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

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

Introduction

1. This note updates the assessment of risks to the Fund arising from the Stand-By Arrangement (SBA) for Argentina and its effects on the Fund’s liquidity, in light of the proposed augmentation and rephasing.1 On June 20, 2018, the Executive Board approved Argentina’s request for a 36-month SBA with access equivalent to SDR 35.379 billion (1,110 percent of quota). Under the arrangement, access was significantly frontloaded, with a first purchase equivalent to SDR 10.614 billion (333 percent of quota) available upon approval. The authorities made the first purchase, using one-half of the available Fund resources (SDR 5.307 billion) for budgetary support, and intended to treat the remainder of the arrangement as precautionary, with 12 equal quarterly installments (Table 1). Under the proposed augmentation and rephasing of access the arrangement would become more frontloaded. The first purchase would be followed by two additional purchases in 2018 for a total amount of SDR 9.6 billion (301 percent of quota), four purchases in 2019 for a total amount of SDR 16.3 billion (511 percent of quota), and six equal disbursements over the remainder of the program of SDR 0.7 billion (22 percent of quota) each. Total access would increase to SDR 40.714 billion (1,277 percent of quota), and the authorities would no longer intend to treat the arrangement as precautionary.

Table 1.

Argentina: 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.

2. The update focuses on major changes since the approval of the original SBA and their impact on the risks to the Fund and to its liquidity position. The note covers first recent economic developments that have a major bearing on the risks to Fund finances. This is followed by an update of the risks to the Fund and its liquidity position, including the impact of the proposed SBA augmentation and rephasing. The final section provides an updated staff assessment.

Augmentation and Rephasing of the Stand-By Arrangement—Recent Developments, and Impact on Fund’s Finances

A. Recent Developments

3. Since Board approval of the SBA in June, macroeconomic conditions in Argentina have deteriorated. As discussed in more detail in the staff report, the recession is now likely to be deeper and more prolonged, and GDP growth for 2018 and 2019 have been revised down by 3.2 percentage points in each year compared to growth forecasts at the SBA approval. Amid an erosion of market confidence, the peso has depreciated much more than originally expected, and the real effective exchange rate is now expected to decline by well over 30 percent in 2018, almost twice the rate assumed at the time of the SBA approval. Market interest rates have also risen sharply since June.

4. Reflecting mainly the larger-than-anticipated depreciation and the high share of FX denominated debt, Argentina’s debt and debt service ratios have increased markedly. For example, public debt is expected to exceed 80 percent of GDP by end-2018 (versus 65 percent at SBA approval), putting Argentina at twice the median of recent exceptional access cases (Figure 1). The changes in macroeconomic conditions have also resulted in a considerable rise in debt service payments. Total external debt service for 2018 is now expected to reach around 17 percent of GDP (versus 16 percent at SBA approval) and exceed exports of goods and services in 2018, the second highest level by this metric after Iceland among recent exceptional access cases.

Figure 1.
Figure 1.

Debt Ratios for Recent Exceptional Access Arrangements1/2/

Citation: IMF Staff Country Reports 2018, 297; 10.5089/9781484381724.002.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-2018 data.2/ Asterisks indicate PRGT-eligible countries at the time of the program.

B. Risks to the Fund

5. With access under the SBA as approved in June already among the highest on a number of indicators, the proposed augmentation, rephasing, and Argentina’s intention to purchase the full amount of available Fund financing, would increase exposures further. The peak Fund exposure in percent of gross international reserves, and peak debt service to the Fund and total external debt service as a share of exports would be the highest among recent exceptional access cases.

  • The initial SBA was the largest arrangement in nominal terms in the Fund’s history, excluding arrangements under the Flexible Credit Line (FCL), and Argentina became the Fund’s largest borrower, with 22 percent of total Fund credit outstanding, upon approval of the arrangement.

  • At the program request, the authorities intended to draw only the first tranche and treat the remaining access under the program as precautionary. With the increased financing needs under the revised macroeconomic framework, the authorities now request the full amount of access under the revised SBA to be made available as budget support.

  • If all purchases were made according to the proposed revised schedule, Argentina’s outstanding use of GRA resources would rise to 634 percent of quota at end-December 2018 (463 percent of quota under the initial schedule) and 1,146 percent of quota at end-December 2019 (722 percent of quota under the initial schedule). It would peak at 1,277 percent of quota in June 2021 (Figure 2). This level of access relative to quota would be more than 50 percent 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).

    Figure 2.
    Figure 2.

    Credit Outstanding in the GRA Around Peak Borrowing1/

    (In percent of quota)

    Citation: IMF Staff Country Reports 2018, 297; 10.5089/9781484381724.002.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 1,048 percent of quota.

  • If all purchases were made in accordance with the proposed schedule, peak Fund exposure to Argentina would exceed across a range of indicators the corresponding medians in recent exceptional access cases. Fund exposure would peak around the projected level of gross international reserves, which is the highest among recent exceptional access cases and well above twice the median peak of recent exceptional access cases.2 As a share of total external debt, peak Fund exposure would be 20 percent, compared with the median peak of recent exceptional access cases of 11 percent. As a share of GDP, peak Fund exposure would be 11.4 percent, compared with the median of 10.7 percent (Table 2 and Figure 3).

    Table 2.

    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 127.1 million is for the period subsequent to the Executive Board discussion of the staff report for the proposed augmentation of the SBA.

    Includes charges due on GRA credit and repurchases. Of the 2018 figure, SDR 127.1 million is for period subsequent to the Executive Board discussion of the staff report for the proposed augmentation of the SBA.

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

    Figure 3.
    Figure 3.

    Peak Fund Exposure and Debt Service Ratios for Recent Exceptional Access Cases1/2/

    Citation: IMF Staff Country Reports 2018, 297; 10.5089/9781484381724.002.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.3/ Excluding arrangements with members belonging to the euro area at the time of the approval of the arrangement: Greece, Ireland, and Portugal.

  • If all purchases were made in accordance with the proposed schedule, projected payment obligations to the Fund would peak in 2023 at SDR 16.9 billion and reach around one-third of projected gross international reserves over two consecutive years. Debt service to the Fund as a share of exports of goods and services would peak at about 26 percent, three and a half times the median peak level for recent exceptional access cases. Total external debt service is projected to peak at almost twice the level of projected exports of goods and services. Both these ratios as a share of exports are the highest among recent exceptional access cases (Table 2 and Figure 3).

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

6. The SBA’s significant impact on the Fund’s liquidity and credit risk exposure would be further elevated under the proposed augmented and rephased arrangement.

  • The initial arrangement reduced the Fund’s forward commitment capacity (FCC) by 16.0 percent from SDR 222 billion to SDR 186 billion. The proposed augmentation would reduce the FCC by a further 2.8 percent from the current SDR 189 billion to SDR 184 billion (Table 3).

    Table 3.

    Argentina: Impact on GRA Finances

    (Millions of SDR unless otherwise noted)

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    Sources: 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 is currently not including resources under the New Arrangements to Borrow for new commitments or resources under 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 the time of completion of the first review, which includes the scheduled second purchase under the proposed augmented arrangement.

    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-review purchase, its share of outstanding GRA credit would increase from 21.8 percent to 27.9 percent. The share of the top five borrowers in total GRA credit would increase to 76.8 percent (Figure 4).

    Figure 4.
    Figure 4.

    Exceptional Access Levels and Credit Concentration

    Citation: IMF Staff Country Reports 2018, 297; 10.5089/9781484381724.002.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 September 27, 2018 plus Argentina’s second purchase under the proposed augmented arrangement.

  • After Argentina’s scheduled second-review purchase in December 2018, GRA exposure to Argentina would exceed the Fund’s precautionary balances (Table 3). If all purchases are made as scheduled, Fund exposure to Argentina as a share of the current level of precautionary balances would rise from 84.6 percent after the first program review to 210 percent by end-2019 (compared with 132 percent previously). It would peak at 234 percent in June 2021.

  • Due to the proposed further substantial frontloading, Argentina’s repurchase obligations would be more bunched than before. Repurchase obligations would amount to SDR 14.5 billion in 2022 and SDR 16 billion in 2023, representing more than 70 and 80 percent, respectively, of projected precautionary balances each year.3 These amounts are well above peak repurchase obligations for other recent exceptional access cases (Figure 5).

    Figure 5.
    Figure 5.

    Comparison of Peak Repurchases

    Citation: IMF Staff Country Reports 2018, 297; 10.5089/9781484381724.002.A002

    Source: Finance Department.1/ Projection for FY 2019 – 2023, capped at Board approved indicative medium-term target of SDR 20 billion.

  • As with the initial SBA, the Fund’s burden sharing mechanism would remain clearly insufficient were Argentina to accrue arrears on charges after drawings under the proposed augmented arrangement. In the current environment of relatively low interest rates, GRA charges for Argentina, which are projected at SDR 127 million for the remainder of 2018, and to average SDR 1,077 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.

Assessment

7. The proposed augmented arrangement will further increase the Fund’s elevated credit exposure to Argentina and continue to have a significant though manageable impact on the Fund’s liquidity. The risks for the Fund and the Fund’s liquidity position are significant even by the standards of other large exceptional access cases. Staff’s assessment remains that managing associated risks will crucially depend on steadfast delivery of program commitments and successful program implementation.

  • As highlighted in the staff report and in the debt sustainability analysis, the program faces substantial risks, and gross financing needs and debt vulnerabilities are expected to remain high.

  • With the proposed revised 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. Some indicators on Fund exposure and debt service, including the peak Fund exposure in percent of the gross international reserves, and peak debt service to the Fund and total external debt service as a share of exports would be the highest among recent exceptional access cases.

  • Steadfast program implementation will be crucial for containing these risks. This will also depend on the authorities’ ability to garner broad political support and their readiness to recalibrate their policies in reaction to potential adverse shocks. Also, if financing conditions do not improve as assumed in the 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. Stabilizing the economy and regaining sustained meaningful market access and financing from other official lenders during the program period and beyond will remain key to reduce financial risks to the Fund arising from the proposed augmented arrangement.

  • The proposed augmented arrangement will continue to pose significant risks to the Fund and the augmentation would further increase the impact on the Fund’s liquidity, but its effect remains manageable. While the Fund’s liquidity position would remain adequate, rising uncertainties in the global economy could result in further demands for Fund resources and warrant a close monitoring of the Fund’s liquidity position.

1

For the initial assessment see Argentina – Assessment of the Risks to the Fund and the Fund’s Liquidity Position (6/15/18) and the relevant policy on exceptional access 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).

2

Excluding arrangements with members belonging to the euro area at the time of the approval of the arrangement: Greece, Ireland, and Portugal.

3

For the purpose of the calculation, projections for precautionary balances are capped at the current Board approved medium term indicative target level of SDR 20 billion.

Argentina: 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
Author: International Monetary Fund. Western Hemisphere Dept.