

    (Percent of GDP)

    Sources: Ministerio de Hacienda and Fund staff estimates.

  • Debt servicing costs. The high levels of inflation experienced in recent years, together with a high proportion of non-interest bearing debt financing, have generated significantly negative real effective interest rates. This high inflation is partially offset by the valuation effect on foreign currency-denominated debt from the nominal exchange rate depreciation.

    Box 1.Fiscal Outlook for Provinces

    Thanks to the federal-for-provincial debt swap initiated in 2004, provincial debt steadily declined during the past 10 years and reached 4.6 percent of national GDP in 2015, or 38 percent of provincial tax revenues (including the portion of the taxes shared with the national government). A third of provincial debt is held by the federal government. At the same time, the combined primary deficit was below 0.1 percent of national GDP, on average, during 2005–14, but it picked up to 0.4 percent in 2015, on account of an increase in the wage bill and current transfers.

    Provincial Debt Ratios

    (Percent)

    Sources: Ministerio de Hacienda and Fund staff estimates.

    Under the baseline scenario, the provincial primary deficit is expected to increase to 0.7 percent of national GDP in 2016, driven by higher wages and capital spending, and then decline gradually to 0.5 percent by 2021, mainly thanks to the devolution of shared revenues that were previously earmarked to ANSES, that is assumed to more than offset lower discretionary transfers from the federal government. Debt is expected to stabilize at 5.6 percent of national GDP in 2021. Although low, these aggregate numbers mask large heterogeneity and vulnerabilities:

    Debt to Provincial Revenue and Share of Debt Denominated in Foregin Currency, 2016

    Sources: Ministerio de Hacienda and Fund staff estimates.

    Note: Red dots indicate the provinces that have been issuing debt denominated in foreign currency since January 2016.

    • Most of provincial debt is concentrated in a few provinces with large deficits. The province and the autonomous city of Buenos Aires (which account for about half of Argentina’s population and GDP) contribute to over half of total provincial debt, with another 20 percent concentrated in other five provinces (Cordoba, Chubut, Mendoza, Neuquen, and Santa Cruz).
    • Over 60 percent of provincial debt is denominated in foreign currency. Since January 2016, the seven provinces mentioned above (those with the largest debt, and the greatest share of FX-denominated debt) have accessed international markets, issuing FX debt for a total of US$5.6 billion. This exposes them to exchange rate risk. For example, a one step 50 percent depreciation in 2017 would increase debt to 47 percent of provincial revenues (from 38 under the baseline), the equivalent of 6.3 percent of national GDP, by 2021.
    Under staff’s baseline, the government will become less reliant on central bank funding and increasingly more dependent on external market financing in foreign currency (the share of FX debt and FX-linked will increase from 69 to 80 percent of total debt between 2015 and 2021). Along with the decline in inflation, this will push up real effective interest rates. As a result, interest spending will increase from 2.1 percent of GDP in 2015 to 2.5 percent of GDP by 2021.
  • Debt. Debt is expected to decline slightly over staff’s forecast horizon, from 52 percent of GDP in 2015 to 47½ percent in 2021, well below the ‘high risk’ summary indicator for emerging markets (70 percent of GDP). In the absence of any fiscal consolidation after 2016, the public debt ratio would reach about 67 percent of GDP by 2021. In a scenario where the current estimated REER overvaluation (between 10 and 15 percent) corrects through a nominal depreciation in 2016, and absent any further real appreciation in the following years, gross federal debt would reach 60 percent of GDP in 2021.

    Federal Government Gross Debt

    (Percent of GDP)

    Sources: Ministerio de Hacienda and Fund staff estimates.

  • Gross financing needs. The large overall fiscal deficit and amortization profiles in 2016–17 will keep gross financing needs (GFNs) elevated at above 10 percent of GDP. In 2016, GFNs will peak at 13.2 percent of GDP, slightly below the ‘high risk’ summary indicator. Going forward, fiscal consolidation and lower amortization needs imply a decline of GFNs to 6–7 percent of GDP by the end of the projection horizon.

C. Shocks and Stress Tests

  • Solvency risks are contained. The relatively low level of debt and the modest downward trajectory suggest that the risk of a solvency crisis for the federal government is modest. Shocks to the primary balance and interest rates are unlikely to cause debt to increase significantly. However, the high and rising share of FX-denominated debt poses risks, especially given that the exchange rate is currently viewed as overvalued (see above). In addition, a shock to real GDP growth (-1 percent in 2017 and 2018) would cause debt-to-GDP ratio to jump to 66 percent in 2018. Finally, a combined macroeconomic shock could be very detrimental and push debt just below 90 percent of GDP by 2018.
  • Liquidity risks are higher. The relatively high level of GFNs through the medium term increases vulnerabilities to a liquidity crisis. A shock to real growth—with knock-on impacts to the primary balance and credit spreads (each 1 percent deviation of the primary balance would increase spreads by 25 basis points, for a total increase of 125 basis points in 2018)—would push GFNs to 15 percent of GDP. A shock to exchange rate would cause a similar spike, and a combined shock would push GFNs as high as 19 percent of GDP.
  • Contingent liabilities could also increase the debt level. Under current policies, contingent liabilities from the increase in pension spending over the long run are estimated to be 40 percent of GDP in net present value term.

Mitigating factors. Rollover risks are mitigated by intra-government cross holdings. The high share of debt held by other public entities reduces the risk of a liquidity crisis. In times of stress, the federal government will likely be able to rely on other public bodies (notably ANSES and the BCRA) to rollover debt coming due and even purchase new issuances. While this can significantly reduce rollover risks for the federal government, it would constrain the behavior of these public entities, preventing them from diversifying risk and pursuing better yielding investment strategies, apart from crowding out private sector credit. Importantly, these intra-government debt holdings do not reduce solvency risks and should therefore not be ‘netted out’ of the headline debt stock. The federal government is obliged to repay these claims in full, and a failure to do so would cause significant problems on the balance sheets of these public entities.

Table 1.Argentina: Federal Government—Funding Envelope and Sources
2015201620172018201920202021
(Billions of U.S. dollars, unless otherwise indicated)
Baseline (fiscal adjustment after 2017)
Primary balance excl. BCRA+ANSES−31.5−26.1−26.7−23.2−17.7−11.0−10.8
Percent of GDP−5.0−4.8−4.5−3.6−2.5−1.4−1.3
Interest (net of ANSES)7.49.110.813.313.513.914.4
Overall balance excl. BCRA−38.9−35.1−37.5−36.5−31.3−24.9−25.2
Percent of GDP−6.2−6.5−6.3−5.6−4.4−3.2−3.0
Amortization34.936.328.224.024.119.333.2
Percent of GDP5.56.74.73.73.42.53.9
Gross financing needs67.464.362.559.554.944.358.6
Percent of GDP11.713.211.09.37.85.76.9
Total net new financing38.935.137.536.531.324.925.2
Percent of GDP6.26.56.35.64.43.23.0
Intra-public sector (excl. Banco Nacion)26.012.610.610.17.25.54.3
BCRA25.310.88.87.35.33.62.2
Profit transfer8.47.43.51.30.70.00.0
Advances16.93.45.36.04.63.62.2
ANSES (FGS)0.20.40.80.40.30.20.3
Other government agencies0.51.41.12.41.61.71.8
Private creditors14.922.827.226.724.319.521.2
External creditors 1/1.511.018.123.721.819.519.6
IFIs0.23.94.54.55.55.24.7
Paris Club & other official−0.6−2.1−2.0−2.0−1.6−0.2−0.2
Private bonds1.918.715.621.217.914.515.0
Domestic creditors13.511.89.23.02.50.01.6
Banking sector0.95.35.10.21.71.62.1
Non-bank domestic creditors12.66.54.12.80.8−1.7−0.5
Other (valuation effects)−2.1−0.3−0.3−0.3−0.2−0.1−0.2
Memo: Federal gross debt, percent of GDP52.151.851.151.250.048.447.5
No fiscal adjustment after 2017
Primary balance excl. BCRA+ANSES−31.5−26.1−37.4−41.9−46.9−52.2−56.5
Percent of GDP−5.0−4.8−6.3−6.4−6.6−6.7−6.7
Interest (net of ANSES)7.49.110.815.017.721.527.7
Overall balance excl. BCRA−38.9−35.1−48.2−56.9−64.6−73.6−84.2
Percent of GDP−6.2−6.5−8.1−8.7−9.1−9.5−10.0
Total net new financing38.935.148.256.964.673.684.2
Identified (=baseline)38.935.137.536.531.324.925.2
Unidentified10.720.433.348.859.0
Memo: Federal gross debt, percent of GDP52.151.852.955.858.662.166.6
Source: Fund staff estimates.

Includes repayment to holdout creditors of US$9.5 billion in 2016.

Source: Fund staff estimates.

Includes repayment to holdout creditors of US$9.5 billion in 2016.

Figure 1.Argentina: Public Sector Debt Sustainability Analysis (DSA)— Baseline Scenario

(In percent of GDP, unless otherwise indicated)

Source: IMF staff.

1/ Public sector is defined as central government.

2/ Based on available data.

3/ EMBIG.

4/ Defined as interest payments divided by debt stock (excluding guarantees) at the end of previous year.

5/ Derived as [(r - π(1+g) - g + ae(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;

a = share of foreign-currency denominated debt; and e = nominal exchange rate depreciation (measured by increase in local currency value of U.S. dollar).

6/ The real interest rate contribution is derived from the numerator in footnote 5 as r - π (1+g) and the real growth contribution as -g.

7/ The exchange rate contribution is derived from the numerator in footnote 5 as ae(1+r).

8/ Includes asset changes and interest revenues (if any). For projections, includes exchange rate changes during the projection period.

9/ Assumes that key variables (real GDP growth, real interest rate, and other identified debt-creating flows) remain at the level of the last projection year. Adjusted to exclude the impact from the real exchange rate depreciation.

Figure 2.Argentina: Public DSA—Composition of Public Debt and Alternative Scenarios

Source: Fund staff calculations and estimates.

Figure 3.Argentina: Public DSA—Realism of Baseline Assumptions

Source: IMF Staff.

1/ Plotted distribution includes surveillance countries, percentile rank refers to all countries.

2/ Projections made in the spring WEO vintage of the preceding year.

3/ Not applicable for Argentina, as it meets neither the positive output gap criterion nor the private credit growth criterion.

4/ Data cover annual obervations from 1990 to 2011 for advanced and emerging economies with debt greater than 60 percent of GDP. Percent of sample on vertical axis.

Figure 4.Argentina: Public DSA—Stress Tests

Source: IMF staff.

Figure 5.Argentina: Public DSA—Risk Assessment

Source: IMF staff.

1/ The cell is highlighted in green if debt burden benchmark of 70% is not exceeded under the specific shock or baseline, yellow if exceeded under specific shock but not baseline, red if benchmark is exceeded under baseline, white if stress test is not relevant.

2/ The cell is highlighted in green if gross financing needs benchmark of 15% is not exceeded under the specific shock or baseline, yellow if exceeded under specific shock but not baseline, red if benchmark is exceeded under baseline, white if stress test is not relevant.

3/ The cell is highlighted in green if country value is less than the lower risk-assessment benchmark, red if country value exceeds the upper risk-assessment benchmark, yellow if country value is between the lower and upper risk-assessment benchmarks. If data are unavailable or indicator is not relevant, cell is white. Lower and upper risk-assessment benchmarks are:

200 and 600 basis points for bond spreads; 5 and 15 percent of GDP for external financing requirement; 0.5 and 1 percent for change in the share of short-term debt; 15 and 45 percent for the public debt held by non-residents; and 20 and 60 percent for the share of foreign-currency denominated debt.

4/ EMBIG, an average over the last 3 months, 03-Mar-16 through 01-Jun-16.

5/ External financing requirement is defined as the sum of current account deficit, amortization of medium and long-term total external debt, and short-term total external debt at the end of previous period.

1This excludes the balance sheets of the provinces, ANSES, and the BCRA. It includes US$11.5 billion (1.8 percent of GDP) of ‘untendered debt’, which was unresolved from the 2001 default.
2CPI-indexed debt makes up 10 percent of the local currency debt stock and has an average residual maturity of 22.4 years. Excluding this, the average residual maturity of local currency debt is 2 years.

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