|
Even
though the opposition Peronists have shown an increased willingness to
compromise on next year’s US$ 64.6 billion budget and the governing
coalition appears to have re-established unity in early November,
investors remained skittish.
Furthermore, attention turned to concern over the government and
private sector’s ability to finance its obligations next year in the
face of tighter liquidity conditions.
Particularly disconcerting is the increased burden that rising
costs on government debt pose to growth prospects given their likely
impact on fiscal balances.
The government’s borrowing requirements for next year are
estimated at approximately US$ 20 billion, up from US$ 18.6 billion in
2000.
Assuming that the demand for domestic securities (letes, bontes,
etc.) remains at current levels, the government should manage to finance
30% of its 2001 requirements through domestic instruments.
The balance would have to be financed by a combination of borrowing
in international markets and through loans with multilateral organisations.
Even though disbursements of a US$ 7.4 billion International
Monetary Fund (IMF) credit line are contingent upon compliance with
specified macroeconomic targets and only available in tranches, the
government is likely to seek to renegotiate terms for full disbursement.
This would leave approximately US$ 7.3 billion in borrowing
requirements that would need to be met through issuance in international
capital markets.
Since Argentina still enjoys a contingent US$ 7.4 billion line of
credit (Contingent Repo Facility) with international banks, the country
should be able cover financing requirements next year.
In
order to regain investor confidence and provide the conditions for support
from the IMF, President De la Rua announced a series of emergency measures
on 10 November intended to reinforce his administration’s commitment to
strengthening the current economic policy framework.
Measures include reforms to the state pension and social security
system, deregulation of the health system, tax reform and the
renegotiation of the current revenue sharing regime with the provinces.
The IMF reacted favourably to the announcement by indicating that
Argentina may be enabled to draw on funds made available under the current
Stand-by Agreement and could be granted further support from the resources
available in the IMF’s Supplemental Reserve Facility.
Total assistance from the IMF could exceed US$ 10 billion.
The final support package may grow to as much as US$ 20 billion if
US Treasury, Inter-American Development Bank officials and bilateral aid
agencies are convinced of the viability of the government’s agenda.
An international aid package would not only serve to boost investor
confidence but also is likely to strengthen the prospects for economic
recovery next year.
Peso
peg unlikely to go.
In the wake of the political turmoil and market upheaval, some concerns
have been raised that political pressure for an abandonment of the current
exchange rate regime could mount. However, support within the
population for the current currency board remains strong. While high
unemployment is a growing concern, Argentines still remain highly
conscious of the benefits that the current regime has brought in terms of
lowering inflation. Furthermore, since some 80% of the total
deposits and over 64% of public debt is dollar-denominated, the government
is more likely to dollarise than to devalue.
Note:
The above text is an abridged version of the LatinFocus Consensus Forecast
briefing on Argentina. For more details please click here.
|
