Argentina: Second Review Under the Stand-By Arrangement and Requests for Modification and Waiver of Performance Criteria
Author:
International Monetary Fund
Search for other papers by International Monetary Fund in
Current site
Google Scholar Close
Publication Date:
09 Jul 2004
eISBN:
9781451801347
Language:
English
Keywords:
ISCR; CR; debt; staff appraisal; banking strategy; authorities' cooperation; debt exchange offer; private sector; exchange offer; monetary policy; financial condition; bank compensation; Currencies; Global
Download PDF (515.5 KB)

This paper examines Argentina’s Second Review Under the Stand-By Arrangement and Requests for Modification and Waiver of Performance Criteria. The economy is recovering rapidly, while inflation remains subdued. Strengthening consumer and business confidence and cautious monetary and fiscal policies have facilitated further reductions in interest rates, a stable peso, and further reserve accumulation. Buoyant tax revenues resulted in larger-than-programmed fiscal savings in 2003. Although high commodity prices and strengthening partner country demand are pushing export receipts to record levels, imports also continue to surge, driven by buoyant economic activity.

Abstract

This paper examines Argentina’s Second Review Under the Stand-By Arrangement and Requests for Modification and Waiver of Performance Criteria. The economy is recovering rapidly, while inflation remains subdued. Strengthening consumer and business confidence and cautious monetary and fiscal policies have facilitated further reductions in interest rates, a stable peso, and further reserve accumulation. Buoyant tax revenues resulted in larger-than-programmed fiscal savings in 2003. Although high commodity prices and strengthening partner country demand are pushing export receipts to record levels, imports also continue to surge, driven by buoyant economic activity.

I. Recent Developments and Policy Implementation

1. Economic growth continues to outpace expectations and inflation has slowed further (Figures 1–2). Real GDP is estimated to have risen by 8.4 percent in 2003, driven both by strong private consumption and investment. Real wages and employment continue to recover—unemployment falling by about 2 percentage points (to 14.5 percent) in the final quarter of 2003—and consumer and business sentiment remain strong. Consumer price inflation slowed further (to 2.3 percent year-on-year) in February 2004, though wholesale and construction price inflation has begun to pick up.

Figure 1.
Figure 1.

Argentina: Indicators of Real Activity

Index Dec-2000 = 100, except where noted

Citation: IMF Staff Country Reports 2004, 195; 10.5089/9781451801347.002.A001

Sources: Ministry of Economy of Argentina; and INDEC.
Figure 2.
Figure 2.

Argentina: Confidence Indicators

Citation: IMF Staff Country Reports 2004, 195; 10.5089/9781451801347.002.A001

Sources: Ministry of Economy of Argentina; INDEC; IPSOS-MORA y ARAUJO; JP Morgan.

2. The external trade surplus is moderating, reflecting the continued strong recovery in imports. While high commodity prices and strengthening partner country demand are pushing export receipts to record levels, imports also continue to surge, driven by buoyant economic activity. The current account remains in substantial—though narrowing—surplus. Capital flight appears to have moderated, while private external arrears continue to accumulate but at a slower pace.

3. Monetary policy continues to facilitate interest rate reductions and increases in international reserves. Interest rates on 30-day time deposits declined to about 2½ percent in February 2004, from almost 4 percent at end-2003. The peso continues to trade narrowly at around 2.9 per U.S. dollar, while gross international reserves have risen further (by US$1 billion since end-2003) to US$15 billion (before the March 9 Fund repurchase) (Table 3). In the first quarter of the year, the central bank intensified its purchases of foreign exchange, which, despite increased sterilization efforts, has resulted in a higher path of base money than programmed (Text Figure). All the Arg$7¾ billion of quasi-monies that were issued during the crisis have now been taken out of circulation.

Table 1.

Argentina: Schedule of Purchases Under the SBA, 2003–06

article image

The figures in US dollars are for illustrative purposes. For past purchases, the US$/SDR used is of the day of the Board meeting. For future purchases, an exchange rate of US$1.5 per SDR is assumed for 2004, US$1.4986 per SDR for 2005 and US$ 1.5018 per SDR for 2006.

All purchases are subject to adherence to the continuous performance criteria. In addition, and for the period that sovereign arrears to private external creditors persist, purchases will be subject to financing assurances reviews.

Table 2.

Argentina: Net Debt Service to the IFIs, 2003–06

(In billions of U.S. dollars)

article image
Source: Fund staff estimates.

For the Fund, January–September 15.

Figures for the Fund are for the period of the arrangement (September 1, 2003–September 15, 2006).

Uses actual $/SDR rate for 2003, and assumes an exchange rate of US$1.50 per SDR for 2004, US$1.4986 per SDR for 2005, and US$1.5018 per SDR for 2006.

Repurchases are on an obligations basis.

Table 3.

Argentina: Quantitative Performance Criteria and Indicative Targets, 2003–04 1/

(In millions of Argentine pesos, unless otherwise noted)

article image

As defined in the Technical Memorandum of Understanding attached to the September 10, 2003, Letter of Intent.

The targets have been adjusted in line with the Technical Memorandum of Understanding.

The following accounting exchange rates apply: Arg$/US$=2.9, US$/SDR=1.3875, Euro/US$=0.869, CAD$/US$=1.347, CHF/US$=1.351, JPY/US$=119.78, GBP/US$=0.604, Gold (U.S.$ per ounce)=371.0.

Excludes Banco de la Nacion deposits and Uruguay bond holdings.

Includes quasi-monies in circulation.

Text Figure:
Text Figure:

Augmented Base Money 1/

(Indicative target, in Arg$ bln)

Citation: IMF Staff Country Reports 2004, 195; 10.5089/9781451801347.002.A001

1/ Monetary base plus federal and provincial quasi-monies in circulation.2/ Measured at the average value over the ten working days preceeding the test date and the ten working day following the test date.

4. The banking system is gradually returning to profitability, but balance sheets remain weak (Box 3). In the final quarter of 2003, the banking system recorded average monthly profits of Arg$38 million, after losses averaging Arg$548 million per month in the year to September. The improvement in financial condition mainly reflects the decline in deposit rates, lower administrative costs, and reduced need for provisions Private deposits—mainly sight deposits—continue to rise strongly, despite sharply lower deposit rates. There are signs of a recovery in consumer credit.

5. Fiscal performance continues to exceed expectations owing to buoyant tax revenues. The consolidated primary surplus in 2003 was 3 percent of GDP—½ percent above target—largely on account of higher-than-expected revenues from the income and foreign trade taxes, and a better-than-expected outcome at the provincial level. Tax collections in the first two months of 2004 were also substantially above the program target. As reported at the time of the first review, arrears on VAT refunds to exporters were eliminated well ahead of the end-March target date (structural benchmark), while the end-March 2004 structural performance criterion on the ratification of the 2004 provincial bilateral agreements by provinces representing over 100 percent of the 2002 deficit was met ahead of schedule.1

6. As regards public debt restructuring, the authorities have selected three international investment banks and three domestic banks to assist in the debt exchange offer. The terms of engagement of the banks are expected to be made public on March 15, with the issuance of a Presidential decree ratifying their appointment (prior action for Board consideration of the second review).

7. Certain of Argentina’s external private creditors and creditor representatives have established a representative committee. The Global Committee of Argentina Bondholders (GCAB) was established on January 12, 2004 comprising representatives of non-Argentine institutional creditors and retail creditors mainly in Italy, Germany, Switzerland and Japan. The government has invited the GCAB and other creditor groups and creditor representatives to Buenos Aires to begin constructive negotiations (¶25 below).

8. The government has announced increases in electricity and natural gas tariffs charged to large industrial and commercial users of between 10–35 percent. Tariffs for liquid gas used in passenger transportation will also be raised. The increase in electricity tariffs is expected to take place shortly and will be retroactive from February 1, 2004. The increase for gas is expected to be implemented by end–May, following public hearings. The impact on inflation is estimated to be about one-half of a percentage point in 2004.

9. Congress has recently approved legislation that reverses aspects of the labor reforms enacted in 2000. The legislation is likely to discourage temporary employment contracts by reducing the employment test period. It also allows more centralized collective bargaining but limits tax incentives for employment to small and medium-sized enterprises.

II. Report on the Discussions

A. Macroeconomic Framework

10. The macroeconomic framework has been updated to reflect the robust recovery (Table 4 and Text Table A). Real GDP is now expected to expand by 5½ percent in 2004 (against 4 percent in the original program and a market consensus of 6.2 percent), driven mainly by strong domestic demand. Private consumption and investment are projected to grow strongly in response to higher real incomes and employment levels, continued low interest rates, and favorable external conditions. With respect to the balance of payments outlook, the authorities indicated that they expect both the current and capital account projections for 2004 to be broadly unchanged from the original program (Tables 5–6). The staff’s view is that, with sustained policies, a higher reserves target could be feasible, especially given the sizable buildup of reserves so far in 2004. In light of considerable uncertainties, including particularly the unresolved sovereign debt, it was agreed to reassess the external projections at the next program review.

Text Table A.

Macroeconomic Framework, 2003-04

article image
Table 4.

Argentina: Selected Economic and Financial Indicators, 1999–2004

article image
Sources: Ministry of Economy; Central Bank of the Republic of Argentina; and Fund staff estimates.

Data are end-October.

Unemployment data beginning in 2002 are based on new survey methodology introduced December 2003.

2004 data are at end-February.

Excludes interest due on nonperforming debt.

Figures are staff estimates based on authorities’ data.

Cash basis.

Table 5.

Argentina: Summary Balance of Payments, 1999–2004

article image
Sources: Ministry of Economy; and Fund staff estimates.

Includes interest due on nonperforming debt but excludes interest on interest arrears.

Includes errors and omissions.

Change in NIR stock during the year. Gross reserves before 2002 include foreign currency securities reported by BCRA to banks. Fund repurchases are on an obligations basis. Projected SDR figures for 2004 are converted to U.S. dollars at a rate of 1.50 per SDR.

As percentage of exports of goods and nonfactor services.

Table 6.

Argentina: External Financing Requirements and Sources, 2001–04

(In billions of U.S. dollars)

article image
Sources: BCRA; and Fund staff estimates.

Includes interest on nonperforming debt.

Includes errors and omissions.

11. The program band of 7–11 percent for inflation has been maintained. The authorities expect inflation to rise from its current low level but to be contained within the lower end of the band (consistent with the February market consensus of 7.1 percent). They pointed out that, in addition to expected further adjustments in regulated prices, some pressures would likely emerge during the year from higher import prices and wage increases, especially in those sectors that have so far led the recovery. The staff pointed out that it would be more appropriate to aim monetary policy at lowering core inflation and avoiding second-round effects from utility tariff increases that are desirable in their own right.

B. Fiscal, Monetary, and Exchange Rate Policies

12. Discussions on the fiscal situation centered on the authorities’ response to a likely revenue over performance in 2004 (Tables 7–9). Consolidated revenues are expected to overperform by about 2 percent of GDP, reflecting both the stronger economic recovery and more determined efforts to reduce tax evasion (Box 4). The authorities’ initial response is that the fiscal policy stance reflected in the recently approved 2004 budget remains appropriate and that they would maintain the consolidated primary surplus target of 3 percent of GDP for 2004.

Table 7.

Argentina: Consolidated Public Sector Operations, 1999-2004 1/

article image
Sources: Ministry of Economy; and Fund staff estimates.

Revenues and primary spending before 2003 include payments with bonds.

Data for interest capitalization, arrears, debt recognition and bank compensation are estimates.

Includes interest (arrears) on nonperforming debt.

Reflects the settlement of obligations in bonds, often as a result of judicial rulings.

Includes compensation to banks for asymmetric pesoization and asymmetric indexation of balance sheets.

Table 8.

Argentina: Federal Government Operations, 1999–2004 1/

article image
Sources: Ministry of Economy; and Fund staff estimates.

Revenues and primary spending before 2003 include payments with bonds.

Data for interest capitalization, arrears, debt recognition and bank compensation are estimates.

Includes interest (arrears) on nonperforming debt.

Reflects the settlement of obligations in bonds, often as a result of judicial rulings.

Includes compensation to banks for asymmetric pesoization and asymmetric indexation of balance sheets.

Table 9.

Argentina: Provincial Government Operations, 1999–2004

article image
Sources: Ministry of Economy; and Fund staff estimates.

Expenditure measured on a commitment basis.

Include transfers to municipalities for coparticipation and transfers to provincial pension systems.

Reflects the settlement of obligations in bonds, often resulting from judicial rulings.

Staff estimates.

13. The authorities intend to use the additional revenues to cut taxes and make room for increases in spending (Text Table B.). The authorities have not yet decided on the mix and details of the tax measures. The staff encouraged them to reduce significantly the financial transactions tax as quickly as possible, given its highly distortionary effects on financial intermediation and the need to further strengthen the banking system. The authorities indicated that they will begin reducing the financial transactions tax from mid-2004, in line with program commitments, and that they may also introduce tax incentives for investment. Staff stressed that, to maximize their impact, the incentives should be temporary and aimed at new investment. On the expenditure side, a substantial portion of additional revenues would be automatically transferred to the provinces under the revenue-sharing arrangements. The staff stressed the importance of monitoring closely the quality of the resulting expenditures and that every effort should be made to accord priority to well-targeted social programs. The authorities agreed to reassess the scope and timing of the tax measures and spending initiatives at the next program review. At that time, discussions would also revisit the likely extent of overperformance and the overall fiscal targets for 2004.

Text Table B.

Projected Allocation of the Revenue Overperformance

article image

Minimum pensions, reduction in arrears, and discretionary transfers to provinces for the homogenization of social security systems.

Including for capital and social spending.

14. Progress is being made, as envisaged in the original program, to further develop the agenda for intergovernmental fiscal reforms. New fiscal responsibility and coparticipation laws have been drafted and will be made available to staff in late-March. Reforms in these areas are expected to strengthen fiscal discipline at the provincial level, improve incentives for provinces to raise revenues, and ensure a more equitable distribution of federal transfers (Box 5).2 A reform blueprint—which has yet to be shared fully with the staff—will be discussed shortly with provincial governors in order to secure formal agreement on its main elements by end-March 2004 (a structural performance criterion). Legislation is expected to be submitted to Congress by end-May 2004 and ratification by federal and provincial legislatures is expected by end-August 2004.

15. Other structural fiscal measures are also progressing in line with the program timetable, though further detail is needed to assess their content. In this regard, the authorities have proposed new structural conditionality through the third quarter of 2004 (Boxes 1 and 2):

  • Tax administration reforms. Building on the recent comprehensive measures to combat tax evasion, the authorities plan to launch by end-March 2004 another package of measures to strengthen provincial tax administration and further increase compliance on customs and social security obligations. The measures will include setting up a unified corporate register based on consistent use of a single taxpayer identification number, and harmonizing procedures for prosecuting customs evasion with those for general tax evasion.

  • Tax policy measures. As noted above, the authorities plan to reduce the distortionary financial transactions tax from mid-2004, and will decide on the extent of the reduction at the next program review. At that time, understandings on other tax policy measures will also be reached, as envisaged in the September 10, 2003 MEFP.

  • Pension reform. The authorities are continuing with preparatory technical work on pension reform, and the staff has encouraged them to solicit feedback on their work from the World Bank and other stakeholders. The authorities also indicated that they wish to complete the initial stage of the intergovernmental reform before initiating the pension reform, given that the revenue-sharing arrangements could have implications for financing the pension system. This will likely delay the submission of pension reform legislation until the second half of 2004.

  • Expenditure management. The authorities will request technical assistance from the Fund to strengthen provincial expenditure management systems and launch an integrated financial management information system in two pilot provinces.

16. Monetary policy will aim at an inflation rate at the lower end of the program band. The authorities viewed the recent pickup in base money (relative to program) as being anchored in a further strengthening of money demand, given the continued decline in inflation, reduction in interest rates, deposit growth, and reserve accumulation. Against this backdrop, they saw room for some easing of base money targets in the second half of the year. At this stage, it was agreed to wait until the third review to revise the program targets, including for international reserves, when more information would be available on the external outlook and any potential inflation risks (Table 10).

Table 10.

Argentina: Summary Operations of the Financial System, 1999-2004

(In billions of pesos, end of period, unless indicated otherwise) 1/

article image
Sources: Central Bank of the Republic of Argentina; and Fund staff estimates.

Projections based on data up to October 2003 for banks and nonbanks, data to January for the BCRA. Foreign currency items in projections are valued at the an exchange rate of Arg$2.91 per U.S. dollar, and US$1.5 per SDR.

Base money plus quasi-monies in circulation.

Currency in circulation plus demand deposits plus quasi-monies in circulation.

M1 as defined in footnote 3, plus foreign- and domestic-currency time and savings deposits.

17. With regard to reforms of the central bank institutional framework:

  • As envisaged, the authorities expect to finalize preliminary recommendations on reforms to its charter by end-March 2004. The recommendations will be issued for comments from a wider audience, including academics and the bankers’ associations, with a view to preparing legislative amendments by end-September 2004. While the staff would have preferred keeping the original timetable for reforms in this area—with submission to Congress of amendments by mid-2004—the authorities explained that it was important to proceed cautiously to ensure that broad-based consensus was achieved, ahead of any commitment to a precise legislative initiative.

  • An updated safeguards assessment found that the central bank has made progress in reducing operational risks. The central bank plans to address remaining weaknesses by further strengthening internal audit and financial reporting systems. Although the assessment recommended publication of audited annual financial statements based on International Financial Reporting Standards (IFRS), the authorities have so far agreed to provide the central bank’s end-2003 financial statements in accordance with IFRS to Fund staff.

C. Banking System Policies

18. With the financial condition of the banking system stabilizing, the central bank is now focusing on strengthening individual banks. This process will continue to be driven by regular submission and analysis of bank business plans and cash flow projections, in the context of a gradual tightening of prudential requirements and strengthened supervision. In this regard, the authorities agreed to an ambitious timetable for the submission of three-year business plans by all banks (due by end-March 2004) and to reach agreement with all banks on strategies to ensure the viability of their operations (by June 2004).

19. The central bank is making progress in strengthening bank supervision. Financial reporting obligations by all banks have now been fully reinstated. In line with program commitments, the capital adequacy regime was reintroduced in January 2004 requiring banks to build gradually an adequate capital cushion against exposure to the public sector and interest rate risk. In addition, the central bank intends to undertake an intensive program of full-fledged on-site inspections for all banks during the remainder of 2004.

20. However, there have been further slippages in finalizing bank compensation because of technical and administrative delays and the authorities have requested that the associated end-March 2004 performance criterion be reset to end-June 2004.

  • As regards asymmetric pesoization, the central bank has completed its verification process and concluded that banks had overestimated compensation due by about Arg$4½ billion—which will need to be written off from bank balance sheets. The banks will take ownership of the bonds (now held in escrow accounts) to cover the verified amount of compensation (Arg$28¼ billion) by end-June 2004.

  • In the case of asymmetric indexation, compensation will be delayed to the second quarter, because of the delays in issuing implementing regulations and the complexity of the verification process involved. The authorities explained that the link between compensation and lending envisaged in the law authorizing compensation is a very liberal one, as the stock of eligible loans (including refinanced loans) is already larger than the estimated compensation due. The latter is in the order of Arg$1½–2 billion, out of an approved ceiling of Arg$2.8 billion.

21. Following recent delays, a timetable for the strategic review of the two largest public banks has been agreed.3 New bids were launched on February 27, 2004 on agreed terms of reference for the selection of the financial advisors to conduct due diligence and strategic reviews of Banco Nacion and Banco Provincia. To guide the process forward, performance criteria are proposed for selection of the advisors (end-June 2004) and preparation of time-bound action plans for strengthening the banks (end-December 2004).4 Meanwhile, all public banks continue to participate in the diagnostic exercises conducted by the central bank, including the submission of annual and multiyear business plans.

D. Corporate Restructuring and Utility Reforms

22. Progress is being made in private corporate debt restructuring, within a broadly acceptable legal and regulatory framework. The survey of private debt restructuring recently completed by the authorities suggests that the market-based and voluntary framework for private debt restructuring adopted under the program is producing good results: about 27 percent of the debt of the companies surveyed (accounting for over US$29 billion, or about 60 percent of Argentina’s estimated total private corporate debt) and identified to be in need of restructuring have completed negotiations with their creditors. In a number of cases, restructurings are being completed under the pre-packaged bankruptcy procedure (a relatively new feature of Argentina’s insolvency system), which allows a court to bind dissenting unsecured creditors to a restructuring plan approved by the requisite majority of creditors. Related to this, a working group charged with reviewing the legal framework for corporate debt restructuring has completed its work and concluded that the current insolvency system is being adequately supportive of restructurings.5 The main corporates where restructuring has still to make progress are the utility/public service companies where tariff and regulatory framework issues remain outstanding.

23. The financial situation of some utility companies is improving, but progress in the renegotiation of concessions has been uneven. Interim agreements on utility tariffs and other revenue-enhancing measures have been reached in most transport concessions, including ports and airports where tariffs have been partially redollarized (Box 6). The announced adjustments in electricity and gas tariffs charged to large commercial users will primarily help nonregulated utility companies. However, tariff increases for regulatory companies have yet to be initiated. The preliminary findings and recommendations of the joint fact-finding Bank-Fund mission that was invited by the authorities to assess the situation of the utility companies are reported in Box 6. In particular, the mission found that the renegotiation of concessions has been hampered by uncertainty over the direction of the broader regulatory changes considered by the authorities. In addition, the World Bank has raised concerns over draft legislation on the regulatory framework. In response to these concerns, the authorities agreed to delay to the second half of 2004 the submission to Congress of new regulatory framework legislation, with a view to giving time to elicit comments from stakeholders and reassess the appropriate role of the government in investment decisions. The staff encouraged the authorities to work closely with the World Bank to develop adequate policies in this area.

E. Debt Restructuring Strategy and Financing Assurances

24. The authorities are developing a framework for reaching a collaborative debt restructuring agreement with private creditors. In their March 10, 2004 LOI, the authorities indicate that the main elements of their approach are to: (i) appoint and retain investment banks throughout the restructuring process—subject to them satisfying their contractual obligations—to assist in preparations and help market the debt exchange offer; (ii) engage in meaningful and constructive negotiations with all representative creditor groups; and (iii) formulate the offer so that it will result in a sustainable debt for Argentina and attain broad support from creditors. In implementing this framework, the authorities explained that they will rely on the advice and input from the investment banks.

25. Consistent with this framework, the authorities have indicated their willingness to negotiate with private creditors with the aim of reaching a collaborative agreement. In particular, they have committed to meaningful negotiations with all representative creditor groups, including with the GCAB. They believe that dealing constructively and transparently with representative creditor groups is necessary to generate a high participation in the debt exchange among a diverse creditor base. The authorities indicated also their willingness to discuss all aspects of the debt exchange offer with creditors and taking into account the need to ensure debt sustainability, and to consider proposals received from them in formulating an eventual offer. Towards this end, the authorities have set in train the following process and timetable for engaging with creditors:

  • On March 9, 2004, as a first step, the authorities invited 21 representatives of creditors, including the GCAB, to hold separate discussions in Buenos Aires during March 24–April 16, 2004.

  • By mid-April 2004, they will seek to reach agreement with creditors on a follow-up process and timetable for negotiations.

26. The authorities have indicated that they will decide on the features of the debt exchange offer and its timing following additional discussions with the investment banks and negotiation with creditors. They are cognizant of the need to mobilize broad creditor support and will seek to avoid a piecemeal approach to the restructuring. In this regard, the authorities would finalize with the assistance of their banks an appropriate minimum participation threshold in the eventual debt offer to obtain a broadly supported restructuring. The authorities reiterated their commitment to the principle of inter-creditor equity, though they noted the difficulty in applying this principle where some creditors have already experienced a previous restructuring of their claims. Given the need for consultations with the investment banks and additional discussions with creditors, the authorities believe that the exchange offer would not be launched before June 2004. At the same time, to avoid further delays, they expect to launch their offer not later than August 2004.

27. Progress needs to be accelerated toward initiating discussions with Paris Club creditors. The authorities are expected to write formally to the Paris Club Secretariat by mid-March 2004 indicating their request for the scope and type of treatment being sought on their bilateral debt.

III. Program Monitoring

28. All quantitative and structural performance criteria for the second review were observed, except for the continuous criterion on the nonaccumulation of arrears to multilateral and bilateral creditors (Table 3 and Box 1). The latter breach occurred following a short delay in completing part of a Fund repurchase. Staff reports a waiver for this breach on the basis that it was temporary. The end-December 2003 ceiling on the federal debt, which was the only applicable end-period quantitative performance criterion for this review, was met by a margin of Arg$2 billion (Table 11).6 The end-December 2003 indicative targets on the consolidated public sector debt and on the primary surplus for provincial governments were also observed. As regards structural conditionality, the performance criterion on the ratification of the 2004 federal-provincial bilateral agreements and the structural benchmark on the elimination of VAT arrears to exporters were met well ahead of the end-March 2004 deadlines. However, two structural benchmarks (on reporting of provincial financing data within 55 days of end-December 2003 and on the preparation of a report on Insolvency Law reform by end-January 2004) were implemented with minor delays (Box 2).

Table 11.

Consolidated Public Debt: 2001-04

(In US$ billions, except where noted; end period)

article image
Sources: Argentine authorities; and staff projections.

Assumes no restructuring of Phase 2 debt.

Includes provincial debt assumed by the federal government.

Includes the effect of converting pesoized P hase 2 bonds to their original U.S. dollar values.

Includes the sum of non-performing Phase 2 debt, bilateral, bank and other debt, and assumes half of provincial debt is nonperforming.

Reflects arrears to multilateral development banks at end 2002.

29. The new program conditionality through the third quarter of 2004 is as follows: (i) the program’s end-September 2004 indicative targets on the federal government debt and the BCRA’s net international reserves and net domestic assets are proposed to be converted to performance criteria; and (ii) the end-September 2004 floor for the federal primary surplus is proposed to be converted to a performance criterion and revised upward slightly, in line with the higher-than-programmed nominal GDP. The authorities also requested the resetting of the performance criterion on finalizing bank compensation for asymmetric pesoization and indexation to end-June 2004, from end-March 2004. Additional structural performance criteria and benchmarks are proposed to be set with a view to monitoring the implementation of key program actions, including on reforms of intergovernmental relations, further strengthening of tax administration, the strategic review of the two largest public banks, and the implementation of multi-year business plans by all banks (Boxes 1 and 2).

IV. Staff Appraisal

30. The continued implementation of cautious macroeconomic policies has been key to keeping the recovery on track with low inflation. Fiscal performance in 2003 was especially commendable, as the authorities were able to markedly step up tax collections and maintain spending discipline and, thereby, far exceed their original primary surplus target. In addition, monetary policy has been restrained enabling reduced interest rates, a stable peso, and a further accumulation of reserves. These policies, combined with favorable political developments, have bolstered consumer and business confidence and provided a foundation for a broad-based recovery in domestic demand. The continuation of disciplined macroeconomic policies is an essential ingredient to ensure the durability of the recovery and set Argentina on a sustainable path of medium term growth and poverty reduction.

31. Strong budgetary performance provides a crucial opportunity for locking in an ambitious fiscal consolidation path and moving ahead forcefully with the debt negotiations. While the staff argue that it is early in the fiscal year to firmly revise the budget, revenue overperformance could be significant and due consideration should be given to the best way of utilizing additional resources, including by increasing government savings. An early and significant reduction in the financial transactions tax should also be a priority given the need to strengthen the banking system, while other tax cuts could also be considered, if they are part of a well articulated tax policy reform. Some additional revenues will automatically be transferred to provincial governments, and spending by the provinces needs to be closely monitored to ensure the additional resources are used efficiently for well-targeted social and public investment programs. In any budget revision, the authorities need to bear in mind that, as committed to in the original letter of intent, an upward trend in the primary surplus will be required over the medium term to ensure fiscal sustainability. In this regard, the overall fiscal targets for 2004 will be discussed at the time of the next program review.

32. Structural fiscal reforms, which are being developed in line with the program timetable, face crucial tests of political acceptance and implementation in the period ahead. The authorities have made good progress in combating tax evasion, and are expected soon to take further important steps to improve social security and customs administration. In addition, progress is expected towards securing a political consensus for the new fiscal responsibility and coparticipation legislation. These are critical initiatives and the authorities need to ensure that the reforms that will be proposed to Congress provide a durable solution for the weaknesses of the current system—namely insufficient control over provincial finances, lack of incentives to raise own revenues at both levels of government, and a lack of equity in the distribution of resources among the provinces.

33. Monetary policy needs to take into account the narrowing output gap and anticipated utility tariff increases, which could fuel a rise in inflation expectations. A number of factors point to the potential for inflation to rise somewhat from its current moderate rate. Thus, while the program target band of 7–11 percent remains comfortably within reach, monetary policy will have to be set carefully so as to maintain low inflation expectations in the presence of sectoral wage hikes and increases in headline inflation due to one-off adjustments in regulated prices. At the next review, an assessment will be made of the potential for easing the program path for base money and adopting a more ambitious target for international reserves taking into account inflation and wage developments, and the external outlook.

34. While financial conditions in the banking system are improving, close central bank supervision is needed given continuing weaknesses in balance sheets. The banking system is gradually returning to overall profitability, though many banks still remain vulnerable to interest rate increases and the system as a whole will take some time to rebuild adequate capital. The reintroduction of a capital adequacy regime in January was an important milestone and the central bank appears to be enhancing its supervisory control through banks’ business plans and on-site inspections. The repeated delays in moving ahead with pending bank compensation and with the due diligence and strategic reviews of the two main public banks are highly regrettable. It is hoped that the authorities will quickly complete the bank compensation and implement the newly agreed schedule for reform in this area in a timely fashion.

35. Private corporate debt restructuring is an essential element for restarting credit flows and supporting growth. The substantial progress reported in the debt restructuring of the major corporates is a welcome sign and gives support to the authorities’ strategy of relying on a purely market-based framework. Given this progress, it will be important for the authorities to continue to resist pressures for any amendments to the bankruptcy law that would weaken creditors’ rights.

36. The authorities are beginning to tackle the problems of the utility companies, but much still remains to be done. Additional efforts are needed both to strengthen the financial position of utility companies and to provide greater certainty about the future environment in which they will operate. While the initiation of electricity and gas tariff increases for large users is a welcome step, the authorities should follow on with tariff adjustments also for the regulated concessionaires so as to help restore their viability. The authorities are also urged to work closely with the World Bank to develop a balanced regulatory framework that would help accelerate the process of renegotiation of concessions, attract new private investment into the sector, protect low income households, and allow utilities to restructure their debts.

37. The authorities’ willingness to negotiate with private creditors is key to reaching a collaborative agreement on a comprehensive restructuring. It is particularly encouraging that the authorities are entering into constructive negotiations with all representative creditor groups and have sent letters to them, including the GCAB. The framework for engaging creditors that the authorities will develop with the assistance of the investment banks should provide the basis for developing proposals and counter-proposals. Much will depend on the adoption of an open attitude by both sides in the initial rounds of meetings with creditor groups that are to be scheduled during March 24–April 16.

38. The avoidance of a piecemeal approach to the debt restructuring is essential to regularize relations with creditors, stem litigation risks, allow responsible reaccess to capital markets, and safeguard Fund resources. The inclusion of a minimum participation threshold for the completion of the exchange offer—by bolstering creditors’ incentives to participate in the exchange—appears the best way to avoid a piecemeal outcome. Importantly, the authorities have committed to consult with the investment bank advisors on the appropriate minimum participation threshold necessary for broad creditor support. Progress in these consultations will be discussed in the context of next financing assurances review.

39. Staff recommends the completion of the second review under the program and of the financing assurances review— in view of the continuing progress in meeting the programs targets and objectives, the authorities’ renewed commitments to the program as exemplified in their March 10, 2004 letter of intent, and the authorities’ proposals for more constructive engagement and meaningful negotiations with creditors. Staff also supports the requested modification of the structural performance criterion relating to completion of bank compensation and a waiver for temporary nonobservance of the continuous performance criterion on nonaccumulation of arrears to bilateral and multilateral creditors.

Current and Proposed Structural Performance Criteria: March 2003–December 2004

article image

Refers to commitments described in the MEFP dated September 10, 2003.

Current and Proposed Structural Benchmarks: March 2003–December 2004

article image

Refers to the MEFP dated September 10, 2003.

An Update on the Financial Condition of the Banking System 1/

The financial condition of the banking system had stabilized by end-2003 and the system as a whole is expected to record positive operating returns during 2004: banks remain very liquid (liquid assets are about 14 percent of total assets); deposits continue to grow (by 21 percent in 2003 and a further 3½ percent in the first two months of 2004), although growth is largely restricted to sight deposits; and credit expansion to the consumer sector is showing signs of recovery. Key recent developments include:

  • Profitability. Average monthly losses declined from Arg$670 million in the first half of 2003 to Arg$180 million during the second half, mainly reflecting the sharp decline in interest rates and steps to reduce administrative costs. In December 2003, the banking system as a whole recorded monthly profits of Arg$410 million, with the improvement taking place mainly in private banks (Text Figure).

  • Asymmetric pesoization. The banks claimed compensation for Arg$33 billion, which they had already recorded as an asset in their balance sheets. Following onsite audits of the bank, the central bank verified claims for about Arg$28½ billion, and the banks will have to write off the difference from the balance sheets in the course of 2004. The foreign, domestic, and public banks account for about Arg$2 billion, Arg$1.4 billion and Arg$1.2 billion of the lost claims, respectively. The compensation payments—in the form of government bonds (Boden 07 and Boden 12 bonds)—were placed in advance in escrow accounts, and the banks will now assume ownership of them.

  • Asymmetric indexation. As the increase in the wage index (CVS) since early 2003 has been much greater than that of the price index (CER), the fiscal cost of the compensation for the asymmetric indexation of loans is now estimated to be about Arg$1.6 billion compared to the initial estimate of Arg$2.8 billion that was approved by the Congress.

  • Net worth. Adjusting the balance sheets of the banks for the elimination of the overestimation of compensation for asymmetric pesoization and the compensation for asymmetric indexation, the net worth of the banks declines from Arg$23.1 billion (12.2 percent of assets) to Arg$20.1 billion (10.7 percent of assets). An immediate write-off of amparos would imply a further decline in net worth to Arg$13.9 billion (7.4 percent of assets).

Text Figure.
Text Figure.

Profitability by Groups of Banks

(Return on assets, in percent)

Citation: IMF Staff Country Reports 2004, 195; 10.5089/9781451801347.002.A001

1/ Prepared by Ceyla Pazarbasioglu and Jorge Cayazzo (both MFD).

Federal Tax Revenue Overperformance1

Tax revenues increased sharply in 2003, substantially overperforming compared to the program, and are likely to continue to overperform in 2004.

  • Tax revenue developments in 2003. Federal tax revenues jumped by 42 percent (3.1 percentage points of GDP), largely reflecting higher-than-projected revenues from the income tax and VAT (Table 1). The overperformance relative to the program (Arg$2.9 billion or 0.8 percent of GDP) reflected:

    • Higher-than-programmed economic activity, which explains over 40 percent of the overperformance (Table 2).

    • Higher-than-anticipated tax buoyancy, especially of the income and trade taxes, in part reflecting new tax administration measures.

    • One-off factors related to recording revenues collected in quasi-monies (patacones and lecops), explaining about¼ of the overperformance.

  • 2004 outlook. Federal tax revenues are projected to remain buoyant, exceeding the original program projections by Arg$7.9 billion (2 percent of GDP). This reflects:

    • Revisions to the macroeconomic framework, which provide for higher growth in major tax bases (consumption, trade).

    • Higher tax buoyancy, reflected in the higher-than-anticipated 2003 tax receipts and the strong tax performance in the first months of 2004.

    • Higher-than-projected corporate profits in 2003. The recently published 2003 corporate income statements suggest record profits, particularly of oil producers and commodity exporters.

Table 1.

Contributions to revenue growth

(in percent)

article image
Table 2.

Federal Tax Overperformance

(estimates, in Arg$bn)

article image
1 The analysis is based on a different revenue classification than presented in the summary federal government operations (see Table 8).

Status of Proposals to Reform of Intergovernmental Relations1

  • The authorities are close to reaching agreement with provincial governors on the main elements of intergovernmental reform, including on: (i) fiscal responsibility that would aim to increase control over provincial borrowing; and (ii) a blueprint for simplifying the tax revenue-sharing arrangements, improving incentives to raise own revenues, and ensuring a more equitable distribution of transfers among provinces.

  • The proposed fiscal responsibility legislation would: (i) establish deficit ceilings and debt limits (equal to 25 percent of revenues) for the provinces; (ii) subject provincial borrowing to federal government authorization (for the portion exceeding the debt limits, though authorization will always be required in the case of foreign currency debt); and (iii) establish incentives and financial penalties for noncompliance with these limits and procedures.

  • The proposed reforms with respect to revenue sharing are:

    • The revenue-sharing base would be the total of taxes currently “coparticipated,” with a simple formula for allocating resources between the federal and provincial governments. The shared tax base will exclude trade taxes (including the export tax) and 70 percent of the financial transactions tax, which will continue to accrue to the federal government. This tax base will be distributed as follows: 60 percent to the federal government and 40 percent to the provincial governments. The increased share going to the federal government would compensated for financing the operations of the pay-as-you-go component of the pension system.

    • Revenue sharing would remain fixed up to the 2004 nominal allocation,2 beyond which: (i) a fixed nominal amount (still to be determined) would be transferred to a fund for federal spending on infrastructure and social spending in the poorer areas of the country — ten northern provinces and the metropolitan areas of Buenos Aires, Cordoba and Rosario; and (ii) remaining revenues would be distributed according to the 60-to-40 proportions specified above, but with 10 percent of the additional allocation to the provinces being distributed according to economic efficiency criteria, i.e., provinces would be rewarded for their relative improvements in own-tax collections, achieving targeted primary surpluses, and reducing their debt.

    • A fiscal federal institution would be created to make decisions with respect to future intergovernmental relations.

1 The September 10, 2003, MEFP envisaged an intergovernmental reform that focused on: “the tax revenue sharing arrangements, the introduction of binding debt and deficit ceilings for provincial governments, reforms aimed at strengthening provincial revenue capabilities, and the creation of a fiscal federalism agency capable of guiding provincial future intergovernmental relations (MEFP ¶31).” 2 The distribution among provinces would not change in the event that coparticipated taxes fall short of the 2004 levels.

Utility Reform: Findings of the Joint WB/IMF Mission

  • The preliminary findings of the joint World Bank-Fund team that visited Buenos Aires in February 2004 to evaluate progress in the renegotiation of the public service and infrastructure companies were as follows:

    • The focus of the renegotiations has changed from agreeing interim adjustments to contracts to agreeing on long-term comprehensive contracts. The authorities also wish to: (i) introduce a new regulatory framework to strengthen the role of government in the utilities sector; and (ii) ensure that the tariff structure includes a “social price” component for most utilities and explicit subsidies in the case of transport. The change in focus has slowed the renegotiation and introduced uncertainties about the future role of the private sector in utilities concessions.

    • As of early-March, 48 out of 62 concessions remain to be renegotiated. In October 2003, 13 inter-urban road contracts were allowed to expire, and new concessions were awarded under a new model of operation and management with government playing a prominent role in investment decisions. The authorities hope to finalize agreements with an additional 39 concessions by end-June 2004, and with the remaining concessions (telecommunications, passenger railways) by end-2004 (see Table).

    • Most concessionaires are now running a cash-operating surplus—reflecting the appreciation of the peso, and to a lesser extent the recovery in demand—but delays and uncertainties in the renegotiation have limited investment and are hampering the utilities’ efforts to restructure their nonperforming debts (an increasing share of which is owned by vulture funds). In addition, the number of cases before the International Center for the Settlement of Investment Disputes (ICSID) has increased to 27.

    • The announced utility tariff increases represent an important step towards restoring the viability of unregulated electricity and gas producers. The measure, however, does not improve the finances of the 22 regulated concessions responsible for energy transport and distribution.

    • A series of clearance procedures is required to give legal status to the agreements reached between the executive and concessionaires, including: public hearings, reviews by control entities, and congressional ratification.

  • The key recommendation of the mission was to expedite the renegotiation process by: (i) finalizing the reports on whether the utility companies have complied with their contractual obligations; (ii) establishing detailed week-by-week negotiation timetables; (iii) clarifying with concessionaires the regulatory impacts of the proposed renegotiation; and (iv) revising the proposed regulatory legislation in a manner consistent with the renegotiated contracts, and supportive of private sector participation, while seeking to protect low-income households.

Argentina. Status of Concession Renegotiation, March 2004

article image

Concessions with majority of foreign shareholders.

Commitment to finalize renegotiations for telecom and passenger railways by end-December 2004. All other concessions by end-June 2004.

Debt restructuring agreement reached with one of the telecommunication companies (roughly US$1.8 billion).

Figure 3.
Figure 3.

Argentina: Recent Financial Indicators

Citation: IMF Staff Country Reports 2004, 195; 10.5089/9781451801347.002.A001

Sources: Central Bank of Argentina; Ministry of Economy; INDEC; and Bloomberg.

ANNEX I

Fund Relations

(As of January 31, 2004)

I. Membership Status: Joined September 20, 1956, Article VIII

A. Financial Relations

II. General Resources Account:

article image

III. SDR Department:

article image

IV. Outstanding Purchases and Loans:

article image

V. Latest Financial Arrangements

article image

VI. Projected Obligations to the Fund: (Under the Repurchase Expectation Assumptions) (SDR millions; based on existing use of resources and present holdings of SDRs):

article image

VII. Safeguards Assessments: The Central Bank of Argentina (BCRA) is subject to a safeguards assessment under the current Stand-By Arrangement. An on-site assessment of the BCRA was performed in December 2003, along with a follow up on the status of recommendations made under the previous assessment of the BCRA, completed on September 05, 2002. The priority recommendations of the on-site assessment are: (i) the publication of audited annual financial statements based on International Financial Reporting Standards (IFRS), commencing with the year ending December 31, 2003; and (ii) extension of strengthened control procedures to ensure that all monetary data reported to the Fund under the program reflect the TMU. The authorities have committed to prepare and provide to the Fund financial statements based on IFRS by June 30, 2004. They have also committed to extend their internal control procedures for data verification and reporting to all monetary data under the program on a quarterly basis, beginning end-March 2003.

B. Nonfinancial Relations

VIII. Exchange rate: On March 27, 1991, a law was passed guaranteeing the full convertibility of the austral under a currency board arrangement and pegging the austral at 10,000 per U.S. dollar. On January l, l992 the peso was substituted for the austral at a rate of 1 peso per 10,000 australes. On January 7, 2002, the currency board arrangement was abandoned in favor of a dual exchange rate regime with an official rate of Arg$1.4 per U.S. dollar for most trade, trade finance, and public sector transactions; remaining transactions were at a market floating rate. On February 11, 2002, the dual exchange rate regime was abolished and substituted by a floating regime with no pre-announced rate of the exchange rate.

All Article VIII restrictions have been removed other than: (i) the restriction arising from the freezing of deposits pursuant to the corralón (which has been approved by the Board until the earlier of March 2004 or the conclusion of the next Article IV consultation with Argentina); and (ii) a restriction arising from limitations on the ability of financial institutions to make moderate loan amortization payments.

IX. Last Article IV consultation: The 2002 Article IV consultation was concluded by the Executive Board on January 8, 2003.

X. Fourth Amendment: Argentina has accepted the Fourth Amendment to the Articles of Agreement.

XI. Technical Assistance, 2002–03

article image

XII. Resident Representative: Mr. John Dodsworth has been the senior resident representative in Buenos Aires since July 2003. Mr. Luis Cubeddu has been the resident representative since September 2002.

ANNEX II

Relations with the World Bank Group1

1. The total current Bank portfolio in Argentina is composed of 32 loans totaling US$4.6 billion in commitments. Twenty-eight loans correspond to investment projects totaling US$3.1 billion in commitments, of which US$1.0 billion remain undisbursed. The remaining four are adjustment operations totaling US$1.5 billion in commitments, of which US$526 million remain undisbursed. The latter category includes the Provincial Maternal-Child Health Sector Adjustment Loan, for US$750 million, signed on October 31, 2003. Upon effectiveness of the loan declared on November 6, 2003, US$450 million of the first tranche were disbursed. The current level of exposure of the Bank in Argentina stands at US$7.5 billion.

2. The last Country Assistance Strategy (CAS) Report was discussed at the Board on June 27, 2000 and was subsequently updated via a CAS Progress Report dated October 1, 2001. Bank’s strategy has been somewhat overcome by the crisis that erupted in end-2001. The Bank has since then adjusted its proposed strategy to respond to the needs emerging from the acute increase in poverty and to support the transition towards the normalization of the economic and social conditions.

3. The Bank’s response to the crisis situation included three major steps: (i) US$270 million were re-allocated from existing projects to emergency social programs in the areas of nutrition, health, and education; (ii) in January 2003 the Board approved the Heads of Household loan for US$600 million, the main program to assist the unemployed, benefiting about two million households; and (iii) in May 2003, the Board approved a US$500 million Economic and Social Transition Loan that supported the redemption of the quasi-monies issued by the provinces and ensured continued execution of programs dealing with the provision of essential social services.

4. On October 28, 2003 the Bank approved a $750 million loan to support the Government’s Health Sector Reform Program that aims to increase the availability and effectiveness of public subsidies in improving the health status of the poor. This loan will specifically support the implementation of a Maternal and Child Health Insurance Program, initiate a major effort to reach the lowest income provinces in Argentina and shift public subsidies from the non-poor to the poor who are largely uninsured. The Loan will be disbursed in three tranches over a period of approximately one year.

5. Efforts to improve performance of the Bank’s investment portfolio have fallen short of expectations. About half of the Bank’s investment portfolio continues to be rated as unsatisfactory for implementation progress. There has been a pickup in disbursements during the last quarter of calendar year 2003, which ended with total disbursements reaching US$618 million, of which US$352 million correspond to the Heads of Household Program, and US$98 million to reallocations made in support of the social emergency. The adjustment portfolio consists of four loans with an amount of $526 million remaining undisbursed. The last tranches of the Córdoba, Santa Fe and Catamarca PRLs, totaling US$226 million, are expected to be disbursed during the first semester of calendar year 2004. The two remaining tranches of the Provincial Maternal-Child Health Sector Adjustment Loan are expected to be disbursed during the calendar year.

6. A new Country Assistance Strategy is expected to be presented to the Board early in calendar year 2004, together with a structural adjustment loan to support economic recovery.

Financial Relations with the World Bank

(In millions of U.S. dollars)

article image

ANNEX III

Relations with the Inter-American Development Bank1

Portfolio

1. The Bank adjusted its activities in Argentina in 2002 and 2003 to better respond to a new economic, social and political context. In particular it:

  • Tightened supervision of its portfolio to take into account harsher fiscal constraints;

  • Reformulated its social and productive sector portfolios in order to better respond to the government’s priority areas as well as to improve portfolio performance. To this end, in March 2002, board authorization was given to redirect US$694.2 million from low-performing operations of lesser priority to support the Argentine government’s Social Emergency Plan for social protection and containment programs, with special emphasis on food, medicines, and education programs. Results to date have been positive both in terms of physical and disbursement targets. In November 2003, the Board approved the reformulation of the Bank’s productive sector portfolio in order to help revitalize economic activity and improve the competitiveness of the productive sectors. This has resulted in the redirectioning of US$296 million toward programs that support small and microenterprises and small rural producers.

2. Early in 2003 the second tranches of two sector loans were reformulated in order to better respond to new needs: the Financial Sector Program in the amount of US$243 million, and the Sector Program to Support the Federal Pact for Growth and Fiscal Discipline in the amount of US$246.7 million. Each of these second tranches was split into two, conditionalities were met and the loans were fully disbursed by the end of 2003.

3. As of December 31, 2003 IDB disbursements for the year totaled US$2.658 billion, of which US$1.9 billion were for emergency loans, US$490 million for policy-based loans and US$268 million for investment loans. For the year as a whole, the net loan flow of resources to the country was positive in US$320 million, the net cash flow was negative in US$305 million.

Lending program and country strategy

4. Under the umbrella of the Transition Program and the three-year stand-by agreement between Argentina and the IMF, approved in January and September 2003, respectively, the Bank approved two emergency loans for US$1.9 billion to protect social expenditure. These loans have been fully disbursed.

5. Additionally, two direct investment loans to the provinces of Salta and Río Negro were approved in 2003, for a total of US$86 million, with the objective of revitalizing economic growth by supporting productive sectors with greater comparative advantages.

6. The Bank has carried out dialogue missions to discuss its future country strategy and lending program with the authorities for the period 2004–08. Work on this strategy has included a series of internal workshops and the preparation of sector-specific studies. A consultation workshop was carried out with the government, private sector and civil society in February 2004 and several workshops are planned for the first semester of 2004 on Competitiveness, Governance and Social Development. The country strategy is planned for approval in the first semester of 2004.

Buenos Aires, March 10, 2004

Ms. Anne O. Krueger

Acting Managing Director

International Monetary Fund

Washington D.C.

Dear Ms. Krueger:

Developments under the economic program continue to be very favorable, helping us to lay the foundations for sustainable growth and poverty reduction. The end-December 2003 quantitative performance criteria were met comfortably and all continuous structural performance criteria were observed. Furthermore, our plans for structural fiscal reform, the further strengthening of the banking sector, and carrying forward utility sector reform remain firmly on track. We are also entering a critical stage in the restructuring of sovereign debt.

Macroeconomic framework

Argentina’s economy is expanding at a faster pace than projected, with real GDP estimated to have increased by 8.4 percent in 2003. Disciplined implementation of well-designed monetary and fiscal policies contributed to strengthening consumer and business confidence, reducing inflation, lowering interest rates, and rekindling private investment. The banking system is returning to profitability and bank deposits are growing strongly. Consumption was boosted by the rise in real incomes as a result of both higher wages and stronger labor demand, which in turn contributed to reducing unemployment and poverty rates. We expect the strong recovery to continue in the period ahead and have revised upward the growth outlook for 2004 to about 5½ percent, mainly on the back of robust domestic demand. Favorable external conditions should allow the continuation of a high trade surplus, despite a continued steep rise in imports of capital goods and intermediate inputs. As foreseen in the September agreement, we expect a modest and transitory increase in inflation, as a result of pending adjustments in relative prices (especially regulated prices), some recovery in retail margins, and the lagged impact of higher commodity prices.

Monetary and fiscal policies

All monetary targets for end-December 2003 were met with large margins and the monetary program remains well on track. The balance of payments remains strong and record sales of central bank bonds (lebacs) kept central bank NDA substantially below the program ceiling. Twelve-month inflation fell below 3 percent in January 2004 and all quasi-monies have now been removed from circulation. While we remain committed to the original targets of the monetary program, the combination of modest exchange rate appreciation and continuous reserve accumulation, rapidly growing bank deposits and falling interest rates, and subdued inflation, suggests a continuing strong recovery in the demand for money. If these trends continue, this may warrant some easing of the base money target at the third review of the program.

The end-December fiscal and debt targets of the program were also met by wide margins. In 2003, the primary surplus of the consolidated public sector was about 3 percent of GDP, ½ percentage point above the target. This good performance is the result of both buoyant revenues—reflecting a stronger-than-expected economic recovery and intensified policies and efforts to combat tax evasion—and continued control over spending at the federal and provincial levels. Tax revenues are expected to remain above program levels in 2004, which should enable us to comfortably meet the targeted primary surplus of 3 percent of GDP, while making room for a reduction in the distortionary financial transactions tax by July 2004. The government is also committed to targeted increases in capital and social spending. The 2004 bilateral agreements have been signed by 12 provincial governors and ratified by sufficient provincial legislatures to meet the related structural performance criterion well ahead of the end-March 2004 deadline.

Structural fiscal reforms

Plans for structural fiscal reforms are advancing in line with our commitments in the September 10, 2003 Memorandum of Economic and Financial Policies (MEFP) and accompanying Technical Memorandum of Understanding (TMU). A formal agreement with provincial governors on the main elements of the fiscal responsibility and intergovernmental reform legislation (described in MEFP paragraph 31, and TMU Section III.c) is expected by end-March 2004 (structural performance criterion). These reforms aim to ensure budgetary discipline for provincial governments, simplify the tax revenue-sharing arrangements, improve incentives to raise own revenues, and ensure a more equitable distribution of transfers among provinces. The legislation is to be submitted to Congress by end-May 2004, with ratification by federal and provincial legislatures expected by end-August 2004 (both structural performance criteria).

We have initiated work on the planned tax policy reform (MEFP paragraph 28) aimed at strengthening core taxes and allowing for the phased elimination of distortionary taxes, including the planned reduction in the financial transactions tax. As originally anticipated, the reform will be discussed at the third review of the arrangement, and legislation will be submitted to Congress by end-September 2004 along with a 2005 budget consistent with the program targets for 2005 (structural performance criteria).

We plan to submit to Congress by end-March 2004 legislation to further strengthen tax compliance covering customs duties and social security contributions (MEFP paragraph 29) (structural benchmark). In the area of social security reform, a draft proposal to extend the coverage and increase the efficiency of the system is expected to be made public by June 2004 to elicit comments from all interested stakeholders; reform legislation will then be submitted to Congress during the second half of 2004.

The banking strategy

Additional measures are being taken to strengthen banks’ capital and profitability so as to facilitate the credit creation needed to sustain the recovery.

  • Progress is being made in finalizing bank compensation payments. In the case of asymmetric pesoization, compensation bonds were placed in advance in escrow accounts; the central bank has recently completed the process of claim verification and informed banks where there has been an overestimation of compensation due. With respect to the compensation for losses from asymmetric indexation, implementing regulations have been issued, and the central bank will soon issue additional instructions to the banks to formalize the process. However, given the complexity of the verification process, compensation will spill over to the second quarter. Therefore, the end-March 2004 target will be missed and we request the structural performance criterion to be reset to end-June 2004.

  • After being suspended for two years, the capital adequacy regime was reintroduced in January 2004. Accordingly, banks are required to build gradually an adequate capital cushion against exposure to the public sector and interest rate risk. Banks that are found not to be in compliance with the new capital adequacy norms or that are expected to incur significant future losses are required by the central bank to take prompt corrective actions and are subjected to intensified monitoring by supervisors.

  • Following the submission and analysis of annual business plans, the central bank has requested all banks to submit multi-year business plans by end-March 2004. Following the review of such plans, the central bank will augment its work and reach agreement with all banks on strategies to ensure the viability of their operations in the context of mutually acceptable multi-year business plans by end-June 2004 (structural benchmark).

As regards the major public banks, and as anticipated at the last review, new bids were launched on February 27, 2004 on agreed terms of references for the selection of the financial advisors to conduct the due diligence and strategic reviews of Banco de la Nación and Banco de la Provincia de Buenos Aires. We expect to select the advisors by end-June 2004 (structural performance criterion) and to complete the strategic review of Banco de la Provincia de Buenos Aires by end-September 2004 and of that for Banco de la Nación by end-November 2004; time-bound action plans for strengthening these banks will be finalized by end-December 2004 (structural performance criterion).

The working group charged with the design of reforms of the central bank is finalizing its report containing its key findings and recommendations and plans to issue it by end-March 2004 (structural benchmark). Based on the report’s findings and feedback from a wider audience, the authorities will finalize recommendations by September 2004. With regard to the safeguards assessment program for central banks, by end-June 2004 the central bank will begin providing financial statements to the Fund in accordance with International Financial Reporting Standards, commencing with the end-December 2003 financial year (structural benchmark). In addition, beginning in March 2004 the central bank’s externally appointed controller (the Síndico) will verify and report to the Fund that all monetary data used for program monitoring purposes have been prepared in accordance with the Technical Memorandum of Understanding.

Legal framework for private corporate restructuring

We have completed the reports on the corporate insolvency framework and the financial condition of the corporate sector, the latter of which shows that substantial progress has been made in restructuring corporate debt in the context of the existing insolvency framework. We are studying the modalities for distributing these reports to a wider audience for comment.

Utility sector reform

We have taken some key steps to advance reforms in this sector, including: (i) initiating tariff increases for key sectors; (ii) pressing forward in the renegotiation of some key concessions; and (iii) updating information of the financial condition of the utility sector as a guide toward further policy evolution.

Regarding the tariff increases, a key step in restoring the viability of the nonregulated energy concessions was taken in mid-February 2004 with the announcement of an increase in tariffs charged to industry-level users for electricity and natural gas, and for liquid gas used in passenger transport. The increases will be in the range of 10–35 percent and will be implemented retroactively to February 2004 in the case of electricity. For gas, increases will become effective by May 2004 after public hearings. The Energy Secretariat has been granted the power to negotiate the specific adjustments on a bilateral basis with gas producers.

Regarding progress in the renegotiation of the 62 concessions, we have allowed 13 interurban road concessions to expire, and awarded new concessions to operate and maintain this infrastructure. We expect to complete the renegotiation of an additional 39 concessions by end-June 2004, and all others by end-2004. The renegotiated contracts will then be subject to public hearings, a review by control entities, and final ratification by Congress.

In February 2004, we invited a joint World Bank-IMF fact-finding mission to update the assessment of the utilities sector and the progress made in the renegotiation of concessions, as part of our previous commitment to work with the international community in this area. The recommendations of the joint mission will provide an input to complete the process of renegotiating the concessions in a timely manner. As a next step, we will invite the Bank and the Fund to discuss this assessment and to detail the areas where the government will seek Bank cooperation.

We are also aiming to strengthen the regulatory framework for the utilities sector. Given that some additional time is needed for further discussion of the issues involved with domestic and international experts, including the World Bank, the legislation to implement the new regulatory framework will be submitted to Congress during the second half of 2004. The framework will be formulated in a manner that is fully consistent with the renegotiated concessions, supportive of private sector participation in the provision of public services, and our social objective of protecting low-income consumers.

Program financing assurances

Finding a sustainable solution to the public debt problem in line with our policy commitments stated in the MEFP of September 10, 2003 and the letter of intent of January 9, 2004, remains a priority of the government. The main elements of our approach aimed at reaching a collaborative agreement are: (i) to appoint banks to assist in preparations and help market the exchange offer; (ii) to hold additional meetings and engage in constructive negotiations with all representative creditor groups, including the Global Committee for Argentine Bondholders (GCAB), domestic institutional and retail holders such as the Asociacion de Ahorristas de la Republica Argentina (AARA), and European retail bondholder organizations such as the Comitato Investori Titoli Argentini (CITA); and (iii) to formulate the offer so that it will result in a sustainable debt for Argentina and would attain broad support from creditors.

We are making progress in these areas as follows:

  • We have recently selected six banks to assist us in organizing and carrying forward the restructuring process. Three foreign investment banks will undertake marketing the exchange offer in foreign jurisdictions and three Argentine banks will undertake the non-institutional domestic portion of the restructuring. A presidential decree that gives legal status to their appointment will be issued before March 15, 2004. The banks are hired for nine months or until an exchange launch (whichever is the earlier). It is our clear intention to retain the banks through the entire restructuring process, subject to banks satisfying their contractual obligations.

  • We will deal constructively and transparently with creditors and we will give due consideration to the initiatives that they may be willing to put forward. We have already invited 21 creditor groups to meet in Buenos Aires to continue the dialogue and have established a schedule for this purpose (see Annex I and accompanying invitation letters). We will also be intensifying the dialogue with domestic bondholders. By mid-April 2004 we will seek to reach agreement on a follow-up process and timetable. This framework will ensure meaningful negotiations with all creditor groups.

  • We have started to formulate such a framework with the investment banks. This will facilitate the development of proposals as a means of reaching a collaborative agreement with creditors. Within such a framework, it is our intention to discuss with creditors all aspects of the debt exchange offer, including how best to optimize the elements of the offer taking into account the proposals received from creditors and the restrictions imposed by Argentina’s debt burden. In tailoring the offer, we would take the necessary steps to maintain the principle of intercreditor equity and endeavor to avoid a piecemeal approach to the debt restructuring, in particular by finalizing with the assistance of the banks an appropriate minimum participation threshold necessary for a broadly supported restructuring.

We will discuss with the banks an appropriate timing for the launch of the offer. Given the need for consultations and additional discussions with creditors, it is difficult to set a precise timetable for launching and completing the exchange offer. At this stage, however, we believe that the offer would not be launched earlier than June 2004 and not later than August 2004.

The program is based on the World Bank and IDB maintaining their exposure to Argentina, which is key to protecting international reserves. We will continue to work closely with the multilateral development banks to ensure that their disbursements are closely in line with the program.

As regards Paris Club creditors, we intend to write to the Paris Club secretariat by mid-March 2004 to indicate the scope and type of treatment that we intend to seek.

Except as modified in this letter and the accompanying addendum to the TMU, the objectives, policies, targets and commitments of the economic program remain as described in the original MEFP of September 10, 2003 and our Letter of Intent of January 9, 2004.

In view of the progress made under the program, we request completion of the second review under the Stand-By Arrangement. As we implement our program, we will continue to maintain a close policy dialogue with the Fund and the rest of the international community.

Yours sincerely,

article image

ANNEX I

The following letter was sent to all the creditor groups listed below on March 9, 2004

Buenos Aires, March 9, 2004

As stated in our letter of February 2004, we are pleased to invite you to Buenos Aires between March 24 and April 16.

We kindly request you to contact:

Lucía Aguirre (laguirre@mecon.gov.ar), Leonardo Costantino (lcostan@mecon.gov.ar) Adrián Nador (anador@mecon.gov.ar) at 54.11.4349.8810 or at the following fax numbers 54.11.4349.8807 and 54.11.4349.8815 in order to set the date and time.

Yours truly,

Roberto Lavagna

List of Creditor Groups Invited to Buenos Aires

  1. Alliance

  2. Altro Consumo

  3. Asociacion de Ahorristas de la Republica Argentina

  4. Asociacion de Damnificados por la Pesificacion y el Default

  5. Capital Research

  6. Comitato Investori Titoli Argentini (CITA)

  7. Comitato per la Tutela degli Interessi e dei Diritti Dei Risparmiatori Privati Italiani Portatori di Quote del Debito Pubblico dello Stato Argentino

  8. Comitato per la Tutela dei Risparmiatori Italiani Portatori di Titoli Obbligazionari della Republica Argentina

  9. Daiwa Securities SMBC Co. Ltd.

  10. Deutsche Bank

  11. DekaBank

  12. Fintech

  13. Global Committee of Argentina Bondholders (GCAB)

  14. Interessengemeinschaft Argentinien e.V (IGA)

  15. JP Morgan Fleming

  16. Mitsubishi Securities Co. Ltd.

  17. Nikko Citigroup Limited

  18. Nikko Cordial Securities Inc.

  19. Nomura Securities Co. Ltd.

  20. Sindacato Italiano Tutela Investimento e Risparmio (SITI)

  21. Swiss Bankers Association (Swiss Banking)

ATTACHMENT I

Addendum to the Technical Memorandum of Understanding

All elements of the Technical Memorandum of Understandings (EBS/03/130, Attachment II) issued on September 12, 2003 remain in force, except for the revisions noted below.

I. Quantitative Program Targets

End-September performance criteria are being added for: (i) the cumulative primary balance of the federal government; (ii) the federal government debt stock; (iii) the stock of net international reserves of the central bank; and (iv) the stock of net domestic assets of the central bank, as follows:

Quantitative Performance Criteria and Indicative Targets

(In millions of Argentine pesos, unless otherwise noted)

article image

The following accounting exchange rates apply: Arg$/US$=2.9, US$/SDR=1.3875, Euro/US$=0.869, CAD$/US$=1.347, CHF/US$=1.351, JPY/US$=119.78, GBP/US$=0.604, Gold (U.S.$ per ounce)=371.0.

Includes quasi-monies in circulation.

II. Other Revisions

  • The following adjustor is added to the performance criterion on the stock of federal government debt (Section I). The debt ceilings will be adjusted:

    • “g. Upward (downward) by the difference in the value of the “Argentine pesodenominated bond” maturing on September 19, 2008 calculated at the program exchange rate and the value of the bond calculated at the exchange rate specified in the original contract arising from the embedded option in the contract. This adjustment includes the valuation of interest arrears and interest payments on this bond.”

  • The continuous structural benchmark on below the line reporting (item (e) of Section III) is modified as follows:

    • “The Secretaria de Hacienda and the BCRA will provide data from below-the-line on the financing flows of the provinces no later than 55 days after the end of the test date, or the following business day, if the 55th day falls on a Saturday, Sunday, or on a public holiday in Argentina.”

The requirement on the kind of information to be provided for this benchmark remains unchanged.
1

By early March 2004, 7 provinces (representing 113 percent of the 2002 deficit) had ratified their bilateral agreements out of 12 provinces that had signed agreements with the federal government.

2

See IMF Country Report No. 03/392 for more detailed background to these reforms.

3

As reported in IMF Country Report No. 03/392, the delays reflected difficulties in the procurement process for funding the due diligence and strategic review of the banks.

4

The selection of advisors was originally an end-April 2004 structural benchmark.

5

The report of the working group on the insolvency law was completed on February 25, 2004, resulting in a short delay from the associated end-January 2004 structural benchmark.

6

Compliance with the other fiscal and monetary end-December 2003 performance criteria was reported at the time of the first review.

1

Prepared by the staff of the World Bank on February 23, 2004.

1

Prepared by IDB staff, February 2004.

Same Series

Other IMF Content

Other Publishers

  • Collapse
  • Expand
Cover IMF Staff Country Reports
Argentina: Second Review Under the Stand-By Arrangement and Requests for Modification and Waiver of Performance Criteria
Author:
International Monetary Fund
Volume/Issue:
Volume 2004: Issue 195
Publisher:
International Monetary Fund
ISBN:
9781451801347
ISSN:
1934-7685
Pages:
63
DOI:
https://doi.org/10.5089/9781451801347.002
Figure 1.

Argentina: Indicators of Real Activity

Index Dec-2000 = 100, except where noted
Figure 2.

Argentina: Confidence Indicators
Text Figure:

Augmented Base Money 1/

(Indicative target, in Arg$ bln)
Text Figure.

Profitability by Groups of Banks

(Return on assets, in percent)
Figure 3.

Argentina: Recent Financial Indicators