1. The following information has become available since the issuance of EBS/00/278, Supplement 1. This information does not change the thrust of the staff appraisal.

2. Recent developments in international capital markets have been favorable for Argentina. Since the cut in interest rates in the United States on January 3, 2001, spreads on Argentine sovereign bonds narrowed by some 70 basis points, to about 710 basis points (compared with a decline of some 40 basis points for the EMBI average), bringing Argentina’s position below the EMBI average for the first time since September 2000. Spreads on private sector debt instruments have also declined. Domestic interest rates have followed suit, with the 30-day interbank rate and the prime rate (both in pesos) dropping by some 300 and 200 basis points, respectively, since January 3. Argentina’s stock market has risen by about 17 percent during the same period.

3. On January 9, Argentina held its first primary auction of short-term Treasury bills after the announcement of the financing support package. The yield on the US$350 million 94-day issue was 8.47 percent, down from 12.18 percent in the previous auction on December 12, 2000, and that on the US$350 million 182-day issue was 9.17 percent, down from 13 percent. On the same date, the province of Buenos Aires tapped international capital markets, issuing a two-year € 200 million bond at a U.S. dollar equivalent yield of 11.4 percent. The Argentine authorities announced on January 8 that they have given a mandate to two investment banks to arrange for the first of the debt swaps that are part of the liability management operations envisaged for 2001.

4. Private sector deposits in the banking system have risen by about Arg$1.4 billion since mid-December 2000, to Arg$77.6 billion, thereby moving back to the level of September 2000. In turn, gross international reserves, including the bank’s liquidity reserves held abroad, rose by over US$4.5 billion from their low point in November 2000, to US$33.2 billion, more than offsetting the decline experienced in the last quarter of 2000.

5. The government resorted to line-item vetoes to enact the 2001 budget, and to special decrees to enact the health reform and the pension reform. With this, the government fulfilled the prior actions that had been agreed with the staff. Subsequently, a judicial injunction was issued, halting the implementation of the health reform. The government has appealed, and has indicated to the staff that they expect a favorable ruling on this appeal in the coming weeks. A court challenge has also been lodged against the pension reform decree, but the relevant judge has not ruled on this as yet.

6. Consumer prices in December declined by 0.1 percent from November, thereby ending the year 0.7 percent below their level at end-1999. Wholesale prices dropped 1.7 percent in December, for an increase during 2000 of 2.5 percent.

7. Foreign trade data for November showed a deficit of US$38 million, resulting in a trade surplus of US$821 million in the first eleven months of 2000, compared with a deficit of US$1.93 billion in the same period of 1999. Through November, exports were 12.4 percent higher, and imports 0.4 percent lower, than in 1999.

8. To evaluate the likely impact on Argentina in 2001 of the changing prospects for the world economy, the staff has updated the scenarios included in EBS/00/278, Supplement 1. Specifically, a new illustrative scenario was prepared in which the staff assumes the following changes with respect to the assumptions in the baseline scenario in EBS/00/278: reductions in a) the rate of growth in industrial countries by 0.5 percentage points; b) in the price of petroleum by US$5 per barrel; c) in the interest rates on new external borrowing by Argentina by 200 basis points; and d) a depreciation by 10 percent of the U.S. dollar vis-à-vis the euro. The combination of these assumptions is likely to boost economic growth in Argentina, but result in some deterioration in the external current account. The rate of real GDP growth would increase to about 3.3 percent, driven mainly by the lower interest rates, the effect of which would be only marginally offset by a decline in the contribution of net exports to growth. Exports would decline by about US$0.7 billion, to US$28 billion, reflecting by and large the drop in petroleum prices, as the effect of the reduction of partner countries’ demand would be largely offset by that of the assumed depreciation of the U.S. dollar. With imports increasing by US$0.5 billion in line with the faster pick up of economic activity, the external current account deficit would widen by about US$1.2 billion, to US$11 billion (3.7 percent of GDP). The lowering of interest rates will also have a positive effect on the fiscal accounts, albeit a marginal one given that the public debt is mostly long term and at fixed interest rates.

9. Table 1 in EBS/00/278 on Performance under the Program, omitted reference to the progress made in regard to structural benchmarks. The attached table provides such information.

Attachment

Attachment: Observance of Structural Benchmarks for the Second Review

Benchmark	Progress
1. Entry into effect of reforms in the Social Security System.	Enacted by special decree in January 2001.
2. Enactment of planned modifications to charter of Central Bank and the banking law.	Legislation was not passed. Nevertheless, court rulings have set jurisprudence along the lines of the original proposal. In addition, a new bill was submitted to congress in regards to immunities and liabilities in the public sector.
3. Completion of restructuring of PAMI.	Substantial progress made, but restructuring not yet completed.
4. Conversion of Banco Nación into state-owned corporation.	Reform implemented in substance. Congress rejected draft legislation to this end. Instead it approved a bill that gives the bank administrative autonomy as a public enterprise; strengthens safeguards on the bank’s assets; and increases the transparency of the bank’s operations.

View Table

Benchmark	Progress
1. Entry into effect of reforms in the Social Security System.	Enacted by special decree in January 2001.
2. Enactment of planned modifications to charter of Central Bank and the banking law.	Legislation was not passed. Nevertheless, court rulings have set jurisprudence along the lines of the original proposal. In addition, a new bill was submitted to congress in regards to immunities and liabilities in the public sector.
3. Completion of restructuring of PAMI.	Substantial progress made, but restructuring not yet completed.
4. Conversion of Banco Nación into state-owned corporation.	Reform implemented in substance. Congress rejected draft legislation to this end. Instead it approved a bill that gives the bank administrative autonomy as a public enterprise; strengthens safeguards on the bank’s assets; and increases the transparency of the bank’s operations.