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14/07/2007 | Argentina: Creative accounting risks sustainability

Oxford Analytica Staff

EVENT: Public debt rose by 8.1 billion dollars in 2006.

 

SIGNIFICANCE: Public debt has continued to increase owing to bond placements and short-term debt-taking. This is despite the payment of capital maturities -- in particular to international organisations -- and the success of the 2005 bond swap. Argentina now owes more than it did in 2005.  

ANALYSIS: The Argentine government has frequently expressed its intention to reduce debt levels, and has demonstrated this commitment through extraordinary capital payments. Nevertheless, the country continues to resort to other sources of borrowing, which is reflected in rising debt levels:  

• Total public (domestic and foreign) debt rose from 128.6 billion dollars at the end of 2005 to 136.7 billion at the end of 2006, according to the Economy Ministry.  

• In comparison with mid-2005, when the debt swap was completed, the increase at the end of last year reached 10.2 billion dollars.  

Of the amount outstanding, 48% is denominated in pesos -- much of it inflation-linked -- while the remainder is in foreign currency, a significant percentage of it at variable interest rates. The rise in 2006 is due primarily to:  

 • the correction of peso-denominated debt indexed to inflation;  

 • the capitalisation of interest on the bonds issued in the debt swap  

 • the issue of new Boden bonds to cancel debts to the banking system; and  

 • the placement of new debt to amortise earlier debt.   Debt calculations.

This calculation of debt stock does not include the bonds in default that did not enter into the 2005 debt swap -- some 26.1 billion dollars -- and which continue to generate demands from creditors. This, together with unpaid debts of some 6 billion dollars to the Paris Club, highlights the difficulty Argentina faces in regaining full access to the international financial community system in equal conditions to those enjoyed by other countries.  

The debt-to-GDP ratio, following capital payments, the bond swap and economic growth, is currently around 64%. This percentage is still above the level recorded at the end of 2001, just before the default, when it reached some 50% of GDP. However, the weight of interest payments fell from a pre-default level of 3.8% of GDP to 1.8% in 2006 -- although total debt cancellations and interest payments in 2006 reached 10.5% of GDP. As a percentage of tax collection, interest payments fell from 21.7% in 2001 to 7.7% last year.  

First-quarter foreign debt. Total public and private foreign debt rose by nearly 3.7 billion dollars in the first quarter of 2007 with respect to the year-earlier period, of which 1.6 billion is represented by public debt. The total increase is due to bond placements and to rising private-sector foreign trade debt. At the same time, short-term debt is rising as a knock-on effect of the policy of maintaining a weak exchange rate:  

• This strategy requires the Central Bank (BCRA) to intervene in the market in order to maintain a weak peso, with a view to sustaining the twin trade and fiscal surpluses by making exports more competitive and increasing peso revenues from export taxes.  

• BCRA dollar purchases for this purpose are increasing international reserves, but also boosting inflationary pressures by increasing the supply of pesos in circulation.  

• In an attempt to ameliorate the inflationary impact, the government is reducing liquidity through short-term debt instruments paid at market interest rates.  

• As the interest rate is higher than that generated by international reserves, the differential of 3-4% annually creates a rising additional debt.  

At the same time, the increase in BCRA debt -- some 20.5 billion dollars, or nearly 40% of bank deposits -- is becoming more significant in a context of rising overall debt.  

Balance of payments.

According to official information, the current account surplus for the first quarter reached 860 million dollars, a year-on-year fall of 27%. The Economy Ministry has stressed that, despite this fall, the accumulated current account surplus for the last four quarters remains close to 3% of GDP, similar to the level recorded over the past three years. However, the first-quarter fall may prove to be the beginning of a negative tendency. Within the current account:  

• exports reached 11.0% billion dollars in the first quarter, a year-on-year rise of some 10%; while  

• imports reached 8.75 billion dollars, a 24% increase.  

If raw materials prices do not remain high in the coming years, the current account result could become increasingly critical.

This is in addition to concerns over other economic indicators that are beginning to show signs that the current economic model is nearing exhaustion.  

Primary surplus.

Taking into account the effects of the recent pension reform (which allowed contributors to withdraw from private pension funds and return to the state system), the government claims that the primary surplus reached a record of 5.3 billion pesos (1.7 billion dollars) in May, up 37% year-on-year. This generated a 16% rise in the first five months of the year to slightly over 12.0 billion pesos. However, of the figure posted for May, 1.5 billion pesos arising from the pension reform were accounted as income.  

The cornerstone of the current economic model is the strategy of maintaining a primary fiscal surplus in excess of 3% of GDP. However, the critical point is the constant modification of the accounting methods used to calculate this amount. If the additional income arising from the pension reform (which should be classified as an accounting adjustment) were not included, the primary surplus would have reached 3.8 billion pesos in May, down on the year-earlier period. This demonstrates the government's tendency not to publish figures that, although truthful, could have a negative impact on markets.

This concern had already arisen over its handling of inflation figures, but there are now fears that it could extend to other important indicators. Arguably the most important figures in this context relate to the important slowdown in capital spending, which has been rising at annual rates of 45% and has now fallen to a rate of around 10%.  

Correcting the model. Various economic indicators suggest that the present economic model is reaching a critical point. The factors that suggest that the next government will be forced to consider either corrections or fiscal tightening include:  

• inflation;  

• energy shortages and the related bottlenecks for sustained growth;  

• changes in the international situation;  

• the erosion of the primary surplus (owing to a sharper increase in spending than in income); and  

• the deterioration of provincial finances.  

The most serious problem is the magnitude of the distortions, given constant accounting changes and the government intervention in the National Statistics Institute: in order to apply effective corrective measures, it is important to know the true level of economic indicators.  

CONCLUSION: Lack of transparency and the distortion of relative prices make prospects for correcting the economic model uncertain, affecting the planning and investment necessary to sustain growth and debt payments.

The next government will be forced to introduce politically unpopular reforms if it wishes to sustain the model. At best, lower growth and a fall in the twin surpluses appear inevitable.

Oxford Analytica (Reino Unido)

 


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