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Argentina: Staff Report for the 2017 Article IV Consultation—Debt Sustainability Analysis

Author(s):
International Monetary Fund. Western Hemisphere Dept.
Published Date:
December 2017
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Debt vulnerabilities have risen as the external imbalances have grown, making fiscal consolidation essential to secure debt sustainability. Federal government debt is expected to remain slightly above 50 percent of GDP over the medium term. The positive effect from a declining primary deficit and improved growth is likely to be matched by higher real interest rates, as the government shifts to greater market borrowing. Risks to solvency are moderate, but the high share of foreign currency denominated debt creates vulnerabilities from a large exchange rate depreciation and the normalization of global monetary conditions. Elevated gross financing needs is a risk, only partly mitigated by the high share of debt held by other public sector entities.

Background

At end-2017, gross (including intra-public sector debt) federal government debt is expected to be AR$5,450 billion or 52.8 percent of GDP. This excludes the debt issued by the provinces (Box 1), ANSES and the BCRA; and excludes the nominal value of around AR$200 billion of GDP-warrants.

  • Recent debt dynamics. Gross federal debt is expected to decline by about 1½ percent of GDP in 2017, as the impact from the high primary deficit is offset by still elevated inflation, which will erode the nominal value of domestic debt The stability of the gross debt-to-GDP ratio masks the decline in debt held by other public sector agencies (mainly BCRA and ANSES) and the increase of debt with the private sector, which went from 26½ percent of GDP at the end of 2015 to an estimated 28½ percent of GDP by the end of this year. This reflects the large volume of debt issuance over the last two years, primarily through international capital markets and domestic U.S. dollar-denominated treasury bills. External bond and loan issuance has been US$22.5 billion this year, with bonds spreads at historical lows. Following the tax amnesty, U.S. dollar domestic deposits grew substantially, and the authorities sought to benefit from this liquidity by issuing U.S. dollar denominated treasury bills in large amounts (US$14.1 billion).

  • Currency composition. Nearly 70 percent of Argentina’s debt stock is denominated-in or linked-to a foreign currency, mainly the U.S. dollar. Of the peso-denominated debt, just under one-quarter is linked to inflation. While the level of foreign currency debt is similar to the late 1990s, the exchange rate was probably more overvalued then, underestimating the real burden of this debt.

  • Maturity. The average residual maturity of Argentina’s debt at end-2016 was over 13 years, which is high relative to other countries, especially emerging markets. Part of this is a result of the 2005 and 2010 debt exchanges, where many of these bonds mature in 2038. But Argentina has also been able to issue at long maturities, most notably the 100-year external bond sold in June 2017. On the other hand, there has also been a marked increase in the stock of short-term treasury bills, increasing from 2 to 4½ percent of GDP between 2015 and 2017.

  • Debt holders. Despite the decline since the end of 2015, the federal debt held by other public sector entities continues to represent a large share of the total stock (45 percent by the end of 2017). Of this, the BCRA holds (effectively) zero-interest bonds equal to 18 percent of GDP. The share of debt held by non-residents has grown on the back of the large-scale bond issuance program. Domestically, non-banks (including retail investors and mutual funds) are estimated to hold a greater share of the debt stock, partly driven by the desire to save their tax amnesty funds in US$ T-bills. This suggests that the domestic creditor base has become more diversified.

Estimated Debt Issuance in 2017

(Billions of Argentine pesos)

Source: Fund staff calculations.

Sovereign Spread

(EMBI+ARG, basis points)

Source: JP Morgan

Gross Federal Debt: By Currency Composition

(Percent of GDP)

Source: Fund staff calculations.

Stock of T-bills

(Percent of GDP)

Source: Fund staff calculations.

Gross Federal Debt by Creditor, 2016

Source: Fund staff calculations.

Gross Federal Debt by Creditor, 2017

Box 1.Fiscal Outlook for Provinces

In 2017, provinces are projected to run an overall fiscal deficit of 0.9 percent of national GDP. As the federal government, they also have been active in issuing foreign currency debt on international capital markets. Over the first three quarters of 2017, external debt issuance has been US$4.5 billion, concentrated in the province of Buenos Aires, and to a lesser extent, Cordoba. Total debt of all provinces is expected to be AR$ 590 billion in 2017 (5.7 percent of national GDP), of which around a quarter is held by the federal government.

Going forward, the overall provincial fiscal deficit is expected to decline, ending in 2022 at 0.2 percent of GDP. This would lead to a slight decrease of provincial debt to 5.3 percent of GDP (and 42 percent of revenues) by 2022. While this is still below historical highs, risks remain, including:

• The overall debt level of provinces masks significant heterogeneity within the group. The ratio of debt-to-total revenues ranges from 1 (San Luis) to about 75 percent (Chubut), and those provinces that have the greatest debt-to-revenue ratios also tend to have the largest absolute debt stock, suggesting potential contingent liability risks for the federal government.

• Sixty percent of provincial debt is denominated in foreign currency, although with great heterogeneity across provinces (with this share varying between 0 and 90 percent). A sharp depreciation of the exchange rate would raise the debt level, potentially jeopardizing continued market access and forcing a sizeable fiscal adjustment. For example, an additional 20 percent depreciation in 2018 would increase debt by 0.6 percent of GDP (to 6.4 percent of GDP).

Provincial Debt Issuance in External Markets

(Millions of U.S. dollars)

Source: Dealogic.

1/ October 9, 2017.

Provincial Debt Ratios

(Percent)

Source: Ministry of Finance and Fund staff estimates.

Debt Indicators by Province, 2016

Source: Fund staff calculations.

A. Baseline Scenario

Debt is expected to remain relatively flat over the forecast horizon at slightly above 50 percent of GDP, well below the ‘high risk’ threshold of 70 percent for emerging markets. By 2022, debt is expected to be about 53 percent of GDP, while the share held by private creditors and IFIs will grow from 27 percent of GDP in 2016 to 35 percent in 2022, reflecting the shift towards market financing. Gross financing needs (GFN) are expected to remain elevated, but declining somewhat after 2018. GFN in 2018 only narrowly miss breaching the 15 percent high risk threshold for emerging markets. This projection is based on the following assumptions:

  • Growth and inflation. Growth is expected to recover in 2017 and slowly accelerate to about 3 percent by 2020. While inflation will gradually decline over the forecast period, it will continue to erode the real value of long-maturity peso denominated debt (mainly held by the BCRA), supporting debt dynamics.

  • Primary deficit. Fiscal consolidation in 2018 and 2019 will have a short-run negative impact on growth, but will help to contain the accumulation of debt going forwards. In staff baseline, a persistent primary deficit of around 2 percent of GDP is expected to remain from 2020 onwards.

  • Exchange rate. A real exchange rate appreciation is expected to support debt dynamics, although this effect is likely to be smaller in the medium term. No correction of the estimated peso overvaluation (see Annex I) is expected, but this remains a risk. If the exchange rate were to realign in 2018 with the level predicted by fundamentals, debt-to-GDP would peak at around 60 percent of GDP in 2022.

  • Financing assumptions. The share of financing from the public sector, notably the advances from the BCRA, will decline over the horizon period (Table 1). Domestic creditors, in particular the non-banking sector, will provide part of the remaining financing, but the majority is expected to come from international markets, with net issuance of around US$15 billion a year. The increase in the reliance on T-bills witnessed in 2016 and 2017 is expected to rollover across the projection period. Taken together, the average effective interest rate on total debt is expected to increase from 4 percent in 2016 to 9½ percent in 2022.

Gross Federal Debt

(Percent of GDP)

Source: Fund staff estimates.

B. Shocks and Stress Tests

Solvency risks

  • Given the high share of foreign currency denominated debt, a shock to the exchange rate is a major vulnerability. The standard DSA stress test (50 percent real depreciation with 0.25 pass-through) shows that debt could jump to 66 percent of GDP in such a scenario, only slightly below the high-risk threshold. Debt is also vulnerable to a growth shock, which under the stress test could raise debt to 65 percent of GDP. Given the relatively long debt maturity profile, a shock to interest rates is not a major risk.

  • Fiscal consolidation is critical to stabilizing the debt level. If the primary balance were to remain unchanged at its 2016 level (-4.2 percent of GDP), debt would follow an upward trajectory, exceeding 60 percent of GDP by 2022. A ‘combined macro-fiscal’ shock would cause debt to rise to 90 percent of GDP, likely triggering a crisis. 1

Liquidity risks

  • High GFN, financed largely through external issuance, will leave Argentina exposed to global liquidity conditions. Stress test shocks to the exchange rate (perhaps driven by an increase in global risk aversion) or growth will generate GFN close to 19 percent of GDP, significantly above the high-risk threshold for emerging markets. A combined macro-fiscal shock will lead to GFN of 24 percent of GDP. In such a scenario, it may not be possible to finance this through market access, triggering the need for steep fiscal consolidation and/or direct financing from the BCRA.

  • Liquidity risks are somewhat mitigated by the significant share of debt held by public sector entities. However, while the public sector holds around half of the federal debt stock, the contribution of this debt to the medium-term GFN profile is relatively small. Over 2017–22, less than one-fifth of the GFN is driven by the amortization of publicly-held federal debt. Even if these principal payments were rolled over in full, a significant GFN profile would remain.

Gross Financing Needs by Source

(Percent of GDP)

Source: Fund staff calculations.

Argentina Federal Government: Funding Needs and Sources
2016201720182019202020212022
(Billions of U.S. dollars, unless otherwise indicated)
Primary deficit23.225.920.815.815.616.016.2
Percent of GDP4.34.23.22.22.01.91.8
Interest payments8.913.114.818.019.624.530.0
Overall balance32.138.935.633.835.240.546.2
Percent of GDP5.96.35.54.74.54.95.3
Amortization33.451.857.044.961.460.058.9
Percent of GDP6.18.38.76.27.97.36.7
Amortization (net of public sector)23.432.440.731.046.045.645.3
Percent of GDP4.35.26.34.35.95.55.2
Gross financing needs65.590.792.678.896.6100.5105.1
Percent of GDP12.014.614.210.912.512.212.0
Gross financing needs (net of public sector)55.571.476.364.981.286.191.5
Percent of GDP10.211.511.79.010.510.510.4
Total net new financing32.238.835.633.935.240.546.2
Percent of GDP5.96.35.54.74.54.95.3
BCRA profit transfer7.43.60.04.92.61.50.8
Borrowing24.835.235.628.932.639.045.4
Intra-public sector (excl. Banco Nacion)8.911.216.91.82.62.01.6
BCRA advances5.45.47.20.41.10.60.2
ANSES (FGS)2.01.63.20.40.60.50.5
Other government agencies1.54.26.51.01.00.90.9
Domestic creditors5.35.72.47.210.514.618.8
Banking sector (incl. Banco Nacion)1.00.20.50.70.81.01.2
Non-banking sector4.45.61.96.59.713.717.6
External creditors 1/10.518.316.419.919.522.325.0
IFIs0.22.03.04.25.26.37.5
Paris Club & other official−1.0−2.0−2.0−0.2−0.2−0.2−0.2
Private bonds11.318.215.315.914.516.117.7
Other (valuation effects)−0.10.10.00.00.00.00.0
Memo items (percent of GDP):
Federal gross debt54.252.851.750.650.551.452.7
Federal gross debt to public sector27.224.423.121.319.918.817.8
Federal gross debt to private sector and IFIs27.128.528.629.230.732.634.9
Source: Fund staff calculations and estimates.

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

Source: Fund staff calculations and estimates.

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

Argentina Public Sector Debt Sustainability Analysis (DSA) – Baseline Scenario

(in percent of GDP unless otherwise indicated)

Source: Fund staff calculations and estimates.

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.

Argentina Public DSA – Composition of Public Debt and Alternative Scenarios

Source: Fund staff calculations and estimates.

Argentina Public DSA – Realism of Baseline Assumptions

Source: Fund staff calculations and estimates.

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.

Argentina Public DSA – Stress Tests

Source: Fund staff calculations and estimates.

Argentina Public DSA Risk Assessment

Source: Fund staff calculations and estimates.

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, 14-Jun-17 through 12-Sep-17.

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.

This involves – i) a one-standard deviation shock to growth, with the corresponding automatic stabilizers and lower inflation; ii) a 50 percent real depreciation, with 0.25 pass-through to inflation; and iii) 200bps shock to interest rates.

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