Abstract
ARGENTINA
Title page
ARGENTINA
THIRD REVIEW UNDER THE EXTENDED ARRANGEMENT UNDER THE EXTENDED FUND FACILITY, REQUEST FOR WAIVERS OF NONOBSERVANCE OF PERFORMANCE CRITERIA, AND FINANCING ASSURANCES REVIEW—SUPPLEMENTARY INFORMATION
December 19, 2022
Approved By
Luis Cubeddu (WHD), Ceyla Pazarbasioglu, Andrea Schaechter (both SPR)
Prepared by the Argentina team of the Western Hemisphere Department
This supplement provides an update on developments since the issuance of the Staff Report (EBS/22/120) circulated to the Executive Board on December 12, 2022. Specifically, it provides details on recently released economic indicators and an update of program performance, including with respect to the prior action for this review and the structural agenda. The thrust of the staff appraisal remains unchanged.
Recent Developments and Performance
1. Consistent with baseline program projections, national accounts data through Q3:2022 confirm a healthy moderation in domestic demand. Real GDP growth reached 6.4 percent y/y cumulatively through Q3:2022 (down from 6.6 percent y/y through Q2:2022), driven mainly by a robust expansion of private consumption and investment (10.7 percent and 14.6 percent y/y, respectively). Nonetheless, domestic demand growth momentum decelerated in the third quarter, reflecting in part the impact of tighter macroeconomic policies, as public consumption contracted by 1.7 percent q/q (s.a.). Specifically, private consumption growth moderated to 1.4 percent (compared to an average of 3 percent q/q in H1:2022), while overall investment contracted by 0.8 percent q/q, both consistent with a deceleration of real import growth.
2. Inflation moderated markedly in November, although it remains high. Headline inflation reached 4.9 percent m/m in November (92.4 percent y/y)—the lowest print since February 2022—reflecting a broad-based decline in prices, especially of food staples and services, as well as seasonal prices. Core inflation declined further to 4.8 percent m/m (from 5.5 percent in October), while regulated price inflation remained strong (6.8 percent m/m), in part reflecting recent increases in energy tariffs. Tighter macroeconomic policies, and the recently implemented voluntary price agreements (now being extended to around 40,000 goods to include apparel and electronics) are contributing to this moderation in inflation. In particular, real monetary policy rates have moved further into positive territory1 as the monthly equivalent policy rate (6.3 percent m/m) stands above market inflation expectations (6.1 percent m/m, 3-months ahead) and the program’s model-based inflation reference rate of 4.8 percent m/m.
3. On the fiscal side, an emergency decree was issued authorizing spending revisions consistent with the program’s primary deficit target of 2.5 percent of GDP for 2022 (prior action). The decree modifies the current budget by revising the nominal expenditure ceilings for the National Administration,2 to reflect higher-than-anticipated nominal revenues and legally mandated increases for wage, pensions, and social assistance. The decree also (i) reallocated spending to accommodate additional targeted social spending and support for small businesses; and (ii) strengthened expenditure controls going forward, by prohibiting transfers to trust funds, public companies and other nonfinancial public sector entities that have freely available funds.
4. The needed fiscal domestic net financing for December was secured, although conditions remain challenging. In the latest auctions, the authorities successfully rolled over maturing bonds held by the private sector, and secured additional net financing (0.5 percent of GDP) to achieve the 2022 programmed rollover rate of 150 percent and net peso market financing of about 3.2 percent of GDP.3 Nevertheless, financing conditions remain challenging, as the latest net placements continued to rely on short-term instruments and the contribution of public entities and banks, while the central bank has continued to make daily purchases, albeit limited, in the secondary bond market.4 Domestic debt service falling due through September 2023 now stands at about 8 percent of GDP.
5. Reserve buffers are being strengthened, supported by the temporary FX incentive scheme for soy exporters. Since implementation of the scheme, liquidation of soybean products reached over US$1.8 billion, with central bank net FX purchases from the official market totaling US$1.1 billion as of December 16. According to latest available data, Net International reserves (NIR) have risen to around US$4.8 billion, putting the end-2022 NIR accumulation target within reach, after considering remaining official disbursements expected by end-December (around US$400 million). These trends have also been supported by an acceleration in the rate of crawl (from an average of 6.4 percent in November to 7.5 percent thus far in December), some narrowing of the FX gaps (now ranging between 85-95 percent), and a seasonal increase in money demand. BCRA intervention in the non-deliverable futures market has remained limited, and well below program limits.
6. Progress continues on the structural front. The authorities have prepared a medium-term debt strategy (MTDS), which aims to ensure financing needs are met at the lowest possible costs while reducing refinancing risks, improving market functioning, and eliminating monetary financing of the deficit (end-December 2022, structural benchmark (SB)). Additionally, the development of a medium-term energy strategy to improve the efficiency and financial sustainability of the energy sector, in consultation with World Bank and IMF staff, is well advanced (end-December 2022, SB). Consultations with key stakeholders are underway and publication is expected by end-year.
At its December 15 meeting, the BCRA Board kept monetary policy interest rates unchanged, and restated its objective to ensure that real positive rates support the demand for peso assets and the disinflationary process.
The decree applied to operations of the National Administration on an accrual basis. Staff assessed consistency with the program’s primary fiscal deficit target, which is defined on a cash basis and also covers selected nonfinancial public entities, companies, and trusts.
Net financing is defined as issuance minus principal.
Cumulative BCRA purchases of government securities in the secondary market stand at 2.2 percent of GDP.
