Argentina: Assessment of the Risks to the Fund and the Fund’s Liquidity Position

Request for Stand-By Arrangement-Press Release and Staff Report

Abstract

Request for Stand-By Arrangement-Press Release and Staff Report

Introduction

1. This note assesses the risks to the Fund arising from the proposed Stand-By Arrangement (SBA) for Argentina and its effects on the Fund’s liquidity, in accordance with the policy on exceptional access.7 The authorities are requesting a 36-month SBA with access equivalent to SDR 35.379 billion (1,110 percent of quota). Under the proposed phasing, access is significantly frontloaded, with a first purchase equivalent to SDR 10.614 billion (333 percent of quota) available upon approval. The authorities intend to make the first purchase, using one-half of the Fund resources (SDR 5.307 billion) for budgetary purposes, and intend to treat the remainder of the arrangement as precautionary. However, in a full-drawdown scenario, in which real GDP ends up being 8 percent lower than in the precautionary baseline by 2023, the first purchase would be followed by 12 quarterly purchases each equivalent to SDR 2.064 billion (64.8 percent of quota) during the remainder of the arrangement period. By mid-June 2019, about a year into the arrangement, cumulative available purchases would amount to SDR 18.869 billion (592.0 percent of quota or 53.3 percent of the proposed access). The final purchase would become available in June 2021, following the completion of the twelfth review (Table 1).

Table 1.

Argentina: Proposed SBA — Access and Phasing

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Source: Finance Department

After approval of the arrangement, all subsequent purchases will depend on the completion of a review and compliance with performance criteria and consultation clause to be established under the arrangement.

Background

2. Argentina had been a prolonged and large user of Fund resources up to the mid-2000s (Table 2). It had been among the top five borrowers during most of the 1980s and 1990s. During the 1990s, two SBAs and two arrangements under the Extended Fund Facility (EFF) were approved in 1991 and 1996, and in 1992 and 1998, respectively. The 1998 EFF was treated as precautionary, and no drawing was made under it. A successor three-year SBA was approved on March 10, 2000 for SDR 5.4 billion. Thereafter, the Board approved two requests for augmentation of access to SDR 16.9 billion, including SDR 6.1 billion under the Supplemental Reserve Facility (SRF). Only SDR 9.8 billion of the approved SDR 16.9 billion was disbursed by the time the program was interrupted. The December 2001 program review was not completed and Argentina declared default on its sovereign debt obligations on December 23, 2001, as the currency peg collapsed.8 After protracted program discussions in 2002, a transitional SBA was approved on January 24, 2003, followed by a three-year SBA approved on September 20, 2003 with access equivalent to SDR 9.0 billion. Argentina incurred short-term arrears to the Fund when it failed to meet a repurchase obligation of SDR 2.9 billion on September 9, 2003.9 This overdue obligation was cleared on September 11, 2003. On January 4, 2006, Argentina repaid all its obligations to the Fund and cancelled the 2003 SBA the following day.

Table 2.

Argentina: IMF Financial Arrangements and Fund Exposure, 1984–2026 1/ (In millions of SDR)

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Source: Finance Department

As of end-December, unless otherwise stated.

The amount reflects also two augmentations including SDR 6.1 billion under the Supplemental Reserve Facility (SRF).

Figures including transactions under the proposed program are in italics. Fund exposure is derived assuming purchases are made as per the schedule in Table 1 and Argentina remains current on all its scheduled repurchases.

3. Argentina’s total external debt-to-GDP has been moderate in recent years, with most of the debt owed by the public sector (Table 3). From a low level of 27⅓ percent in 2013, total external debt-to-GDP increased marginally over a two-year period to nearly 28 percent by end-2015. It increased significantly during 2015–17 while remaining moderate at almost 37 percent of GDP by end-2017, below the median of recent exceptional access cases (Figure 1, Panel A). Short-term debt represents about one-third of total external debt. Public sector debt accounts for a large share of Argentina’s external debt (70 percent in 2017). Total external debt is expected to increase further, to 51 percent of GDP in 2018, reflecting bonds issued earlier this year and the scheduled first purchase under the proposed SBA (Table 4).

Table 3.

Argentina: External Debt Structure, 2011–20171/

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Source: Argentine authorities and IMF staff estimates.

End of year unless otherwise indicated.

Table 4.

Argentina—Capacity to Repay Indicators1/

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Source: Argentine authorities, Finance Department, and IMF staff estimates.

Assumes full drawings and indicators based on the adverse macroeconomic scenario presented in the staff report.

Includes GRA basic rate of charge, surcharges, service fees, and SDR charges. Of the 2018 figure, SDR 195.4 million is for the period subsequent to the Executive Board discussion of the staff report for the request of the proposed SBA.

Includes charges due on GRA credit and repurchases. Of the 2018 figure, SDR 195.4 million is for period subsequent to the Executive Board discussion of the staff report for the request of the proposed SBA.

Staff projections for external debt, GDP, gross international reserves, and exports of goods and services, are based on the adverse scenario in the staff report for the request of the proposed SBA up to 2023 and extended to 2026.

Figure 1.
Figure 1.

Argentina: Debt Ratios for Recent Exceptional Access Arrangements 1/2/

Citation: IMF Staff Country Reports 2018, 219; 10.5089/9781484367551.002.A002

Source: Argentine Authorities and IMF staff estimates1/ Estimates as reported in relevant staff reports on the request of SBAs or arrangements under the EFF approved since September 2008. For Argentina, ratios reflect end-2017 data.2/ Asterisks indicate PRGT-eligible countries at the time of the program.

4. Argentina’s external debt service is high, reflecting the large share of short-term debt. As a share of GDP, Argentina’s total external debt service for 2017 is estimated at around 11 percent of which more than 70 percent represents obligations of the private sector. The large external debt service is almost equivalent to exports of goods and services in 2017, making Argentina second only to Iceland among recent exceptional access cases (Figure 1, Panel C).

5. Argentina’s public debt is relatively high and is projected to rise further by end-2018. Over the period 2007–15, the public debt-to-GDP ratio averaged nearly 47½ percent. Reflecting larger gross financing needs since 2016, public debt increased to nearly 57 percent of GDP by end-2017. This debt level is 17 percentage points of GDP above the median public debt at the time of approval of recent exceptional access cases (Figure 1, Panel D). It is projected to increase further to almost 63½ percent of GDP by end-2018 (Table 4).

The New Stand-By Arrangement—Risks and Impact on Fund’s Finances

H. Risks to the Fund

6. Access under the proposed SBA would exceed both annual and cumulative access limits and would be among the highest on a number of indicators.

  • It would be the largest arrangement in absolute terms, in the Fund’s history, excluding arrangements under the Flexible Credit Line (FCL).

  • After the scheduled first purchase upon approval of the arrangement, Argentina would be the Fund’s largest borrower, with SDR 10.6 billion credit outstanding (333 percent of quota), representing 22 percent of total Fund credit outstanding.

  • If Argentina did not treat the remainder of the arrangement as precautionary, and all purchases were made according to the proposed schedule, Argentina’s outstanding use of GRA resources would rise to 592 percent of quota and 722 percent of quota at end-June 2019 and end-December 2019, respectively. It would peak at 1,110 percent of quota in June 2021 (Figure 2). This level of access relative to quota would be almost the same as that of Ukraine 2010 SBA and would be more than 38 percentage points above the median of peaks in recent exceptional access cases. It would however be below recent exceptional access peaks in arrangements with euro area members—Greece, Ireland, Portugal—even if Argentina’s access is scaled by its pre-14th review quota.

    Figure 2.
    Figure 2.

    Credit Outstanding in the GRA around Peak Borrowing 1/

    (In percent of quota)

    Citation: IMF Staff Country Reports 2018, 219; 10.5089/9781484367551.002.A002

    Source: Finance Department and IMF staff estimates.1/ Peak borrowing “t” is defined as the highlest level of credit outstanding for a member. Repurchases are assumed to be on an obligations basis.2/ Based on quotas at the time of approval, i.e., pre-14th Review quotas for all countries except Argentina. Median credit outstanding at peak is 802 percent of quota; average is 1,041 percent of quota.

  • If all purchases were made in accordance with the proposed schedule, peak Fund exposure to Argentina would consistently exceed corresponding medians in recent exceptional access cases. Fund exposure would peak around 83 percent of projected gross international reserves, which is over twice as high as the 39 percent median peak of recent exceptional access cases.10 As a share of total external debt, peak Fund exposure would be 14 percent, compared with 11 percent which is the median peak of recent exceptional access cases. As a share of GDP, peak Fund exposure would be 8.4 percent, compared with 10.4 percent, which is the median peak of recent exceptional access cases (Table 4 and Figure 3).

    Figure 3.
    Figure 3.

    Peak Fund Exposure and Debt Service Ratios for Recent Exceptional Access Cases 1/2/

    Citation: IMF Staff Country Reports 2018, 219; 10.5089/9781484367551.002.A002

    Source: Argentine authorities and IMF staff estimates, and World Economic Outlook.1/ Estimates as reported in relevant staff reports on the request of SBAs or arrangements under the EFF approved since September 2008.2/ Asterisks indicate PRGT-eligible countries at the time of the program.

  • If all purchases were made in accordance with the proposed schedule, projected payment obligations to the Fund would peak in 2023 at SDR 11 billion, representing almost 18 percent of projected gross international reserves. Debt service to the Fund as a share of exports of goods and services would peak at about 15 percent, twice the median peak level for recent exceptional access cases. Total external debt service as a share of projected exports of goods and services is projected to peak at 178 percent, which is the highest ratio of external debt service to exports among recent exceptional access cases (Table 4 and Figure 3).

I. Impact on the Fund’s Liquidity Position and Risk Exposure

7. The proposed SBA arrangement would have a significant impact on the Fund’s liquidity and on the Fund’s credit risk exposure.

  • The proposed arrangement would reduce the Fund’s liquidity by 16.0 percent (Table 5). It would reduce the one-year forward commitment capacity (FCC) from SDR 222 billion as of June 7, 2018 to SDR 186 billion.

    Table 5.

    Argentina—Impact on GRA Finances (millions of SDR unless otherwise noted)

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    Source: Argentine authorities, Finance Department, and IMF staff estimates.

    The FCC is defined as the Fund’s stock of usable resources less undrawn balances under existing arrangements, plus projected repurchases during the coming 12 months, less repayments of borrowing due one year forward, less a prudential balance. The FCC does not include resources under the New Arrangements to Borrow or 2016 Bilateral Borrowings Agreements.

    A single country’s negative impact on the FCC is defined as the country’s sum of Fund credit and undrawn commitments minus repurchases one-year forward.

    Projected credit outstanding for Argentina at time of approval of the proposed arrangement, which amounts to the scheduled first purchase.

    Burden-sharing capacity is calculated based on the floor for remuneration which, under current policies, is 85 percent of the SDR interest rate. Residual burden-sharing capacity is equal to the total burden-sharing capacity minus the portion being utilized to offset deferred charges.

  • After Argentina’s scheduled first purchase under the proposed arrangement, the Fund’s exposure to the top five borrowers would decline marginally (Table 5). The share of the top five borrowers amounts to 77.9 percent. After Argentina’s scheduled first purchase, its share of outstanding GRA credit would be 22.1 percent and the share of the top five borrowers would fall to 74.8 percent (Figure 6).11

  • GRA exposure to Argentina would exceed the Fund’s current level of precautionary balances (Table 5). The GRA commitment to Argentina amounts to nearly twice the current level of precautionary balances. If all purchases are made as scheduled, Fund exposure to Argentina as a share of the current level of precautionary balances would rise from 61 percent after the first purchase is made to 132 percent by end-2019 and would peak at 203 percent in June 2021 (assuming the current level of precautionary balances).

  • Were Argentina to accrue arrears on charges after drawing under the proposed arrangement, the Fund’s burden sharing mechanism would be clearly insufficient. In the current environment of relatively low interest rates, GRA charges for Argentina, which are projected at SDR 194 million for the remainder of 2018, and to average SDR 894 million a year over 2019–2024 if all purchases are made as scheduled, significantly exceed the Fund’s limited current capacity to absorb charges in arrears through the burden sharing mechanism.

Figure 4.
Figure 4.

Exceptional Access Levels and Credit Concentration

Citation: IMF Staff Country Reports 2018, 219; 10.5089/9781484367551.002.A002

Source: Finance Department.1/ Does not include FCL arrangements as well as arrangements with relatively low access in SDRs. Asterisks indicate countries that were PRGT-Eligible at the time of approval.2/ Total credit outstanding refers to credit outstanding as of June 7, 2018 plus Argentina’s first purchase under the proposed arrangement.

Assessment

8. The proposed SBA for Argentina is intended to support the authorities’ economic program during a period of macroeconomic adjustment to reduce vulnerabilities and promote strong, sustainable, and inclusive growth. The success of the program will depend critically on the acceleration of fiscal consolidation to restore credibility of the authorities’ reforms and boost market confidence. Against the backdrop of the long and sometimes controversial history of Fund program engagement in Argentina, building a broad consensus on the objectives of the program and the associated policies would be critical to ensure the political sustainability of the program and maintain the implementation momentum needed for the program to succeed.

9. The program faces substantial risks. As highlighted in the staff report and in the debt sustainability analysis, gross financing needs and debt vulnerabilities are expected to remain high. The debt trajectory is sensitive to deviations from program assumptions, in particular for the exchange rate, economic growth, and fiscal adjustment paths. If key policies or program assumptions do not materialize, the stabilization of Argentina’s economy would be undermined, with the likelihood that gross financing needs will increase and debt would follow an upward trajectory:

  • There is a risk that domestic support for the policies and reform measures underpinning the program would not be sustained notwithstanding measures aimed at protecting the most vulnerable from the burden of adjustment.

  • If the envisaged fiscal adjustment is not realized, there would be a deterioration in market confidence that could fuel a sell-off of Argentine assets, curtail access to new private financing, and trigger significant pressures on the exchange rate as observed in the run-up to the initiation of discussions on the proposed arrangement.

  • An even less favorable macroeconomic framework relative to the full-drawing scenario could pose serious risks to debt sustainability and exacerbate Argentina’s already high burden of debt service. Such a scenario could result from policy slippages that erode market confidence, lingering crisis of confidence that constrain Argentina’s access to capital markets more than assumed in the adverse scenario discussed in the staff report, unfavorable external conditions such as weaker growth in trading partner countries that subdues exports, a deterioration of its terms of trade, tighter-than-expected global financing conditions, or a combination of adverse factors.

10. The steadfast implementation of the program will be critical. With the proposed access and schedule of purchases and repurchases, the Fund would be highly exposed to Argentina for an extended period in terms of both the stock of outstanding credit and debt service falling due. Reflecting the proposed frontloaded access, Argentina would become the Fund’s top borrower soon after approval of the proposed SBA. The Fund’s exposure to Argentina would be significant and increase thereafter with each purchase, if made, exceeding the Fund’s precautionary balances for several years to come. Also, scheduled repayments to the Fund are large during 2022–25, with a peak of SDR 10.98 billion (almost 344 percent of quota) in 2023. The experience with Argentina’s 2003 SBA-supported program highlights the importance of sustaining broad political support for reforms. The authorities’ ability to garner such support and their readiness to recalibrate their policies in reaction to potential adverse shocks would be crucial to help stabilize the economy and facilitate sustained meaningful market access and financing by other official lenders during the program period and beyond. This is key to reduce financial risks to the Fund arising from the proposed arrangement.

11. The proposed arrangement will have a significant, though manageable, impact on the Fund’s liquidity. On approval of the arrangement, the Fund’s liquidity would be reduced by the full amount of the proposed access, which is the largest ever in absolute size for a Fund arrangement (except for some arrangements under the FCL). While the Fund’s liquidity position would remain adequate, the current uncertainties in the global economy could result in further demands for Fund resources. Therefore, a close monitoring of the Fund’s liquidity position is warranted.

7

See paragraph 5 of Decision No 14064–(08/18), adopted 2/22/2008, as amended, and The Acting Chair’s Summing Up of the Review of Access Policy Under the Credit Tranches and the Extended Fund Facility, and Access Policy in Capital Account Crises—Modifications to the Supplemental Reserve Facility and Follow-Up Issues Related to Exceptional Access Policy (3/5/03).

8

In 2003, Argentina decided to restructure its debt starting in 2005. The restructuring process has been protracted. Since taking office in December 2015, the current administration has sought to settle outstanding claims with holders of the defaulted bonds. Settlement with most of the holdout creditors in April 2016 allowed for the country to regain access to international capital markets. According to information made available to staff, Argentina continues to have outstanding arrears to private creditors and one official bilateral creditor (see the main report).

9

There had been other incidents of Argentina’s short-term overdue obligations to the Fund, mostly in the late 1980s.

10

The computation of the median of peak Fund exposure in percent of gross international reserves excludes arrangements with members belonging to the euro area at the time of the approval of the arrangement: Greece, Ireland, and Portugal.

11

The decline in the share of the top five borrowers is due to the impact of Argentina’s large scheduled first purchase on total credit outstanding.

Argentina: Request for Stand-By Arrangement-Press Release and Staff Report
Author: International Monetary Fund. Western Hemisphere Dept.