Argentina: First Review Under the Stand-By Arrangement; Inflation Consultation; Financing Assurances Review; and Requests for Rephasing, Augmentation, Waivers of Nonobservance and Applicability of Performance Criteria, and Modification of Performance Criteria—Press Release; Staff Report; and Staff Supplement
Author: International Monetary Fund. Western Hemisphere Dept.
Publication Date:
26 Oct 2018
eISBN:
9781484381724
Language:
English
Keywords:
ISCR; CR; y inflation; Center inflation target; Argentina; debt service; foreign currency; potential GDP; current account; debt sustainability; inflation expectation; Global; debt exchange
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First Review under the Stand-By Arrangement; Inflation Consultation; Financing Assurances Review; and Request for Rephasing, Augmentation, Waivers of Nonobservance and Applicability of Performance Criteria, and Modification of Performance Criteria-Press Release; Staff Report; and Staff Supplement

Abstract

First Review under the Stand-By Arrangement; Inflation Consultation; Financing Assurances Review; and Request for Rephasing, Augmentation, Waivers of Nonobservance and Applicability of Performance Criteria, and Modification of Performance Criteria-Press Release; Staff Report; and Staff Supplement

Developments

1. Since Board approval of the Stand-By Arrangement (SBA), Argentina has faced important unanticipated developments:

  • A new bout of volatility hit emerging markets in August, reducing the availability of market financing for the entire emerging markets asset class.

  • In Argentina itself, a wide-ranging domestic corruption investigation emerged that has implicated senior members of the previous government as well as large domestic construction companies.

  • Finally, markets have doubted the authorities’ commitment to the program. This partly reflects an initially timid communication strategy around the stabilization plan, as well as an unclear and, at times, inconsistent FX intervention strategy from the central bank.

2. These external and domestic factors have served to erode market confidence, causing sovereign spreads to rise to almost 800bps in early September amid increasing pressures on the currency. With the government unable to issue new FX debt in sufficient volumes and with FX intervention exceeding limits agreed in the Stand-By Arrangement, international reserves have been depleted at a much faster pace than was anticipated under the program (at end-September, net international reserves were US$6.7 billion below the program floor).

uA01fig01

EMBI and CDS spreads

(Basis points)

Citation: IMF Staff Country Reports 2018, 297; 10.5089/9781484381724.002.A001

Source: Bloomberg.
uA01fig02

Exchange Rate

(AR$ / US$)

Citation: IMF Staff Country Reports 2018, 297; 10.5089/9781484381724.002.A001

Source: Bloomberg.

3. In the last week of August, this difficult situation took a dramatic turn when President Macri publicly announced that he had reached agreement with the Fund to bring forward program resources to fund the government’s fiscal needs in 2018–19. The uncertainty surrounding the announcement amplified the volatility of the peso (which had already been on a depreciating trend), leading the currency to depreciate by 8 percent vis-à-vis the U.S. dollar on the day of the announcement. On the following day, despite a 1500 bps increase in the policy interest rate, a 5-percentage point increase in reserve requirements, and the sale of US$330 million in FX reserves, the currency fell another 11 percent. Bond spreads moved dramatically higher, with the 1-year CDS spread rising from 499 bps before the announcement to 798 bps by the end of that week. During August, the peso depreciated by 26 percent versus the U.S. dollar.

uA01fig03

BCRA FX Intervention

(US$bn)

Citation: IMF Staff Country Reports 2018, 297; 10.5089/9781484381724.002.A001

Source: BCRA.

4. On September 3, with market pressures continuing, President Macri announced an overhaul of his cabinet and a further tightening of fiscal policy targeting primary balance in 2019. The adjustment was to be underpinned by an increase in export taxes, cuts to capital spending, and reductions in subsidies and other spending. In thin markets, the exchange rate depreciated 4.3 percent on September 3 and the central bank sold US$100 million at the end of the trading day. Ongoing FX sales by the central bank did not arrest the continued depreciation of the peso during the rest of September, with the exchange rate peaking above 41 pesos to the dollar on September 28.

5. As the September maturity date for LEBACs approached, both resident and nonresident investors appeared to be moving from peso to FX-denominated assets, even as Argentine bonds rallied. To stabilize markets ahead of the September 19 LEBAC maturity, the central bank announced it would (i) rollover only half (AR$150 billion) of the maturing LEBACs held by nonbanks; (ii) raise remunerated reserve requirements by 5 percent; and (iii) be ready to auction FX to counter disorderly market conditions. In the following 5 days, the central bank sold US$0.6 billion in foreign currency as the exchange rate modestly appreciated. In advance of the October maturity of LEBACs, the central bank announced a further 3 percent increase in remunerated reserve requirements. in the context of an appreciating peso and higher interest rates, the October 17 LEBAC maturity was met with stable conditions in monetary and exchange rate markets.

6. Despite worsening financing conditions, the authorities continue to issue debt in domestic markets. Since June, the federal government has placed US$17 billion in domestic law debt (Annex I). Private sector rollovers of FX debt reached low levels in June-August, driven by the exit of non-resident holders. During those months, only about 40 percent of the new issuance of FX bonds was purchased by private sector holders. Higher interest rates have attracted stronger private sector demand in both September auctions (with an average 70 percent rollover rate). Around US$5.3 billion in short term peso bonds were issued in August and September, with yields in excess of 50 percent for 3- to 6-month maturities.

7. The large and rapid depreciation of the peso has caused inflation and inflation expectations to depart from program targets. With medium-term inflation expectations now well outside the program’s inflation consultation clause outer band through end-2020, the strength of the nominal anchor provided by the inflation targeting regime has been undermined.

uA01fig04

FX LETES Private Sector Rollovers

Citation: IMF Staff Country Reports 2018, 297; 10.5089/9781484381724.002.A001

uA01fig05

Private sector deposits

(In billions of ARS and USD, respectively)

Citation: IMF Staff Country Reports 2018, 297; 10.5089/9781484381724.002.A001

Source: BCRA.
uA01fig06

Inflation Consultation Clause

(Percent)

Citation: IMF Staff Country Reports 2018, 297; 10.5089/9781484381724.002.A001

Source: BCRA and Fund staff calculations.

Banking Sector Indicators (end-June)

article image

8. Despite this market volatility, there has not been a meaningful movement of deposits out of the banking system. US dollar-denominated deposits have fallen by around 5 percent since end-August but are around the same level as at the time of program approval. The Argentine banking sector appears solid with sizable capital positions, ample liquidity, low NPLs, strong provisioning, limited mismatches (either for currency or with regards to inflation-linked assets and liabilities), and high profitability. Exposure to sovereign liabilities is limited (at around 10 percent of banks’ total assets) although banks do have significant holdings of central bank liabilities.

9. The economic slowdown has deepened. GDP fell by 4 percent (q/q sa) in the second quarter of 2018, driven by the negative weather shock to agricultural production and the impact of tighter financial conditions and market volatility on the rest of economy. Leading indicators of activity suggest that the recession has continued in the third quarter, reflecting the deterioration in confidence, the negative impact of inflation on real wages, and the sharp increase in real interest rates. Labor market conditions have worsened, with the unemployment rate rising to about 9½ percent in Q2, up from 8.6 percent the same quarter last year. Poverty rose to 27¼ percent in the first half of 2018, about 1½ percentage points higher than in the previous six months.

10. Despite the weaker currency and slower economic activity, the current account deficit remained high at 5.6 percent of GDP in the second quarter. A surge in imports in the first quarter together with sharp declines in agriculture production and primary exports (driven by the drought) led to a widening of the trade balance. Interest payments on external debt remain high, making up more than one-half of the current account deficit. In the first quarter this deficit was predominantly financed by public sector borrowing (including US$13 billion in federal government issuance to nonresidents, with additional inflows from nonresident purchases of provincial bonds and LEBACs). In the second quarter, balance of payments flows shifted dramatically as the government was precluded from issuing debt in international markets, non-resident holdings of LEBACs unwound, and there were outflows from private sector assets. An adjustment in the trade balance also appears to have begun in July.

uA01fig07

BoP flows

(Billions of U.S. dollars)

Citation: IMF Staff Country Reports 2018, 297; 10.5089/9781484381724.002.A001

Source: BCRA.
uA01fig08

Current Account

(% 4-quarter rolling GDP)

Citation: IMF Staff Country Reports 2018, 297; 10.5089/9781484381724.002.A001

Source: BCRA.

Policy Changes

11. The authorities’ policy objectives remain unchanged from the original SBA:

  • To fully restore market confidence through macroeconomic policies that lower the cost of borrowing, lessen the federal government’s financing needs, and put public debt on a firm downward path.

  • To strengthen the central bank’s institutional framework by reinforcing its autonomy and designing a policy strategy that ensures inflation falls consistently over time.

  • To lessen the strains on the balance of payments, allow the exchange rate to operate flexibly as a shock absorber, increase international reserves, lower the current account deficit, and reduce Argentina’s gross external financing needs.

  • To protect Argentina’s most vulnerable citizens from the burden of this needed policy recalibration.

12. However, achieving these objectives in this more difficult environment has necessitated a strengthening of the authorities’ policy program. With more limited market access, Argentina now faces a pressing balance of payments need that is intimately entwined with a large fiscal financing gap, which cannot be resolved through policy adjustment alone. The authorities have decided to respond forcefully by:

  • Submitting a 2019 Budget with a zero-primary deficit target, backed by an agreement between the government and provincial leaders to support the government’s policy program.

  • Adopting a simpler, stronger, and verifiable monetary policy framework that decisively lowers inflation and inflation expectations. To this end, the inflation targeting framework has been replaced by a monthly target on the growth of base money.

  • Allowing the exchange rate to float freely. The authorities will undertake rules-based FX intervention only in limited, pre-specified circumstances to prevent a significant overshooting of the peso. All such FX intervention, if it occurs, will be unsterilized.

  • Agreeing an increase in budget support from other IFIs and seeking to increase the swap line with the People’s Bank of China (by US$9 billion).

  • Increasing the level of social assistance benefits in the main safety net programs.

Details of the proposed policy changes are outlined below.

A. Fiscal Policy

13. The government is on track to modestly outperform the 2018 fiscal target (a primary deficit of 2.7 percent of GDP). The positive effect of the depreciation on trade-related taxes (i.e., export taxes and the VAT on imports), the effect of higher inflation on revenue, and the fact that spending on pensions and social transfers responds to inflation with a lag, should offset the impact of the recession on the fiscal position. In addition, the authorities have introduced new taxes on exports that became effective in early September and have reduced the tax reimbursement to exporters.1 The authorities plan to use the resulting, modest, fiscal space in 2018 to increase spending on externally-financed investment projects, boost social spending (by giving one-off extra payments in September and December to those that receive the universal child allowance), and pay a bonus to public-sector employees (whose wage would otherwise be locked into a public wage agreement that provides for an average nominal increase of 8 percent from June 2018 to June 2019).

14. The 2019 draft federal government budget, which was submitted to Congress on September 17, targets a primary balance of zero by:

  • The introduction of taxes on all exports (which will remain in place until end-2020).

  • An increase in the wealth tax, which is levied on the richest members of Argentina’s society and will be based upon their assets held both within Argentina and abroad.2

  • The elimination of the exemption of public employees’ wages (at all levels of government) from the Personal Income Tax.

  • The elimination of the non-taxable component of salaries (componente no remunerativo) and the elimination of exemptions of financial profits of cooperatives and mutual institutions from the Corporate Income Tax (CIT).

  • The draw-down of the national pension fund assets (Fondo de Garantía y Sustentabilidad, FGS).

  • A one-year suspension of the planned reduction in the financial transaction tax (impuesto al cheque).

  • Scaling back inefficient energy subsidies by (i) raising tariffs to increase cost recovery from an average of 50 percent in 2018 to 70 percent in 2019; (ii) introducing a new pricing system for gas production; and (iii) reallocating the responsibility for transportation subsidies to provincial governments (which are better placed to judge how best to design and fund such support).

  • Containing capital spending, especially in transportation and energy projects where private sector participation is expected to pick up.

  • An overall 5 percent real cut in spending on goods and services (while increasing the purchase of food and medicine for the poor) and a 2 percent reduction in public employment.3

  • A reduction of current discretionary transfers to provinces (including by eliminating the Fondo Federal Solidario, through which 30 percent of revenues from soy taxes were redistributed to provinces).

Some fiscal resources will, however, be used to fund additional social spending (see below), reduce the corporate income tax rate (to encourage investment), and increase the minimum amount of income that is exempt from the employer’s social security contribution (to reduce the burden on lower income workers), according to the pace established by the end-2017 tax reform.

15. The 2019 budget strengthens the social safety net. The budget keeps social assistance spending constant as a share of GDP (once adjusted for one-offs in the last quarter of this year),4 preserves health spending in real terms (while concentrating resources on the most vulnerable) and achieves efficiency gains in the purchase of medicine and food for poor households. In addition, the program allows for an additional 0.2 percent of GDP in spending on specified social assistance programs to protect the poor, should such an increase be needed. The authorities have introduced a multi-transit public transportation fare, which will particularly benefit the poor. With the support of the World Bank, the National Social Security Administration will continue to improve targeting and expand coverage of the universal child allowance (Asignación Universal por Hijo).5 The authorities have also developed a system to monitor social conditions (based on multiple indicators including poverty, employment, and the number of social program beneficiaries) to better respond to the emerging needs of low income households. The authorities intend to finalize a comprehensive social protection reform strategy by end-2019.

16. Fiscal policy will unavoidably become more procyclical in 2019. The zero-primary balance target in 2019 implies a structural fiscal adjustment of 3.1 percent of potential GDP, a 1.7 percent of potential GDP larger negative fiscal impulse than was built into the original SBA. This reflects the urgency of lessening the fiscal financing needs and the need to assure market participants that the public debt remains on a sustainable path. The targeted path for the primary deficit will ensure that debt peaks at 81 percent of GDP in 2018 and falls steadily thereafter to 59 percent of GDP by 2023. To this end, it will be necessary that the authorities meet their target of a 1 percent of GDP primary surplus in 2020 and keep a primary surplus above 1 percent of GDP over the medium term. Also, these targets will support the disinflation process by lessening domestic demand. Staff will continue to work with the authorities over the course of the program to improve the quality of the fiscal consolidation, and make it as growth-friendly and durable as possible. This could include an eventual expansion of coverage of the PIT from the top decile to the top quintile of the wage distribution, as well as reducing exemptions on VAT.

17. Provinces are in a relatively healthy fiscal position and are well placed to achieve the targeted fiscal rebalancing without reducing essential services. On aggregate, provinces had a primary surplus of 0.6 percent of GDP in June this year and are expected to close 2018 with a small primary surplus, due to a contraction in the wage bill, goods and services, and capital spending (as a share of GDP). For 2019, provinces are expected to achieve a small primary surplus, despite the cut in discretionary transfers and the handover of responsibility for subsidies on intra-provincial public transport and the payment of the social tariff on electricity. The cut in discretionary transfers to provinces envisaged under the program will be almost fully offset by a programmed increase in automatic transfers (total transfers to provinces are expected to fall only slightly in 2019).6 Moreover, the Fiscal Responsibility Law, approved at the end of 2017, limits the increase in public employment at the provincial level, and commits provinces to maintain non-wage current primary spending flat in real terms. Finally, a modification to the 2017 Fiscal Pact will allow provinces to delay the planned reduction in stamp duties and other taxes. which will help their revenue position.

Summary Of 2019 Fiscal Measures Under The Baseline (Federal Government)

(estimated impact on deficit, as a percent of GDP)

article image
Note:

A −/+ sign means that the measure reductes/increases the primary deficit.

At program approval, the authorities were planning to suspend the increase in minimum salary above which employers pay SSC. Under the 2019 budget, the increase will proceede as originally planned.

18. The authorities remain committed to their policy plans to promote gender equality. The 2019 budget includes an expansion of public childcare facilities, which should help raise female labor force participation and contribute to level the playing field for women in the labor market (particularly for lower income households). The Comisión Nacional de Valores is in the process of setting up a registry of gender balance in listed companies’ executive boards and management positions. Finally, legislation that extends the duration of paternity and maternity leave is being considered by Congress.

B. Monetary Policy

19. Since the approval of the IMF-supported program, the BCRA has set its policy interest rate based on the gap between end-2019 inflation expectations and its inflation target. Policy statements have appropriately announced and explained rate decisions as being calibrated to bring inflation back to target over the medium term. This approach has been well understood by the market, although there have been important doubts as to how long the BCRA would be willing to withstand the high interest rates needed to bring down inflation.7

20. However, the conduct of monetary policy has been overshadowed by significant exchange rate volatility and an important weakening of the currency. With the central bank’s policy framework not providing a firm nominal anchor, currency depreciation is strongly passing through into domestic prices. Inflation accelerated from 3.1 percent (month-on-month) in July to 6.5 percent in September, bringing year-on-year inflation to 40.5 percent.

21. Inflation expectations have increasingly diverged from central bank targets. The September survey of professional forecasters predicted inflation to be well above the outer band of the inflation consultation clause through end-2020. This is despite the BCRA’s forceful policy response in August and September, which included: (i) raising the policy rate by 2,000 bps (to 60 percent), (ii) extending time-based forward guidance (i.e., committing to not lower the policy rate until at least December), and (iii) raising the reserve requirement by 5 percent.

uA01fig09

Inflation expectations

(Percent)

Citation: IMF Staff Country Reports 2018, 297; 10.5089/9781484381724.002.A001

Source: BCRA.

Monetary Aggregate Targeting During Stabilization Episodes

With limited central bank credibility, unanchored inflation expectations, and accelerating inflation, the BCRA has adopted a monetary framework centered on zero growth of base money. This approach is simple and easily monitorable and should help to stabilize the Argentine economy. Base money targets have been used extensively in the context of Fund-supported reform programs, including in 45 of the 105 arrangements over 2002–2012 that were reviewed in IMF (2014).1 This box summarizes experiences from three of these programs:2

  • Indonesia (1997). Following a 70 percent depreciation of the rupiah, Bank Indonesia aimed to reduce soaring inflation during 1998 by adopting an intermediate target of 16 percent broad money growth and using an operational target for the growth rate of base money. Amid low central bank credibility, the adoption of a simple base money target delivered some degree of clarity and predictability to the monetary framework. Inflation was reduced from a crisis peak of 150 percent to single digits in the space of around 18 months. Interest rates were highly volatile in the early months of implementation and rose to over 100 percent before stabilizing. GDP fell by 21 percent before the economy began growing again in 1999, reflecting the combined banking and BOP crisis (much of which took place before the base money target was introduced). An inflation targeting framework was adopted in 1999, alongside the passage of a law establishing the independence of the central bank.

    uA01fig10

    Inflation

    (month-on-month percentage change)

    Citation: IMF Staff Country Reports 2018, 297; 10.5089/9781484381724.002.A001

  • Mexico (1995). Following a forced transition to exchange rate flexibility, Banco de Mexico adopted an intermediate target on the growth of the monetary base in early 1995, with borrowed reserves as its instrument. Amid a deepening crisis, initial implementation of the rule involved substantial volatility of the exchange rate, as the velocity of money was very unstable. However, once the central bank took decisive action to ensure that interest rates rose to nearly 100 percent, inflation and the exchange rate stabilized, amid a fall in output of 10 percent. Inflation was gradually lowered from over 50 percent in 1995 to the mid-twenties by 1997. An inflation targeting regime was formalized in 2001.

  • Turkey (2001). Following a 50 percent depreciation of the currency, the Central Bank of Turkey set a target for the growth rate of base money of about 25 percent during 2001 as part of its macroeconomic stabilization program. Early in the program dollarization reduced the demand for Lira, which allowed for a reduction in the rate of growth of the monetary base but without having a marked impact on inflation. The liquidity crisis led to a fall in output of over 5 percent in 2001. Together with tight interest rate policy, inflation was reduced from chronically high levels of above 50 percent to single digits by 2004.

1 IMF Policy Paper, “Conditionality in evolving monetary policy regimes,” March 2014.2 IMF Occasional Paper, “Managing Financial Crises: Recent Experiences and Lessons for Latin America”, no. 217, 2003.

22. The authorities have decided, therefore, to replace their inflation targeting framework with a target on the growth in the monetary base. The objective is to set monetary policy in a simpler, stronger, and more verifiable way, to bring down inflation and inflation expectations more rapidly. The core of the new framework is a commitment to a ceiling on the growth rate of nominal base money that is equal to zero percent per month until June 2019, and to one percent per month until end-2019.8 This framework is expected to be a transitional arrangement until the system has stabilized. Once inflation and inflation expectations become well anchored, the central bank plans to return to an inflation targeting framework.

23. Changes to the operational framework are being implemented to increase the BCRA’s control over domestic liquidity conditions. LELIQ issuance is being calibrated to reach the base money target on average for each month based on fixed allotment, variable rate auctions. Also, to avoid an unintentional loosening of monetary conditions, the base money growth target is supplemented by a commitment to maintain short-term rates above 60 percent until such time as 12-month-ahead median inflation expectations fall decisively for at least two consecutive months. The commitment to keep short-term rates from falling below 60 percent has been operationalized by introducing a minimum bid rate at the LELIQ auction. The central bank will accommodate increases in the interest rate as needed to ensure the achievement of its quantitative target.

C. Exchange Rate Policy

24. Over the past few months, the central bank’s approach to the exchange rate lacked a clear objective and has resulted in an excessive loss of reserves while doing little to address disorderly market conditions. Contrary to their commitments under the program, the authorities have followed an ad hoc, discretionary intervention strategy. They have intervened on some days without a significant movement of the peso, sold reserves into an appreciating currency, sold reserves both by auctions and direct sales to the market, and occasionally stepped out of the market altogether in the face of very large daily movements in the currency. The authorities have been concerned by low levels of liquidity in the currency market, that creates a risk that small transactions result in very large movements in the exchange rate, and have tried to counter this with their intervention strategy. However, the volumes trading in the market became endogenous to the potential of the central bank stepping in to sell dollars. This lack of a clear framework has been particularly evident in the disruptive conditions in the currency market in August and September.

25. The authorities have allowed the currency to freely float. The central bank regards that a floating exchange rate is best suited to Argentina’s current circumstances, particularly given the uncertain prospects for the terms of trade and for capital flows. However, the BCRA has indicated it would be prepared to intervene—in a limited, simple, and rules-based way—to prevent disorderly market conditions and in the event that there is a significant overshooting of the exchange rate. Specifically, the central bank is committed to undertaking no FX purchases or sales within a wide, “non-intervention zone” (of AR$39 per US$ ± 15 percent).9 In the event the currency were to move outside of this zone, the BCRA would have the option (but not a commitment) to announce a competitive auction to either buy or sell up to US$150 million per day. The central bank is committed to ensuring that all FX purchases/sales are unsterilized, which would result in an expansion/contraction of base money (i.e. base money would grow at a faster/slower rate than the announced monthly targets).

D. Debt Management

26. Prior to the program, Argentina’s debt management has relied on a mix of monetary and external financing. The BCRA’s advances to the Treasury resulted in a liquidity overhang absorbed by the BCRA via the issuance of its own securities (LEBACs), incurring a significant quasi-fiscal cost and undermining the authorities’ disinflation objective. In addition, the debt management strategy relied on sizable U.S. dollar denominated issuances, exposing public debt to exchange rate risk. While monetary financing was suspended in the context of the IMF-supported program, the latter risk remains.

27. The Treasury faces sizable FX funding needs in the remainder of 2018 and 2019. About US$5.1 billion in FX LETES will mature in the remainder of 2018, together with a US$3.1 billion repo with banks. In 2019, if rollover rates remain as projected under the baseline, the Treasury would face FX gross financing needs (with the private sector) of US$22.3 billion.

28. The development of a liquid, peso-denominated domestic government securities market is a priority to improve the currency composition of public debt. This will require a successful macroeconomic stabilization effort and a gradual increase in domestic currency debt issuance, supported by measures that improve the effectiveness of debt management policies and that develop the local financial market. The Treasury should issue peso-denominated securities more regularly, preferably based on a pre-announced schedule, with benchmarks provided by a few (initially short) maturities to deepen the market and develop a yield curve. Given the strong preference for liquidity, the development of secondary and repo markets will be important and would benefit from the introduction of a market making agreement. Regulatory limits on banks’ exposure to sovereign risk have resulted in a larger role played by mutual funds in the local fixed income market, and could be reconsidered in the context of market development efforts.

Impact on the Macroeconomic Outlook

29. In line with the more difficult financial situation, and with a larger fiscal adjustment and tighter monetary conditions, staff has revised down its growth projections. The economy is expected to continue contracting for the remainder of the year, and growth for 2018 is now forecast to be −2.8 percent (versus 0.4 percent at SBA approval). The rebound of agricultural activity is expected to contribute to a gradual recovery starting in 2019Q2, but a 1.7 percent contraction is still projected on average for 2019 (versus 1.5 percent expansion expected at the time of program approval). Domestic demand growth is expected to remain weak for some time. However, the real exchange rate depreciation, stronger agricultural and energy exports, and import compression are expected to create a significant boost to GDP from net exports.

uA01fig11

Contribution to GDP growth

(Percent)

Citation: IMF Staff Country Reports 2018, 297; 10.5089/9781484381724.002.A001

Source: IMF calculations and estimates.

30. The recent depreciation of the peso is projected to boost near-term inflation. Inflation is now expected to exceed 43 percent by end-2018 (versus 27 percent at SBA approval). Contracting activity, continued moderation in wage increases, and the shift in the monetary framework are expected to reduce inflation to 20 percent by end-2019.

31. The exchange rate is expected to remain far more depreciated than originally envisaged under the SBA. In real effective terms, the currency has depreciated by about 34 percent so far in 2018, already exceeding the overvaluation estimated at the time of the 2017 Article IV. The sharp real depreciation, together with the projected continued contraction in demand, is expected to result in a significant external adjustment for the remainder of the year and into 2019, with the current account deficit expected to fall to 1.6 percent of GDP in 2019. The public sector is not expected to tap international markets in 2019, although nonresident investors are expected to purchase domestic law bonds. A cumulative real appreciation of around 20 percent is expected by 2020. In the program scenario (where stability gradually returns and confidence in the policy framework is rebuilt), both the level of the REER and the current account position are expected to converge to levels that are consistent with medium-term fundamentals and desirable policies.

uA01fig12

Real effective exchange rate

(Index; Long-run average = 100)

Citation: IMF Staff Country Reports 2018, 297; 10.5089/9781484381724.002.A001

Source: IMF staff calculations.

32. The current baseline scenario is worse than the “adverse scenario” outlined in the Stand-By Arrangement in June. That scenario assumed higher rollover rates and a less depreciated peso than currently envisaged, and accordingly, a higher path of reserves, and a lower debt-GDP ratio. It was envisaged at the time of program approval that, in such circumstances, there would be a need for additional fiscal measures and that the domestic counterpart of Fund financing would be drawn and made available as budget support (as is now proposed in the changes to the SBA).

Argentina SEI – Adverse Scenario vs Current

article image

Implications for the Stand-By Arrangement

33. BOP need. Argentina faces a BOP need arising from pressures on the current and capital accounts, stemming from a shift in the global appetite for emerging market assets and idiosyncratic concerns about Argentina. The resulting tightening of financial market conditions has constrained the government’s ability to issue new debt, including to cover its debt obligations falling due, and created significant difficulties for Argentina in meeting its gross external financing needs. Indeed, the lower rollover rate since program approval has translated directly into lower international reserves. This, in addition to higher private outflows and lower inflows, has implied a sizable revision in the capital account and a downward adjustment in the current account deficit. As such, an augmentation and front-loading of access under the SBA is warranted to address Argentina’s actual BOP need. In staff’s judgment, the Fund’s financing, together with sustained implementation of the reform program, should help bolster confidence and restore external financing flows, both to the government and to the private sector, eventually restoring stability to Argentina’s external position. Indeed, the program assumes that the successful implementation of adjustment policies as envisaged, combined with the support from international community, will help reestablish access to international markets at reasonable terms. The BOP pressures that Argentina is currently facing are seen as temporary.

34. Access. Even with the authorities’ more front-loaded fiscal adjustment program, and assuming the revised macroeconomic framework discussed above, the federal government is likely to be left with a significant financing need in 2018–19. The program is based on a conservative scenario where:

  • Other IFIs provide new financing sufficient to at least cover their upcoming amortizations in 2018–19. Financing assurances have been given for new lending of about US$5 billion by the World Bank, Interamerican Development Bank, and the Development Bank of Latin America (CAF).

  • The private sector rolls over 50 percent of the amortizations coming due, rising gradually to 70 percent by end 2019, and nearly 100 percent in 2020, as confidence returns.

  • Public sector entities maintain/increase their exposure to federal government liabilities, as non-financial public-sector entities also capitalize their interest payments.

  • The Federal fiscal position is adjusted to achieve primary balance in 2019 and a 1 percent of GDP surplus in 2020.

Under such assumptions, there would be a financing gap that the authorities have requested be met from IMF financing. This would imply a larger and more front-loaded disbursement of Fund resources: an augmentation of access by SDR 5.335 billion (around 167 percent of quota or US$7.1 billion) with SDR 25.9 billion (or about US$36.3 billion, 813 percent of quota) made available as budget support between end-September 2018 and end-December 2019. This would bring total access under the SBA to 1,277 percent of quota (SDR 40.714 billion or about US$57 billion).

35. Capacity to repay. Argentina’s capacity to repay the Fund continues to be assessed as adequate, although subject to heightened risks (see below). The Fund’s exposure in terms of debt service metrics are at the higher end compared to other exceptional access cases, and the frontloading would result in a considerable bunching of Argentina’s repurchase obligations to the Fund. Nonetheless, international reserves are projected to remain adequate at the end of the program and throughout the repayment period. Moreover, Argentina’s efforts over the past few years to strengthen institutions, improve governance, and increase transparency help provide assurances. That said, a steadfast delivery of program commitments will be crucial for a successful IMF-supported program in Argentina, which would significantly reduce sovereign and balance of payments risks, result in lower spreads, increase access to global capital markets, and permit Argentina to successfully exit from Fund support.

36. Program performance. While all end-June quantitative performance criteria (QPC) under the SBA were met,10 some end-September QPCs, for which data are available, have been missed.

  • In particular, the deterioration of market conditions has meant that (i) inflation has exceeded the inner band since end-June (requiring staff consultation) and the outer band at end-September (40.5 percent y/y, requiring consultation with the Executive Board), largely owing to the sharp depreciation of the peso11; (ii) NIR fell below its end-September target and the stock of non-deliverable forwards rose above the program ceiling, owing to the BCRA’s significant spot and forward FX intervention and lower-than-expected rollover rates; and (iii) difficult financing conditions have precluded the Treasury from reducing its stock of liabilities to the central bank, thus missing the QPC on net credit to government. Waivers for non-observance are, therefore, requested for the end-September QPCs for net international reserves, net credit to government, and non-deliverable forwards.

  • Corrective actions are being taken to recalibrate monetary policy and accelerate the process of fiscal adjustment in the context of the newly reformulated program. The authorities have begun to reduce the outstanding stock of NDFs, with around US$200 million having been rolled off during September, and the stock will be monitored going forward through a continuous QPC.

  • The authorities are requesting waivers of applicability for all end-September fiscal QPCs. However, preliminary data indicates that these targets will be met and, in the likely case that the final data becomes available before the board date, a staff statement will be issued reporting on their performance.

  • The continuous QPCs for external payment arrears and central bank financing of the government were met.

  • The end-June structural benchmark for the establishment of FX auctions was met. The end-September structural benchmark on the establishment of a senior-level debt management coordinating committee between Finance and the BCRA was implemented on October 1 (i.e. with a minor delay).

37. Risks. Needless to say, the large scale of financing under the revised program creates significant risks to the Fund.

  • First among these risks is the uncertainty surrounding the degree to which private capital participates in financing Argentina in the coming months. If rollover rates are lower than is assumed in this revised program, even the proposed increase and front-loading of Fund resources would be unable to fully finance the balance of payments and fiscal needs. In such circumstances, it would be difficult to represent that the program remains fully financed. Similarly, if financing terms do not improve as envisaged under the baseline, even if rollover rates are realized, this could raise concerns about program financing and the sustainability of the federal debt.

  • If macroeconomic outturns were to weaken beyond staff’s projections, the authorities’ fiscal objectives could be called into question, necessitating further policy measures to achieve the fiscal targets under the program. Even then, the debt-GDP path would likely be higher than is forecast in the baseline, which may raise sovereign spreads and lessen the availability of market financing.

  • An inability to achieve the targeted fiscal adjustment, or continued difficulty re-establishing central bank credibility within the new monetary framework, could undermine the authorities’ policy efforts and lead to concerns over the path of public debt and future inflation. This, in turn, would make it more difficult to convince investors of the sustainability of Argentine public debt or to establish a nominal anchor.

  • Risks to the program could also arise from external shocks, such as unanticipated changes to U.S. monetary policy, a potential deepening of trade tensions, increased uncertainty arising from geopolitical tensions, or an exogenous tightening of global financial conditions (particularly one that is incident on emergent market economies).

  • Finally, maintaining social and political support for the authorities’ proposed adjustment is likely to be difficult, particularly when (as is expected) the economic downturn deepens. This risk is exacerbated further by the fact there will be national elections in October 2019.

38. Debt sustainability. Debt burden indicators have worsened since the time of the program request, and beyond what was envisaged in the adverse scenario. Public debt is expected to peak at 81 percent of GDP by end-2018. This reflects the recent real exchange rate depreciation and the high share of FX-denominated debt and, to a lesser extent, lower GDP growth. With the implementation of the new monetary framework and additional fiscal consolidation, the staff’s baseline envisages a rebound in market confidence, including a partial and front-loaded unwinding of the real exchange rate depreciation and a return of growth, leading debt to fall to around 59 percent of GDP by 2023. Nevertheless, there are significant downside risks to this baseline scenario including (i) if the rebound to market confidence envisaged in the program does not fully materialize, (ii) the structurally high share of FX-denominated debt, and (iii) potential contingent liabilities from the broader public sector. At the same time, the 40 percent of public debt that is held by other public entities is a mitigating factor. Overall, staff’s assessment is that debt remains sustainable, but not with a high probability (see Annex I).

39. Prior Actions and Structural Benchmarks. The authorities have already submitted a 2019 Budget to Congress with a zero-primary deficit target and that quantifies the 2019 policy measures and tax expenditures, contains a statement of fiscal risks and mitigating measures (including from PPPs), and eliminates article 27 of the Law 11,672 (which established that capital expenditures under the Programa de Inversión Prioritaria have to be recorded below the line). Also, the government has submitted the revenue legislation (on the wealth tax) that underpins their fiscal plan as a prior action for completion of this review. Passage of the budget and the tax legislation are proposed as structural benchmarks for end-November. A new structural benchmark is proposed for end-October for submitting a medium-term budget to congress, and the timing of the structural benchmark for limiting the counterparties for LEBACs is proposed to be changed to end-March 2019 (from end-September 2019).

40. Political Assurances. The authorities have obtained an expression of support for the fiscal program from the provincial governors, who have signed an addendum to the 2017 Fiscal Pact whereby they agree on the importance of the federal government reaching a primary balance in 2019. After approval in Congress, the addendum to the Fiscal pact will be submitted for approval to the provincial legislative bodies, thus reflecting the support from a broad spectrum of political forces within Argentina. Further, the head of the Partido Justicialista block in the Senate has expressed support for the fiscal plan that underpins the Stand-By Arrangement. Although broader statements of support from the IMF-backed program have not been expressed by all political factions, these statements of support on the fiscal adjustment, together with the BCRA’s well-executed communication of the new monetary policy and the concrete fiscal and monetary policy measures adopted since the time of program approval, provide sufficient assurances that the authorities are committed and able to implement the program.

41. Reviews. Given the uncertainties, staff propose incorporating into the program a second review based on an end-October test date and a third review based on an end-December test date, and then subsequently move back to regular quarterly reviews.

42. Conditionality. Program conditions will include:

  • Primary balance of the federal government. The primary balance target for 2019 will be set at zero for the year as a whole (although the quarterly targets will take into account seasonality in revenues and spending). The adjustor for capital spending financed by multilateral and bilateral official donors (of up to 0.2 percent of GDP) will be maintained.

  • Social targets. The floor on social assistance spending and 0.2 percent of GDP adjustor for social spending will be maintained under the redesigned program.12

  • Net credit to government (NCG). Starting in end-October the targeted change in NCG will be reduced to zero. At each review, staff will examine with the authorities the prospect of reinstating a targeted reduction of the NCG, depending on market conditions.

  • Net International Reserves. NIR targets will assume Fund resources are fully drawn down as budget support (rather than having an adjustor to the NIR target for the use of Fund budget support as was previously the case). Adjustors will be introduced as follows: (i) a downward adjustor to the floor based on cumulative FX sales insofar as they take place outside the non-intervention zone and are no more than US$150 million per day, and (ii) an upward adjustor to the floor insofar as the cumulative issuance of FX denominated debt is in excess of that assumed in the program baseline. There will also be an adjustor linked to changes in the timing of IFI disbursements to Argentina.

  • Non-deliverable forwards. A continuous ceiling for the stock of non-deliverable forwards will be kept at US$3.6 billion (the same as the end-September stock) until end-December 2018. Starting in 2019, this will become a quarterly performance criterion (with monthly indicative targets) and the stock will be reduced gradually.

  • Inflation targets. Reflecting the change in the monetary policy framework from inflation targeting to monetary targets, the inflation consultation clause will be eliminated from program conditionality.

  • Net Domestic Assets.13 NDA QPCs will be established that are consistent with the programmed path for NIR and the central bank’s targeted growth in base money. These program targets will be defined as a ceiling on the monthly average of NDA. There will not be an adjustor to the NDA ceiling linked to FX sales (purchases), so that these transactions are not sterilized and automatically lead to a reduction (increase) in the growth of base money. An adjustor based on changes in the timing of disbursements of IFI budget support—symmetric to that for NIR—will be included for the NDA ceiling.

In addition, modifications are requested for end-December performance criteria for the primary balance of the federal government, domestic arrears, social assistance spending, NIR, NDF, and net credit to government.

43. Safeguards. A safeguards assessment of the BCRA has been completed. The assessment mission found that the BCRA has strong external audit arrangements and is planning to transition financial reporting practices to international standards in 2020. Plans to amend the BCRA Charter are underway. Central bank independence will need to be strengthened in key governance aspects including refocusing the bank’s objectives on monetary and financial stability and strengthening governance arrangements at the BCRA board (including the personal autonomy of board members and the Governor). Recapitalization of the BCRA will be necessary to strengthen the balance sheet. Staff also recommended closer coordination between the authorities and staff on the use of budget support resources in line with the Memorandum of Understanding, signed between the Treasury and the BCRA, that sets out terms and responsibilities for handling IMF resources used for budget support. In light of the proposed additional budget support under the SBA, a fiscal safeguards review is planned for October-November 2018.14

44. Financing Assurances. The combination of a larger fiscal adjustment and increased resources from the Fund ensure the program is fully financed. The authorities will continue to seek further bilateral and multilateral financing for Argentina (including larger support from other IFIs and an increase in the size of the foreign currency swap with the People’s Bank of China). Additional FX resources should be kept to build-up reserves in order to strengthen Argentina’s external position. It is expected that the increase in access and re-phasing of the program will play a key role in bringing back market confidence and supporting the authorities’ reform plan. Continued strong program implementation should allow Argentina to meet its obligations to the Fund in a timely manner.

Settlement of Untendered Debt as of December 31, 2017

(In billions of US$, unless otherwise noted)

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Source: Ministry of Finance.

45. The authorities continue to make good faith efforts to resolve outstanding arrears to external private creditors. The debt exchange undertaken by the government in 2016 reopened capital markets and resolved the bulk of the arrears that had built up over the past several years with the previous two administrations. However, a residual amount of arrears to private creditors remains unresolved. Currently, a total of around US$1.2 billion in principal (or US$3.2 billion including accrued interest) remains outstanding. Since program approval, the authorities have continued to make payments under the agreements executed. While there have been no new agreements since June, the authorities have continued to work with the Attorney General’s office and are now in the final stages of approving and publishing the instructions for the procedure for settlement of claims under Argentine Law. The authorities expect that this will bring in another wave of agreements for claims under Argentine Law out of a total of about US$90 million in original principal amounts eligible. The authorities maintain open discussions with creditors and all documentation to enter into agreements are available on the government’s website. The terms offered are the same as those offered to the creditors who accepted in 2016. Litigation initiated by certain bondholders continues in several jurisdictions. Staff is of the view that, based on the authorities’ actions, they are making good faith efforts as required under the Fund’s Lending into Arrears policy.

46. There are limited outstanding arrears to official bilateral creditors. These arrears, of approximately US$30 million (in principal amount), claimed by the French export credit agency, relate to the building of a gas pipeline in the Tierra del Fuego region of Argentina by a French company in the late 1970s. The parties are currently in arbitration in the International Chamber of Commerce International Court of Arbitration. Discussions are ongoing, and both countries have recently agreed that the constitution of the Court will be decided under Argentine Law.

Exceptional Access Criteria

47. While the environment under which the SBA would be implemented has worsened, Argentina is judged to continue to meet the four criteria for exceptional access:

  • Criterion 1. The member is experiencing or has the potential to experience exceptional balance of payments pressures on the current account or capital account resulting in a need for Fund financing that cannot be met within the normal limits. Tighter global financial conditions since the approval of the program in June have reinforced the shift in portfolio preferences away from peso assets and intensified capital account pressures. The return of market confidence has not materialized as envisaged at the time of Board approval and has resulted in a weaker-than-expected exchange rate and a lower rollover rate of private holdings of public debt. This gives rise to a larger financing need than was envisaged at the time the program was designed which cannot be met within the normal limits of Fund access.

  • Criterion 2. A rigorous and systematic analysis indicates that debt is sustainable but not with a high probability; exceptional access is justified as financing from sources other than the Fund improves debt sustainability and sufficiently enhances the safeguards for Fund resources. Under staff’s new baseline, Argentina’s federal government debt is projected to increase above the high-risk threshold (70 percent). Gross financing needs (GFN) are high but remain below the 15 percent of GDP high-risk threshold during the projection period. The end-2018 federal debt-to-GDP ratio forecast for end-2018 is 16 percentage points higher than at program approval (due to depreciation, and to a lesser extent, lower growth rate). Notwithstanding this, the debt-GDP ratio is projected to fall over the medium term as a result of the fiscal efforts of the government, a return to growth, and a reversal of the overshooting of the real exchange rate. There are, however, sizable risks around this baseline: the high actual level of debt to GDP, the large share of foreign currency debt, significant rollover needs, and implementation risks around the proposed fiscal consolidation all leave Argentina vulnerable to changing market sentiment and movements in the real exchange rate. There are also potential contingent liabilities from the broader public sector, including (as yet undetermined) BCRA recapitalization needs. On the other hand, the large share of public debt held by other public-sector entities serves as an important mitigating factor. All in all, staff’s assessment is that debt is sustainable but not with a high probability. Exceptional access in such situations requires the existence of non-Fund financing that improves debt sustainability and ensures sufficient safeguards for Fund resources. Staff judges that the required safeguards are in place. Notably, prospects for market access under the program are expected to strengthen, despite the recent strains, and the long maturity of Argentina’s privately-held foreign currency-denominated debt15 improves the prospects of adequate private creditor exposure being maintained throughout the program.

  • Criterion 3. Staff judges that the member has prospects of gaining or regaining access to private capital markets within a timeframe and on a scale that would enable the member to meet its obligations falling due to the Fund. Despite the recent tightening of financial conditions, Argentina continues to maintain access to domestic financial markets, where resident and non-resident investors have continued to participate in recent peso- and US$-denominated bond placements. Global and domestic factors have, however, tightened external financing conditions and average yields on Argentina’s external bonds have risen. Nonetheless, staff expects that the successful implementation of Argentina’s policy program, combined with support from the international community, will help reestablish Argentina’s access to international capital markets on reasonable terms.

  • Criterion 4. Staff judges that the policy program provides a reasonably strong prospect of success, including not only the member’s adjustment plans but also its institutional and political capacity to deliver that adjustment. The initial implementation of the program showed a mixed picture of the authorities’ commitment to their policy plans. But despite the difficult political situation, weaker economic environment, and unfavorable market conditions the government has reinforced its ownership of the fiscal adjustment that is needed under the program (although there is space for improving the quality of the adjustment). In addition, the government has been working within Congress and with regional governors to build political support for its policy efforts, particularly as regards fiscal policies. Indeed, the majority of provincial Governors have publicly expressed their willingness to share the burden of the fiscal adjustment with the federal government and, in a recent addendum to the 2017 Fiscal Pact, have recognized the importance of the federal government reaching primary balance in 2019. In addition, the head of the Justicialista party block in the Senate has public indicated his support for the government’s announced fiscal plan underlying the Stand-By Arrangement, which should help facilitate the passage of the 2019 Budget. Despite a complicated economic situation and a difficult history of IMF lending to Argentina, social opposition to the program has been more subdued than might have been expected. On the monetary side, the central bank has raised policy rates by a cumulative 20 percent since the time of program approval, increased reserve requirements in an effort to anchor inflation and inflation expectations, and (on October 1) rolled out a simpler and tighter monetary policy framework, which immediately led to a rise in short-term interest rates, and committed to a freely floating exchange rate regime with a transparent FX intervention rule. This demonstrates the authorities’ commitment to taking action, as needed, to achieve their monetary goals. Although broader statements of support from the IMF-backed program have not been expressed by all political factions, the concrete actions on the fiscal and monetary fronts, the statements of support on the fiscal adjustment, and the BCRA’s well-executed communication of the new monetary policy provide sufficient assurances at this stage that the authorities are committed and able to implement the program. Finally, the authorities continue to demonstrate strong ownership of their policy framework and a high-level political commitment to partnering with the Fund in their efforts. Strong, sustained and consistent policy implementation will be crucial, and broad societal ownership of the government’s economic plan continues to be essential, for program success.

Staff Appraisal

48. Argentina is confronting a renewed bout of financial market volatility. A significant current account deficit, large gross fiscal financing needs, and limited foreign currency reserves, have left Argentina vulnerable to shifts in global market sentiment. Even with the support of the Fund (under the Stand-By Arrangement that was approved by the Executive Board on June 20) market confidence has remained fragile and, in the past 2 months, partly due to some policy slippages and miscommunications, has turned decidedly against Argentina.

49. The authorities have responded forcefully by redoubling their reform efforts. This has included an important acceleration in the pace of fiscal adjustment to achieve a primary fiscal balance in 2019 as well as a redesign of the monetary policy framework to provide a simpler and more effective nominal anchor to guide inflation expectations downward.

50. The Argentine authorities remain committed to protecting the vulnerable from the burden of adjustment. This is evidenced by measures already taken to increase social assistance programs, as well as the prioritization of social assistance and childcare spending in the 2019 Budget and the maintenance of the flexibility within the program to increase such spending further in 2019, should the government deem it necessary.

51. There appears to be broad societal understanding of the need for the government’s reform efforts. Provincial governors have, for the most part, endorsed the fiscal plan that has been articulated by the administration. Moreover, there have been statements from the head of the Partido Justicialista block in the Senate indicating his backing for the authorities’ fiscal plan.

52. Certainly, there are important risks to the authorities’ strategy. A significant amount of Fund resources will be devoted to supporting Argentina’s balance of payments adjustment and financing a large share of the government’s fiscal needs for the next 15 months. However, this strong show of support from the international community together with the stronger policy framework should reassure domestic and international investors, and return Argentina to both macroeconomic stability and an external position that is aligned with medium-term fundamentals. Steadfast implementation will be critical for the program’s success.

53. Staff supports the authorities’ request to modify the program supported by the Stand-By Arrangement. The government’s economic plans will address longstanding vulnerabilities and the Fund’s support will provide time for the administration to undertake the needed realignment of policies. Under the modified program, the debt remains sustainable, inflation will come down, and growth and job creation will be restored. There will be challenging times ahead for the Argentine people, but the authorities’ policy plans merit the support of the international community. Staff support the authorities’ request for converting the program from precautionary to a drawing arrangement for budget support, an augmentation, rephasing, waivers of non-performance and applicability, completion of the first review and inflation consultation, and completion of the financing assurances review.

Figure 1.
Figure 1.

Recent Market Developments

Citation: IMF Staff Country Reports 2018, 297; 10.5089/9781484381724.002.A001

Figure 2.
Figure 2.

Real and External Sector

Citation: IMF Staff Country Reports 2018, 297; 10.5089/9781484381724.002.A001

Figure 3.
Figure 3.

FX and Monetary Developments

Citation: IMF Staff Country Reports 2018, 297; 10.5089/9781484381724.002.A001

Table 1.

Argentina: Selected Economic and Financial Indicators

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Sources: Ministerio de Hacienda y Finanzas Públicas, Banco Central de la República Argentina (BCRA), and Fund staff estimates.

The primary balance excludes profit transfers from the central bank of Argentina. Interest expenditure is net of property income from the social security fund before 2016.

Percent of potential GDP.

Includes transfers to municipalities, but excludes municipal spending.

Average of all LEBAC maturities before 2017 and midpoint of the repo corridor starting in 2017; ex ante real rates.

Excludes overall balance of the BCRA.

Table 2.

Argentina: Summary Balance of Payments

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Sources: INDEC, Fund staff estimates and projections.

Includes currency swap transactions.

Table 3.

Argentina: Consolidated Public Sector Operations

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Sources: Ministerio de Economía y Finanzas Públicas and Fund staff calculations.

Include transfers to municipalities, but exclude municipal spending.

Percent of potential GDP.

Table 4.

Argentina: Federal Government Operations

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Sources: Ministerio de Economía y Finanzas Públicas and Fund staff calculations.

It includes universities.

It includes, in 2017, those obligations for subsidies under Plan Gas that will be settled starting in 2019.

Percent of potential GDP.