Argentina
Recent Economic Developments
Author: International Monetary Fund
Publication Date:
04 Jun 1998
eISBN:
9781451801262
Language:
English
Keywords:
ISCR; CR; syndicated loan; fiscal policy; public expenditure; current account; financial system; banking system; central bank; line of credit; Foreign direct investment; Total expenditures; Income; Public sector; Europe; privatization proceeds; poverty rate; private sector bond; capital goods; per capita income
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This paper describes economic developments in Argentina during the 1990s. The paper describes the main elements of the economic strategy put in place since 1991, highlighting the relation between supply and demand aspects of this strategy. The paper highlights that the Convertibility Plan and associated reforms introduced in Argentina starting in 1991 succeeded in accelerating growth, stopping a protracted inflation—that had twice already resulted in hyperinflation—and fundamentally changing the nature of the economy. The paper also analyzes the financial policies and the consolidation of the banking system.

Abstract

This paper describes economic developments in Argentina during the 1990s. The paper describes the main elements of the economic strategy put in place since 1991, highlighting the relation between supply and demand aspects of this strategy. The paper highlights that the Convertibility Plan and associated reforms introduced in Argentina starting in 1991 succeeded in accelerating growth, stopping a protracted inflation—that had twice already resulted in hyperinflation—and fundamentally changing the nature of the economy. The paper also analyzes the financial policies and the consolidation of the banking system.

I. Supply and Demand Aspects of the Convertibility Regime, 1991–971

The Convertibility Plan and associated reforms introduced in Argentina starting in 1991 succeeded in accelerating growth, stopping a protracted inflation—that had twice already resulted in hyperinflation—and fundamentally changing the nature of the economy. The Plan is regarded as a successful exchange-rate based stabilization program, which indeed it was. What is not usually noted is that a substantial part of this program was focussed on the supply side, i.e., on shifting the aggregate supply schedule outward and thus making attainment of low inflation consistent with a resumption of growth. The role of aggregate demand policy in this Plan (essentially reflecting the fiscal balance) changed markedly over time. As is shown below, fiscal policy was actually expansionary in the early years through 1994, i.e., in the years when inflation came down rapidly to single digit levels. Only since 1995 did fiscal policy and supply reforms pull in the same direction to limit inflation, which then disappeared altogether. This note describes the main elements of the economic strategy put in place since 1991, highlighting the relation between supply and demand aspects of this strategy.

A. The Convertibility Plan

The Convertibility Plan involved at least five distinct areas of policy initiatives or regime shifts, that had clear effects on improving supply conditions in the economy. These regime shifts included the convertibility proper, liberalization of foreign trade, deregulation, privatization, and the reform of the financial system.

Convertibility

The first regime shift, began with the launching of the Convertibility Plan at end–March 1991, contained the reform of the exchange rate system and, subsequently, that of the central bank charter. In the exchange rate reform, the currency was pegged to the U.S. dollar, the stock of currency issued was tied to the stock of foreign exchange held by the Central Bank (BCRA), and full convertibility of the peso for both current and capital transactions was established.2 These steps increased transparency in the economy, set the exchange-rate anchor, and had an early effect in sorting out efficient from inefficient enterprises. In 1992, to support the independence of the central bank, its charter was rewritten to prohibit the financing of public sector deficits and to remove lender-of-last-resort functions in the bank’s relations with the rest of the financial system. The central bank retained some policy instruments that it uses in its relations with banks, such as repurchase agreements, but in practice these facilities have remained small and are used mostly at the margin for overnight liquidity management.

Trade

Very early in the Plan,3 a second regime shift comprised a trade reform designed to reduce distortions and to integrate the economy with external markets. Export tariffs and nontariff import barriers were eliminated (except those for automobiles, textiles, and shoes); and average import tariffs were cut from a level in excess of 40 percent in 1989 to some 9 percent by the end of 1991, with a zero rate for capital goods and raw materials. The trade reform in particular helped improve profitability in the agricultural sector, where Argentina has a comparative advantage. Also, the removal of tariffs and nontariff barriers on capital goods and other inputs was important, as it affected relative factor prices and improved the investment climate at the outset of a period of strong demand for new capital stock.

Deregulation

A third regime shift involved deregulation of the economy. Between 1989 and 1992, the Government abolished all price controls, some of which had been in place for decades; and closed down a number of regulatory and marketing bodies and boards, mainly in the agricultural area. In 1992, the Government deregulated wholesale and retail trade; and in 1993, restrictions that had regulated access to professional services were relaxed. The deregulation and privatization of ports, public utilities, transport, and the oil and gas sectors resulted in important cost reductions in production, shipping, and transportation; while the availability and quality of gas, water, electric, and telephone services improved, favoring a more dynamic economy.

Privatization

Within about three years (1991–94), the Government privatized some 90 percent of all state enterprises for the equivalent of more than US$20 billion, which for the most part was used to clear arrears and for other forms of debt reduction. The privatization program brought about considerable gains in economic efficiency. At the same time, it made visible previously hidden unemployment, as the new owners typically reduced manpower to increase productivity and improve competitiveness, thereby making available labor to increase output elsewhere in the economy (relative factor prices permitting). Between 1989 and 1994, employment in privatized enterprises was reduced from 302,000 to 138,000 with particularly large reductions in the railways, and the oil and steel sectors. Also, privatization reduced the size of the public sector and its influence in allocating overall resources in the economy.

Financial system reform4

The transformation of the financial system was a fifth regime shift, contributing to make more efficient the intermediation of financial resources in the economy. Banking and financial intermediation services had shrunk during the hyperinflation years of the 1980s, with broad money amounting to just 6 percent of GDP by the end of the decade. With the return of price stability, the conditions for banking improved, at a time when banks were also placed in a more competitive environment. The drive for modernization accelerated with the financial crisis of early 1995 when a run on deposits resulted in the shake-out of the weakest financial institutions while further progress was made in the privatization of (provincial) public sector banks.5 Furthermore, to provide banks with a liquidity cushion that could reduce the need for a lender of last resort, nonremunerated reserve requirements were replaced by remunerated liquidity requirements (mostly held off-shore), and a schedule was established to bring these requirements to 20 percent of deposits by February 1998. Also, in late 1996, the BCRA negotiated a US$6.1 billion contingent repurchase facility with international banks to provide the banking system in Argentina with liquidity in the event of a systemic liquidity crisis. At the same time, capitalization ratios were boosted to 20 percent of assets in the banking system. The stock of nonperforming loans was reduced from 17 percent of total credit at its peak in mid–1995 to 11.4 percent by mid–1997. As a result, and with the increase in confidence in the banking system, by 1997 the ratio of broad money to GDP had increased to 24 percent of GDP. Also, there was renewed interest from foreign direct investors and by end–1997, foreign banks had purchased several large private banking institutions in Argentina and had increased their share in total deposits to about 40 percent. In turn, this strengthened the linkage of the Argentine financial system with the world economy.

Labor market reform

Notwithstanding the progress made in improving supply conditions in the economy, Argentina still faces considerable pressure in its macroeconomic balance, as witnessed by the simultaneous occurrence of a large and growing current account deficit and a very high rate of unemployment. Given that labor services represent ⅔ of the total value added in the economy, these circumstances underscore the need for a substantive labor market reform that would help reduce labor costs and improve labor productivity.

Modernization of the labor markets would have constituted a sixth major regime shift. Although some progress was made in this area, a significant part of the pre-Convertibility labor legislation has not yet been updated.6 Current labor laws and regulations inhibit flexibility in job assignments within the enterprise; make part-time work contracts expensive (through provisions that require full-time equivalent job benefits); result in costly severance payments; inhibit entry in certain professions or impose additional costs in certain sectoral branches through “special statutes”; and impede the renegotiation of contracts, as contracts remain legally binding after their expiry if there is no agreement to renegotiate between unions and employers (the “ultra-actividad” clause). Also, while infrastructure and other conditions can be different between regions in Argentina, thereby giving rise to regional differences in productivity, most contracts are negotiated at the central level in Buenos Aires (the most productive region) and are binding nationwide, thereby creating standards that are too demanding for substantial employment growth in other less productive areas of the country.

B. Fiscal Policy

Fiscal policy also had important aspects that supported the supply-side orientation of the early Convertibility regime, such as tax cuts and the removal of tax and expenditure distortions. Indeed, in the early years of the Plan the contribution of fiscal policy to the reduction of inflation was more associated with these supply-side aspects than with its impact on aggregate demand. During these early years, fiscal policy was pro-cyclical, with the public-sector deficit declining by less than what would have been consistent with the operation of automatic stabilizers during the upswing of 1993–94. Only in 1995, when the country slipped into a recession, did the contribution of fiscal policy turn restrictive, prompted by the need in order to maintain confidence and to adapt to financing constraints.

Compared with the base year of 1992, the fiscal stance was expansionary throughout the period 1992–97.7 However, the fiscal impulse, which is indicative of the year-on-year impact of the fiscal stance on aggregate demand, was positive (i.e., had a pro-cyclical effect on aggregate demand) during the early years of the Convertibility Plan (1992–94, when the economy was growing above potential), and negative in the later years (1995–97, when a negative output gap developed as a consequence of the recession in 1995). In other words, in the early years of the Plan through 1994, the exchange rate anchor together with supply improvements in the economy appeared to have been strong enough significantly to reduce inflation notwithstanding an expansionary fiscal stance and impulse; in contrast, during the period 1995–97, fiscal policy, at least as measured by the year-on-year impulse, contributed to the reduction and eventual elimination, of inflation.

Fiscal Stance and Impulse, 1992–97

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Source: Fund staff calculations.

Public sector balance on a cash basis comprising the federal government, off-budget funds and programs, and the balance in provincial governments.

These calculations of the fiscal stance and impulse assume that the structure of the public finances remained the same throughout the period of analysis. In fact, this was not the case. In mid–1994, the Government implemented a pension reform comprising a scaled down public pay-as-you-go pension facility, designed to grant a basic minimum pension for all current and future old-age pensioners and financed with employer social security contributions, and a complementary private capitalized system for supplementary pensions funded by employee social security contributions. Although this reform resulted in a reduction of future liabilities of the public system, during the transition period it widened the fiscal deficit by an amount equal to the contributions shifted to the private system by those individuals that signed up for the capitalized pension system. These transition costs are estimated to amount to about 1 percent of GDP a year. Without these additional expenditures, the stance of fiscal policy in 1996–97 would have been approximately neutral to slightly contractionary, instead of expansionary as indicated above, highlighting further the coincidence of supply improvements and demand management in maintaining low inflation.

As regards the contribution of fiscal policy to improving supply conditions, early in the Convertibility Plan the Government introduced tax measures aimed at eliminating smaller taxes and shifting the relative tax incidence from output and productive factors to consumption. These measures included the elimination of some 21 federal taxes and levies (including those on bank debits, assets, and exports) with a yield of about 3 percent of GDP, the removal of exemptions (notably from the VAT), and the elimination of subsidies (including under regional incentive programs). Also, to help reduce labor costs, effective January 1994, employer payroll tax rates were reduced by 30 to 80 percent, mostly in the traded goods sector.8 On the expenditure side, the Government undertook steps to downsize and improve the efficiency of the national civil service, as well as transferring to the provinces responsibilities for health and education. As a result, core employment at the national administration was reduced from 526,000 to 300,000 employees, and on balance, there was a transfer of labor from the public to the private sector.

II. Financial Policies and the Consolidation of the Banking System9

On the eve of the introduction of the Convertibility plan in March 1991, financial intermediation in Argentina had reached its lowest point in more than a decade. Years of high inflation and large-scale capital flight had brought the ratio of broad money (M3) to GDP down to 6 percent in 1990 from around 20 percent in the early 1980s, while commercial bank credit to the private sector fell to 12 percent of GDP from some 28 percent a decade earlier.

With the advent of macroeconomic stabilization, real interest rates on deposits became positive, capital repatriation bolstered deposits in the banking system, and broad money (M3) increased to 19 percent by GDP by 1994. During the same period, bank credit to the private sector rose at an average rate of 12½ percent a year in real terms. Financial deepening was accompanied by significant productivity improvements in the banking industry. Notwithstanding a rapid expansion of financial services, the number of employees in the banking system fell by 10 percent between end–1990 and end–1994, reflecting not only widespread computerization of banking services, but also streamlining and elimination of inefficient institutions, the privatization of a number of provincial public banks and greater competition amongst financial intermediaries.

The rapid expansion of financial intermediation during 1991–94 was interrupted by the crisis triggered by the devaluation of the Mexican peso in December 1994. Between December 1994 and March 1995, the banking system lost about 18 percent of its deposits while the Central Bank of Argentina (BCRA) lost over a third of its liquid international reserves. In response to these events, a comprehensive set of monetary and fiscal measures was introduced in early 1995 to help shore up confidence in the financial system. By end–1995, bank deposits and BCRA’s gross international reserves were virtually back to pre-crisis levels. However, the recovery of deposits was concentrated in the twenty largest banks and a number of provincial, cooperative and small private banks continued to experience problems.

The 1995 financial crisis prompted a tightening of prudential regulations and the introduction of structural measures to accelerate the consolidation of the banking system and foster financial intermediation. This note describes these measures and their impact on financial sector developments in Argentina, and provides an assessment of the present strength of the Argentine banking system relative to that before the 1995 crisis.

A. Financial Policies in the Aftermath of the 1995 Crisis

Background

The currency board arrangement introduced by the Convertibility Law of March 1991 imposed strict limits on the Central Bank as a lender of last resort. There was an allowance for central bank intervention through repo operations, but this was limited to the smoothing of seasonal fluctuations in the interbank market; the extension of rediscounts and credit advances to financial institutions beyond a 30–day period was virtually prohibited. Direct lending to national, provincial or local governments as well as to the nonfinancial private sector was ruled out.10 The BCRA was allowed to purchase government bonds at market prices under the proviso that BCRA’s bond holdings cannot grow by more than 10 percent a year.

Given such limits, and in light of the fragile state of the financial system after years of high inflation and monetary disarray, financial policies since 1991 have been directed toward strengthening the banking system and removing institutional obstacles to financial intermediation. To this end, a comprehensive regulatory framework was developed along three main lines: i. measures to ensure that, banks operate with high liquidity margins and capital adequacy ratios; ii. measures to reduce banks’ exposure to credit, market, and trading risk through stricter bank supervision and high provisioning requirements; iii. efforts to minimize information asymmetries in credit markets and reduce structural costs of financial intermediation.

Starting in 1991 reserve requirements were simplified—with uniform rates being set for domestic and foreign currency transactions—and compliance with these requirements was made more stringent; new capital adequacy requirements were introduced and progressively tightened on the basis of a more stringent weighting system and by incorporating a risk factor related to the interest rate charged on loans. Also, a comprehensive system of loan classification, portfolio risk rules and provisioning rules was introduced from mid–1994. As a result, by late 1994, the outstanding stock of BCRA credit to financial institutions had fallen markedly from 1990 levels, reserve requirements averaged 17½ percent of deposits, and the risk weighted capital-asset ratio for the financial system as a whole rose well above the 8 percent Basle standard.

Despite the substantial progress made during 1991–94, the crisis triggered by the devaluation of the Mexican peso in December 1994 brought into sharp relief the remaining weaknesses of Argentina’s banking sector. Notwithstanding nearly three years of buoyant economic activity, the stock of problem loans of the banking system still exceeded 10 percent of the loan portfolio by late 1994 and was asymmetrically distributed, with small private and provincial banks accounting for a disproportionately high share of the total. In these circumstances, the run on deposits caught several banks short of liquid assets and the ensuing contagion spread to a number of apparently solvent institutions.11 The authorities responded to the growing banking crisis with measures that included lowering reserve requirements, providing distressed banks with fresh Central Bank credit through swaps and rediscounts of lengthened maturity,12 setting up two fiduciary trust funds to foster the privatization of provincial banks and help the capitalization and restructuring of private banks, the establishment of a temporary safety net coordinated by the largest national bank (Banco Nacion) to redistribute liquidity within the system,13 and by creating a privately managed deposit insurance scheme (SEDESA) funded with compulsory contributions from financial institutions.14

These measures, coupled with fiscal adjustment efforts and financial support from multilateral institutions, proved effective in shoring up public confidence in the banking sector. Deposit recovery speeded up in the second half of 1995 and by early 1996 deposits had risen above pre-crisis levels.15 By late 1995, the country risk premium and domestic interest spreads had declined sharply and, although remaining above pre-crisis levels, clearly signaled that the worst of the crisis was over. The authorities took advantage of this reprieve, and began to put in place a “second generation” of prudential measures to consolidate and deepen further the 1991–94 reforms. The new measures aimed at raising banks’ liquidity margins and capital-asset ratios further, and placed emphasis on addressing information asymmetries in credit markets and overhauling the country’s payments system.

Measures

In the third quarter of 1995, reserve requirements were replaced by a system of remunerated liquidity requirements which was gradually tightened. High legal liquidity requirements (LLRs) are regarded by the authorities as a vehicle to improve depositors’ confidence and a bulwark against imprudent lending policies—a view corroborated by developments during the 1995 crisis, when it was observed that banks with weak liquidity positions proved to be the ones more likely to witness a run on deposits.16 At the same time, higher LLRs are deemed to provide an incentive for the recapitalization of banks by raising the relative cost of deposits relative to banks’ own capital as a source of funding. Under the new system, banks were allowed to hold LLRs either at the BCRA under a repo agreement renewed on a daily basis (“pases pasivos”), or in deposit accounts at the New York branch of the Deutsche Bank, or in OECD countries’ government bonds rated ‘A’ or above held at the same international custodian.17

Subsequent to the introduction of this new system, LLRs were tightened by extending their applicability to banking liabilities other than deposits and through the establishment of a scheduled increase of 2 percentage points a year, to reach 20 percent of most banking liabilities by February 1998—a rate substantially higher than that prevailing in most countries.18 Banks’ capacity to withstand liquidity shortages was enhanced further through an agreement between the BCRA and a group of 13 major international banks on a contingent repo facility which allows the BCRA to swap a collateral (Argentine government securities owned by the BCRA or by domestic financial entities) for up to US$ 7.3 billion in cash—an amount equivalent to 11¾ percent of total deposits in December 1996, when the contract was signed. The scheme works as a put option which can be exercised at the BCRA’s discretion during the period of the contract (currently with a minimum maturity of two years and a maximum maturity of five years), subject to a margin call19 and a commitment fee of 33 basis points. In the event of a drawing, the implicit cost would be equivalent to the U.S. dollar LIBOR plus 205 basis points.

Capital-asset ratios were raised through the introduction of a new weighting system which takes into account market risk factors (besides the usual counterpart risk)20 as well as the institution’s CAMEL rating in determining the minimum coverage of banks’ assets with own capital.21 The CAMEL rating of a bank is determined by the superintendency of banks on the basis of information provided by financial entities and monitored on the basis of quarterly inspections by authorized external auditors.

Information asymmetries are widely acknowledged to be a main determinant of high interest rate spreads in Argentina and a hindrance to efficient credit allocation. In particular, information deficiencies have long affected small but financially viable agricultural producers in the countryside and small and medium industrial enterprises (“PYMES”), which are charged high lending rates and are often subject to credit rationing.22 At the root of the problem lies the difficulty faced by financial institutions in Argentina in assessing the creditworthiness of new borrowers in the absence of a comprehensive nationwide system of credit information. Limited access to credit information has hindered competition amongst financial intermediaries for creditworthy clients, has contributed to the segmentation of the system and exacerbated adverse selection effects, as banks—when faced with difficulties to screen out “bad” from “good” borrowers—tend to raise interest rates across the board and thus crowd out the creditworthy borrower. To promote the dissemination of credit information amongst financial institutions, a credit risk bureau was established in the BCRA in September 1996 with a mandate to centralize information from all financial entities on the credit history of their debtors, which can then be passed on to any individual institution that so requests.

Steps were also taken to disseminate information about the performance of individual banks and foster market-driven monitoring of bank’s performance. The authorities’ objectives in this area are to increase public awareness of riskier institutions, impose market discipline on their management and enhance competition in the supply of banking services.23 To this end, a monthly publication containing individual banks’ balance sheets, together with a set of performance indicators, has been given wide circulation and made available to the general public through the BCRA internet site. The accuracy of such information has been enhanced through quarterly external audits and rating reports based on the CAMEL evaluation system. Starting in 1998, all financial institutions will be obliged to print their rating on billboards, deposit certificates and other publications related to raising funds from the public. Moreover, also starting in 1998, banks (with exception of branch offices of foreign banks with investment grade’ and foreign bank subsidiaries with explicit backing of their parent institution) will need to issue debt for at least 2 percent of their deposit base, with a minimum two-year maturity, under the form of publicly-offered bonds, or loans or time-deposit certificates to be held by a foreign bank with rating “A” or higher.

The high cost of financial services has been a long-standing constraint on financial deepening in Argentina. High reliance on cash as a means of payments and the limited use of banking services by the public through the early 1990s reflected years of macroeconomic disarray and a general lack of confidence in the financial system after episodes of asset confiscation and freezing of private sector deposits by previous administrations. With macroeconomic stabilization and the gradual strengthening of public confidence in the system, the use of banking services in Argentina has risen rapidly since 1991; yet, it remains well below industrial country levels, both on a per capita basis and as a ratio to GDP. A main factor is the relatively high cost of financial services in Argentina which, in turn, has been attributed to three main variables:24 i. the composition of payment instruments demanded by the public, which in Argentina is highly skewed toward labor intensive tasks, leading to higher operating costs;25 ii. low monetization, which entails a proliferation of low-value deposit accounts that are expensive to manage; iii, the high cost of interbank transfers and settlement of financial transactions.

The impact of low monetization on the cost of financial intermediation is being gradually corrected by the effect that price stability, tighter prudential regulations and further strengthening of the currency board arrangement are having on agents’ confidence in the domestic financial system. In addition, the authorities have taken a number of steps to spread the use of bank accounts and interbank payment transfers, which include making it compulsory for enterprises of over 100 employees to pay wages and salaries through bank accounts, heftier penalties on default on checks and stricter regulations on direct debit instruments.

In the area of interbank payments and settlement system, substantial advances have been made toward a comprehensive reform. Prior to 1997, interbank settlements were based on a multilateral net settlement system for large value transactions managed by the BCRA. The system operated on the basis of a form that financial institutions had to submit to the BCRA, which was processed semi-manually before the transfer of funds was authorized at the close of each business day (system 4090). Low value transactions were settled in 83 clearing houses around the country,26 not interlinked electronically and relying on physical transfers of cash balances for the final settlement of net outstanding positions—an arrangement that was both risky and costly. Starting in the second half of 1997, a system of real time gross settlement (RTGS) for high value interbank transfers was introduced, replacing the previous net settlement system (system 4090). Stand alone computers at the different institutions have been linked via a gateway to a terminal connected to the BCRA, which coordinates debit/credit operations of the respective institutions’ current account at the BCRA. Since no transactions are posted if the bank’s current account funds are insufficient to cover the electronic payment order in full, the new system imposes greater discipline on the liquidity management of financial institutions, while also eliminating the main source of credit risk underlying the previous system—a particularly desirable feature under a currency board arrangement. In the area of retail payments, the reform involved the setting up of two automated clearing houses (ACHs)—one comprising the large private banks and the Banco Nacion, while the other ACH includes small private banks as well as provincial public banks. The BCRA is responsible for regulating the operations of the ACHs, and the settlement of the ACH’s net positions takes place over the current accounts of banks at the BCRA. As with the reform of the wholesale payments system, the overhaul of the retail payments network is expected to bring about a substantial reduction in credit risk and banks’ operating costs.

Main Measures implemented during 1996 and 1997 to strengthen the banking system and promote financial deepening

• Extension of legal liquidity requirements to liabilities other than deposits (such as lines of credit from abroad, interbank repo operations and commercial paper) together with a preannounced timetable for increasing LLR from 15 percent of most banks’ liabilities in February 1996 to 20 percent by February 1998;

• A tightening of minimum capital requirements through the introduction, from September 1996, of a more stringent criterion for calculating the risk-weighted stock of assets, which in addition to the usual criteria for “counterpart risk”, also includes a measure of “market risk” and takes into account the CAMEL rating of the respective institution;

• The establishment from September 1996 of a credit information bureau at the BCRA with the purpose of providing information to financial institutions about the credit rating of borrowers nationwide;

• A contingent line of credit set up in December 1996 with a group of foreign financial entities, whereby the BCRA and participating local banks have the option to engage in a repurchase agreement with Argentine government securities for up to US$ 7.3 billion;

• A reform of the payments system, including replacement of a semi-manual clearing system by a real time gross settlement system from the second half of 1997;

• Obligation, starting in late 1997, for all enterprises with more than 100 workers to pay their employees through deposit accounts in financial institutions;

• Introduction, in December 1996, of compulsory quarterly external auditing; and requirement, from January 1998 for all financial entities to publish their ratings on billboards, deposit certificates and all other publications aimed at raising funds from the public;

• Obligation, starting in 1998, for all financial institutions to issue debt for at least 2 percent of their respective deposit base in the form of bonds or loans to be placed with institutions with a ‘A’ rating or higher.

B. Recent Trends in Financial Intermediation

Figure 1 (top panel) depicts trends in banking system deposits, credit to the private sector and total credit (private sector plus government). Deposits grew at an average annual rate of 21 percent since end–1995 and at end–September 1997 stood 42 percent above end–1994 levels, while credit to the private sector grew at an annual average rate of 8½ percent. After having nearly doubled during the 1995 crisis,27 net bank credit to the public sector declined by some Arg$2.5 billion (or 30 percent) between end–1995 and mid–1997 (Statistical Appendix Table 32). Thus, notwithstanding an acceleration in recent months, overall credit expansion remained well below the growth of deposits. This reflected the tightening in LLRs, a sharp reduction in the bank’s net foreign liabilities, as well as a more prudent attitude on the part of banks toward new lending in the aftermath of the 1995 crisis. Despite the rapid growth of deposits, indicators of financial deepening such as broad money (M3) and credit to the private sector to GDP, remain well below industrial country levels.28

Figure 1.
Figure 1.

Argentina: Bank Deposits, Credit and Spreads

Citation: IMF Staff Country Reports 1998, 038; 10.5089/9781451801262.002.A001

Sources: Central Bank of Argentina; and Fund staff estimates.

The increase in banks’ liquidity margins resulted in a wider coverage of total deposits with liquid foreign assets. Liquidity requirements, plus the BCRA’s contingent line of credit and the banks’ cash in vault amounted to 33 percent of deposits in September 1997, up from 23 percent in end–1994.29 The BCRA’s liquidity position also strengthened during the period with the recovery of rediscounts that were granted during the 1995 crisis and some sale of government bonds, which resulted in a reduction in the Bank’s net domestic assets of about Arg$1.8 billion since end–1995. As a result of such improvements in the liquidity position of both the BCRA and the rest of the financial system, the coverage of broad money (M3) with liquid foreign assets rose by 6 percentage points between end–1994 and September 1997, to 46 percent.

The gradual strengthening of Argentina’s banking system can also be gauged from a number of solvency and capital-adequacy indicators. The stock of problem loans for the aggregate system fell from 16½ percent of total loans in the second half of 1995 to 11.4 percent in August 1997 or, when measured net of provisions, from 7¾ percent to 4¾ percent. Although the stock of problem loans as a percentage of total loans remained substantially higher among public banks than among private banks, both groups witnessed a similar improvement. The number of checks with no funds—an important indicator of private sector solvency in Argentina—declined markedly over the past two years, partly reflecting the macroeconomic recovery but also the stiffer penalties on defaults on checks introduced by the new checking law. The risk-weighted capital-asset ratio for the banking system rose from 18.2 percent in December 1994 to 20.1 percent in July 1997 on the basis of the Basle criterion. Growing domestic liquidity has been accompanied by a marked reduction in the stock of net foreign liabilities of commercial banks and nonbanking financial institutions, which declined from US$7.4 billion at end–1995 to 2.7 billion at mid–1997 (Statistical Appendix Table 32).

Both deposit and lending interest rates fell substantially from end–1995 levels, partly due to improved macroeconomic prospects and a decline in exchange-rate and relative country risk, but also due to a reduction in banking spreads (Figure 1, bottom panel). The decline in intermediation spreads since late 1995 reflected a decline in problem loans as well as an improvement in operational efficiency—the two most important determinants of domestic intermediation spreads in Argentina.30 Although the tightening of prudential rules—notably in legal liquidity requirements—increased the cost of funding during the period, its adverse effect on banking spreads was minor, reflecting the fact that LLRs are fully remunerated.

After bottoming out in the second quarter of 1995, the rate of return on equity (ROE) for the banking system as a whole increased markedly, from an average of -1.6 percent in 1995 to an average of 6 percent in the first half of 1997 (Figure 2). This reflected both the reduction in average costs accruing from higher monetization and computerization of bank operations, as well as the consolidation of the banking sector. Not only the total number of institutions fell markedly—from 205 in end–1994 to 143 in September 1997—but also the share of deposits accounted for the 15 largest institutions in total deposits increased from 58 percent in end–1994 to 69 percent in September 1997. Several loss-making provincial banks were privatized and a number of private banks were merged or taken over by financially sounder institutions. Competition amongst the latter, stemming in particular from the greater penetration of foreign banks in the Argentine market, became stiffer. Three large domestic banks and two mid-sized ones had their majority ownership taken over by international financial groups, whose share in total deposits in the financial system rose from 16½ percent in end–1994 to 39 percent in end–September 1997. The increased competition for the supply of banking services appears to have exerted a disciplinary effect on management policies, while also providing further incentives for the search of new clients. Consultations to the BCRA credit rating bureau have increased rapidly since late 1996, while information made available by financial institutions already covers some 4.2 million borrowers. A swift expansion of the banking network, particularly toward the inner regions of the country, has been underway.31

Figure 2.
Figure 2.

Argentina: Efficiency Indicators of the Banking System

Citation: IMF Staff Country Reports 1998, 038; 10.5089/9781451801262.002.A001

Sources: Central Bank of Argentina; and Fund staff estimates.1/ Data available up to first half of 1997.

III. SOCIAL EXPENDITURE32

Argentina has a history of generous spending on its social sector. This note examines recent developments in social spending. It begins by looking at overall expenditure by the public sector on a functional basis, in order to put aggregate social spending in the context of total public expenditure. It then goes on to examine the distribution of spending within the social sector, and looks at some of its most important (in terms of the level of expenditure) elements. Finally, it examines the recent development of some key social indicators, including the distribution of income.

A. Overall Trends

Reductions in public expenditure have played a major role in the fiscal restructuring that has occurred in Argentina in recent years. At the beginning of the decade, total public sector expenditure (including the federal government, provinces, municipalities, and state enterprises) on a commitment basis reached nearly one-third of GDP (see Table 1). In 1996, total public sector expenditure had fallen to 27 percent of GDP, its lowest level in many years. However, this decline largely reflects growth in GDP. Between 1990 and 1994 spending by the consolidated public sector rose by nearly 25 percent in constant peso terms, and although real spending fell in 1995 and 1996, spending by the consolidated public sector was nevertheless 18 percent greater in constant peso terms in 1996 than in 1990 (Table 2).33

Table 1.

Argentina: Functional Distribution of Public Expenditure for the Consolidated Public Sector

(In percent of GDP)

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Preliminary

Source: Ministry of Economy and Public Works.
Table 2.

Argentina: Functional Distribution of Public Expenditure for the Consolidated Public Sector

(In constant pesos, 1990=100) 1/

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Deflated by the implicit GDP deflator.

Preliminary.

Sources: Ministry of Economy and Public Works and Fund Staff Estimates.

Virtually all of the decline in spending relative to GDP can be traced to two categories: interest and economic services.34 In 1989—the year of the hyperinflation—spending on these categories equaled more than 40 percent of total expenditure (Table 3), but since then this figure has fallen to a little less than 15 percent of total spending (in 1996). Relative to GDP, these categories of expenditure have fallen from about 17 percent to about 4 percent over the same period. The decline in interest expenditure primarily reflects the decline in inflation, and the accompanying fall in domestic interest rates. The decline in spending on economic services (more than 70 percent in constant pesos since the late 1980s) can be traced in part to the authorities’ privatization program. Currently, more than 45 percent of spending on economic services goes for transportation and communication, spending on which is divided more or less equally between the federal government, on one hand, and provincial and municipal governments on the other. Expenditure on defense and internal security including pensions outlays amounted to less than 2 percent of GDP in 1990, and has remained fairly constant relative to GDP since then.

Table 3.

Argentina: Functional Distribution of Public Expenditure for the Consolidated Public Sector

(Percent of expenditure)

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Preliminary

Source: Ministry of Economy and Public Works.

Because much of the decline in total expenditure occurred in the category of interest expenditure, declines in primary expenditure have been much more modest than those in total expenditure. Relative to GDP, primary expenditure remained essentially constant between 1990 and 1995, before falling by about 2½ percent of GDP in 1996. In constant peso terms, primary expenditure grew by nearly 40 percent between 1990 and 1994, before declining in 1995 and 1996. In essence, the decline in interest rates and high levels of real GDP growth in the early 1990s allowed the authorities to increase real primary expenditure significantly while still recording a decline in total expenditure relative to GDP.

The distribution of expenditure at the various levels of the public sector has also changed in recent years. Since 1989 the share of the federal government, the social security institutions and the public corporations in total spending has declined from nearly 73 percent to about 56 percent (Table 4). To some extent, this reflects the privatization of a number of public sector enterprises and the decline in the importance of interest expenditure, which is predominantly (though decreasingly) an area of federal government expenditure. However, it also reflects a shift in most other categories of expenditure toward increasing local (provincial and municipal) participation, including in the social sector.

Table 4.

Argentina: Spending by Federal Government, Social Security Institutions and Goverment Corporations as a Share of Total Expenditure

(In percent of public sector expenditure)

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Source: Ministry of Economy and Public Works.

B. The Social Safety Net in Argentina

The official social safety net comprises the social security system, which provides pensions to about 3½ million retirees; the public education system, which provides free education at the pre-school, primary, secondary, and university levels; and the public health system, which provides free health care for the indigent and uninsured. In addition, the Government has established a number of programs to assist the poor and the unemployed, including programs in the areas of training, special education, emergency social assistance, employment, income support for families, food, and housing. The most important social programs include health care for the elderly (PAMI) and housing programs (principally FONAVI). While unemployment benefits exist, eligibility requirements are strict and the length of coverage is limited (to between four and twelve months).

C. Trends in Social Spending

Social spending has increased faster than GDP (by about 45 percent in real terms since 1990). Coupled with the sharp declines in expenditure on interest and on economic services, social expenditure now represents two-thirds of total public expenditure, compared to less than one-half in 1988 and 1989. The two-thirds ratio of social to total expenditure applies at each of the national, provincial and municipal levels. Nearly three-quarters of public primary expenditure now goes to the social sector, compared to about 55 percent in 1988 and 1989.

Within the social sector, the relative shares of different categories of expenditure have remained fairly constant in recent years. Social security expenditure accounts for about 40 percent of total social spending, health care about 25 percent and education about 20 percent (Table 5). Within subsectors, spending on basic education constitutes about two-thirds of total spending on education and culture, and spending on secondary and university education about one-fifth. The balance is made up by spending on science and technology, and by other cultural expenditures. Slightly more than one-third of health expenditures go for the direct provision of medical services, about one-third toward obras sociales,35 and the balance for medical care for retirees (PAMI).

Table 5.

Argentina: Social Expenditure as Percent of Total Social Spending

(In percent)

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Source: Ministry of Economy and Public Works.

The shift in expenditure from the national to the local level has been particularly marked in two areas: education and housing. Beginning in 1992 responsibility for expenditures on secondary and university education was transferred from the federal to the local level.36 In addition, while expenditure on housing has always been almost exclusively within the domain of the provinces, by 1996 virtually all public expenditure on housing occurred at the local level. About three-quarters of expenditure on welfare and social security occurs at the national level, along with about half of health expenditure. Provincial health expenditure goes primarily for direct medical services, although provinces do have some expenditures on the obras sociales for their own employees.37

Education

Primary school coverage in Argentina is virtually universal, and secondary school coverage is about 59 percent, which is about average for a medium-income country. Relative to GDP, spending on education in Argentina is about the same as in comparable countries. However, there are problems with the efficiency of spending. Despite the 60 percent increase in real spending on education between 1990 and 1996, neither enrollments nor graduation rates have increased, and achievement levels remain low, especially for poor children. At least in urban areas, enrollment ratios for students from poor families have fallen over the last several years, while those from better-off families have grown. As a result, the gap between enrollment rates for children aged 14 to 19 from the highest and lowest income quintiles has widened from 14.4 to 31.8 percentage points between 1990 and 1996. When students do go to school, the quality of the education they receive is questionable: at both the primary and the secondary level, nationwide achievement exams have found that students are learning only 60 percent of what they are expected to know in the areas of mathematics and science. In addition, the ratio of graduates to total university enrollment has declined from 8 percent to 5 percent over the last decade. By contrast, Brazil, Chile and Mexico all have ratios of graduates to enrollment of between 12 and 15 percent. Moreover, the ratio of science graduates to total population in Argentina is less than half the OECD average, and about one-quarter of the ratio in Australia, Ireland, Japan and Korea.

During the 1990s the authorities have adopted a number of reforms to the education sector. In 1993 a new Ley Federal de Educación extended the mandatory period of schooling from 7 to 10 years. A national system has been established to measure the quality of primary and secondary education nationwide, and universities have been given the right to raise their own resources by instituting charges for some services.

Health

Argentina has a highly developed health system, with broad coverage, a wide range of preventive and primary care services available, and nearly 80 percent of young children vaccinated. The ratios of doctors and of hospital beds to inhabitants are similar to those in many OECD countries. About 70 percent of the population has health insurance, and the remainder of the population receives free care in government hospitals. About 90 percent of those with health insurance are members of obras sociales, while the remainder of the insured population is covered by private programs, some of which are for-profit. In recent years the authorities have introduced reforms to allow competition among obras sociales, for example by allowing workers some flexibility in changing affiliations among union-led obras sociales.

Overall health expenditures are financed primarily by earmarked social security taxes and by private payments (in the form of contributions to private insurance plans or pre-pagas, plus copayments, deductibles and out-of-pocket expenses for medications, etc.). To a lesser extent, general tax revenues, primarily from provincial governments, also finance health spending.

Health care delivery is shared about equally between the public and private sectors. The public sector accounts for about 40 percent of total hospital beds and also provides immunization programs, maternal health care, and nutrition programs for mothers and children. Nearly all public hospitals are owned by provincial or municipal health ministries rather than by the federal government. However, most insured individuals receive their health care from private sector providers, and most physicians have either full- or part-time private practice.

Health care insurance for most retirees and disabled persons—totaling about 3½ million individuals—is provided by PAMI. PAMI is financed by a portion of the payroll tax as well as by transfers from the social security system and own revenues. Over the years PAMI has run large deficits, and the program has accumulated a stock of debt estimated at about Arg$1.3 billion. PAMI’s financial problems are due to a number of factors, including declining revenues due to reductions in required employer contributions; overstaffing; and a lack of emphasis on cost containment. With the support of the World Bank, PAMI has undertaken a number of cost control measures, which have combined to reduce its monthly cash flow deficit from Arg$71 million in December 1995 to about Arg$35 million a month in the first half of 1997. Among these measures are a reduction in staffing by 24 percent since 1995, an umbrella agreement with the pharmaceuticals industry that reduces monthly pharmaceutical spending by nearly 20 percent, and the signing of other contracts with providers to reduce unit costs. In March 1997 the Government approved a decree to transfer all PAMI debts to the treasury, and in 1998 the program is to be converted into an autonomous institution within the public sector.

Housing programs

The FONAVI housing program is a lending program funded by the Federal Government via a portion (currently 42 percent) of the revenue generated from fuel taxes and by reflows from previous loans. In 1996, FONAVI benefitted about 150,000 individuals and had total costs of about Arg$1.1 billion. FONAVI is a significant player in the housing market: in 1995, FONAVI loans accounted for 20 percent of the total stock of housing loans, while 35 percent of houses were financed with FONAVI loans. FONAVI was established as a revolving loan fund, but with very generous terms. In practice the collection rate on FONAVI loans has been extremely low, converting the program largely into a pure transfer program. Although reforms introduced in 1993 have improved the collection rate on loans, and the quality of FONAVI-financed houses has improved, problems remain. For example, the recovery ratio on loans is still only about 50 percent.

Social Security

Social security accounts for about 40 percent of social expenditure (Table 5), and in recent years the social security system has undergone a dramatic transformation. Starting in July 1994, participants in the public, defined-benefit social security system were given the opportunity to opt out of part of the public system and instead contribute to a privately administered (although publicly regulated), defined contribution retirement scheme. While employer contributions would continue to accrue to the public system, and all employees would retain coverage for disability insurance and a minimum pension under the public system, the employee contributions of those who elected to join the new, capitalized system would be credited to their accounts with private investment firms (Administradoras de Fondos de Jubilaciones y Pensiones). Retirement benefits for these individuals will be paid from the accrued balances of their individual accounts, and will therefore depend both on their contributions and the performance of their investment portfolios. At the same time, the retirement age was increased by five years, to ages 65 for men and 60 for women. By mid–1997 more than two-thirds of contributors had chosen to affiliate with the privatized scheme.

Other programs

A variety of other social programs exist, including health care for needy mothers and infants; feeding for needy young children (PRANI); assistance for street children (PROAME); assistance to needy elderly (ASOMA); schooling opportunities for children; employment opportunities for heads of households (TRABAJAR, supported by the World Bank); and salary subsidies for heads of households who are over the age of 45. In addition, there are programs to provide low-cost housing for at least 50,000 needy families each year, and basic infrastructure for the 1,000 poorest municipalities.

D. Developments in Key Social Indicators

Most social indicators show significant improvement with respect to their levels in 1990, likely reflecting the more serious adverse impact hyperinflation had on the living standards of the poor than on those of the wealthy. However, since 1994 many indicators have worsened, reflecting the impact of the recession that followed the Mexican crisis of late 1994 and the resulting high unemployment rate. However, it appears that the ongoing economic recovery, and associated recent decline in the unemployment rate, has led to a renewed reduction in poverty rates. Between May 1990 and May 1994 the poverty rate in Greater Buenos Aires (defined as the percentage of the population below the poverty line) declined from about 43 percent 2to about 16 percent, only to increase to 26 percent in May 1997. The rate of indigence—those whose incomes are insufficient to afford a minimum consumption basket of foodstuffs—fell from 9.2 percent in May 1990 to 2.6 percent in May 1994, but rose to 4.1 percent in May 1997.38

Looking beyond incomes, the performance of several indicators closely linked to poverty has also improved over recent decades. For example, the infant mortality rate has declined steadily from nearly 52 per 1,000 live births in 1970 to 27 in 1987 and to 22 in 1995. This figure is significantly better than the average of 37 for Latin America and the Caribbean, or 35 for upper-middle-income countries. Similarly, life expectancy at birth has grown from 67 years in 1970 to 71 years in 1987 and to nearly 73 years in 1995, compared to the 69 year average in Latin America and the Caribbean and in upper-middle- income countries. Progress has also been made in reducing adult illiteracy, which has fallen from 4.7 percent of the population aged 15 and over in 1990 to 3.8 percent in 1995.39

Throughout the early 1990s income distribution figures documented the improving relative status of the middle class, with the share of national income accruing to the middle 60 percent of the income distribution (in Greater Buenos Aires) rising from 54.6 percent in 1990 to 57.3 percent in 1994. Over the same period, the share of national income accruing to the poorest 30 percent of the population rose marginally, from 8.8 percent in 1990 to 9.0 percent in 1994. Thus, the significant increases in per capita incomes that occurred in the early 1990s appear to have been relatively larger for the lower and especially the middle classes than for the wealthy, and by the mid-1990s the distribution of income in Argentina was generally more equal than in most Latin American countries. However, the groups that benefitted from the economic growth of the early 1990s were those that suffered the most from the downturn in 1995. That year, the last for which data are available, the share of income accruing to the poorest 30 percent of the population stood at 8.1 percent, lower than their share at the beginning of the decade. The overall improvement in poverty indicators between 1990 and 1995 reflects the fact that while the poor were receiving a smaller slice of the economic pie, several years of economic growth that were only partially offset by the recession of 1995 resulted in a much larger pie. High levels of social spending might not translate into permanent improvements in social indicators if there are inefficiencies or substantial leakage of social expenditures to middle or upper classes. A study conducted by the Ministerio de Economia [de Flood and others (1994)], which attempts to measure the redistributive impact of public sector social expenditure, suggests that social expenditure in Argentina is in fact mildly progressive. Using data from 1991 and 1992, the authors found that on a per capita basis, total social expenditure was oriented disproportionately toward upper income groups: the highest income quintile received benefits worth US$1,112 on a per capita basis, compared to US$752 for the lowest income group. However, the benefits received by lower income groups tended to be much larger as a share of per capita income. Moreover, the higher absolute benefits received by the better-off were due to the fact that social security benefits are much higher for upper income groups than for lower income ones. Excluding social security benefits, the authors found that the lowest income decile received substantially greater benefits than higher income groups both in per capita dollar terms and as a percentage of per capita income. In particular, they find that spending on health and education are highly progressive, while spending on housing is mildly regressive.

IV. Foreign Direct Investment40

Foreign direct investment (FDI) now constitutes a substantial proportion of capital flows into Argentina. This note presents an overview of FDI and related items in Argentina over the period 1992–95, based in large part on the results of a first-ever study undertaken by the Ministry of Economy.41 The study indicates that the increase in FDI in the 1990s occurred in response to: (i) the prevailing international environment; (ii) the structural reforms put in place in Argentina favoring its insertion into the international economy; (iii) privatizations; and (iv) the elimination of restrictions on foreign investors in particular and capital transactions in general.

Table 6 includes summary data on foreign direct investment (the capital account item comprising new investment inflows and reinvested income from existing investment stocks); the accumulated investment position (the aggregate existing investment stock); and investment income (a current account entry reflecting income generated from the accumulated investment position).42 FDI averaged some US$3½ billion per year over 1992–95, or US$4.2 billion per year if the portfolio investment element of the privatization program is included.43 While aggregate FDI under either measure exhibited virtually no growth over the period, the disappearance of privatization opportunities implies that other FDI grew rather briskly, at 23 percent per annum. The substantial jump in FDI in 1994–95 was due in large part to (i) the creation of the private pension funds (AFJPs), which reportedly generated direct investment by nonresidents of around US$300 million, and (ii) the category of other investments, which reflects the sale of private firms. The latter has replaced privatization as the main component of FDI.

Table 6.

Argentina: Foreign Direct Investment and Related Items

(In millions of U.S. dollars)

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Source: Ministry of Economy.

The accumulated investment position over 1992–95 increased by 18½ percent per annum, from US$14.8 billion to US$24.6 billion. It should be noted that the change in this item does not precisely correspond to the flow data owing to valuation effects. Investment income, which is disaggregated by ultimate use into either cash distributions or reinvested returns, grew by some 15 percent per annum over the period, with most of the growth and variability accounted for by cash distributions. Investment income declined somewhat in 1995 reflecting the contraction in economic activity.

Table 7 shows FDI and related items by sector of destination. FDI grew mostly rapidly in the communications (99 percent per annum) and manufacturing (55 percent per annum) sectors. Large privatizations took place in electricity, gas and water (1992, 1993, and 1995) and petroleum (1992), while FDI growth in manufacturing and communications (1994, 1995) reflected the installation of a new plant and the purchase of existing facilities. Manufacturing had the largest accumulated investment position (available on a comprehensive basis only through end–1994) at 35 percent of the total, followed by electricity, gas and water at 18 percent, with petroleum, communications and banking each accounting for 10–13 percent. With regard to investment income, there were marked outflows related to the petroleum, manufacturing, and trade sectors over 1992–94, all of which declined in the recession year of 1995. Profits generated by electricity, gas, and water, and communications grew steadily over the period, while flows associated with the banking sector were somewhat erratic, with the drop in 1994 mirroring that of the stock market, in which the banks had invested heavily.

Table 7.

Argentina: Foreign Direct Investment by Sector of Destination

(In millions of U.S. dollars)

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Source: Ministry of Economy.

FDI data by country and region of origin are presented in Table 8, which show the United States as the main single country foreign investor into Argentina. Close to 40 percent of the more than US$14 billion of FDI over 1992–95 originated in the United States. Chile was the second largest individual country investor with over 10 percent. Europe accounted for about 30 percent of the total, with sizeable shares coming from France, Italy, the Netherlands, and the United Kingdom. Regarding the accumulated position, at end–1994, the United States comprised about one-third of the US$20.4 billion total, while Europe comprised over 40 percent, led by France, the Netherlands, and Spain. The distribution of investment income flows broadly mirrored that of the accumulated stocks.

Table 8.

Argentina - Foreign Direct Investment by Country/Region of Origin

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Source: Ministry of Economy.

Preliminary data for 1996 and a substantial part of 1997 indicate that the decade long trends in FDI and related items just described have continued. FDI is estimated to have topped US$4 billion in 1996 with continued growth in intra-private sector flows (privatization proceeds comprised less than US$500 million). FDI in 1997 is projected at some US$6½ billion reflecting the privatization of ESEBA (the electricity utility of the Buenos Aires province) and sizeable investments into the banking sector. The accumulated investment position is estimated to have increased to US$28½ billion at end–1996 and to US$30¾ billion at end–June 1997. Investment income has grown apace.

The inclusion of FDI and related items into the balance of payments statistics has improved the coverage and transparency of these statistics, particularly in the capital account, and confirmed the importance of FDI in total capital inflows into Argentina. At an annual average of around US$3½ billion over 1992–95, FDI constituted some 40 percent of the capital account surplus over this period. This would increase to 47 percent if portfolio investments related to the privatization process were included. Moreover, further revisions to the data, in particular the inclusion of FDI into the agro-industrial sector, should raise this percentage even higher.

V. Private Sector Borrowing44

This note presents an overview of borrowing by the Argentine private sector from international capital markets from 1990 through the third quarter of 1997 employing data from the Fund’s DCBEL database. In line with trends across emerging markets in general, and Latin America in particular, private sector borrowing in the form of both international bond issues and syndicated loan commitments increased sharply during the decade. At the same time, developments in private sector bond issues over this period have broadly paralleled those of the sovereign in terms of the overall trend, the declining spreads, the lengthening maturity, and the fixed rate nature of the debt.

It should be emphasized that the data on private sector borrowing presented here relate only to international bond issues and syndicated loan agreements—i.e., the aim is to measure access to international capital markets. Bond data are on an “at issue” basis while the loan data are on a commitment basis and may not reflect actual disbursements. Private sector borrowing from official sources, borrowing in the form of commercial paper (including CDS), and trade-related credits are not included.

Total external private sector debt at end–1997 is estimated at 9½ percent of GDP. The size of the debt consistent with the data identified in this note would be equivalent to some 6 percent of GDP (3½ percent for bonds and 2½ percent for loans), taking into account the identified bond issues and assuming full disbursement of the loan commitments. Regarding the volatility of private sector flows, these range from relatively stable foreign direct investment (see note on Foreign Direct Investment above) and portfolio flows, to highly volatile cross-border deposits. Broadly speaking, syndicated loans would appear to be in the less volatile end of the spectrum, while bond issues, which show some correlation with both the business cycle and developments in global capital markets, would be somewhat more volatile.

International Bond Issues

Since 1990, the Argentine private sector has tapped the international bond market for some US$14¾ billion (Table 9). The bulk of private sector issues came in the two episodes of robust macroeconomic expansion: 1993–94 and 1996 to date, with annual average issuance in those periods of over US$3.0 billion. Private sector bond issues fell sharply to below US$1 billion in 1995, the year of the Mexican exchange crisis, with the drop in the financial sector being particularly pronounced. The denomination of choice of Argentine private sector bonds has been the U.S. dollar, which accounts for over 90 percent of the total. This contrasts with the denomination of sovereign Argentine issues, which have moved increasingly toward yen and Deutsche mark, and, more recently, lira.

Table 9.

Argentina—International Bond Issues

(In millions of U.S. dollars)

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Source: DCBEL database.

On the details of bond issues (Table 10), the average U.S. dollar amount has risen from about US$50 million early in the decade to US$150 million by 1997. As is the case with the sovereign, the terms of borrowing for the private sector have generally improved throughout the 1990s, again with the exception of 1995. The weighted average maturity at issue lengthened to about five years in 1993-94 before falling to 3.3 years in 1995, and recovering thereafter to some 5½ years in 1997. Weighted average spreads were in the area of 400 basis points over the comparable instrument in the country of the currency denomination in 1993–94, but jumped to 570 basis points in 1995 before falling to under 300 basis points through the first three quarters of 1997. More than 90 percent of the private sector bonds have been issued at fixed rates. Regarding maturities at issue (Table 11), some 8 percent of the total private sector bond issues over the decade were short-term, while about two-thirds had maturities between one and five years, with the remaining 25 percent having maturities of more than five years. In 1997 the percentage of bonds with maturity of more than five years exceeded 40 percent.

Table 10.

Argentina - International Bond Issues, Selected Details

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Source: DCBEL database.

DCBEL reports spreads on some 80 percent of the bonds in the database.

Table 11.

Argentina - Maturity Structure of Private Sector International Bond Issues

(In millions of U.S. dollars)

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Source: DCBEL database.

As to the composition of private sector international bond issues by sector of origin, about one-third of the total over the period or US$5 billion were placed by the financial sector (Table 12). The telecommunications and the coal, gas and oil sector have each issued some US$3 billion in bonds this decade, or about 20 percent of the total. Of note, over half of the amount for the telecommunications sector was issued by Telecom Argentina. Utilities is the remaining sector with a significant share of bonds issued over the period with 10 percent of the total.

Table 12.

Argentina - International Bond Issues and Syndicated Loan Commitments by Sector

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Source: DCBEL database.