Market confidence was boosted by the announcement that the IMF would raise the amount available to Argentina under its current credit facility.  The additional funds will provide the government with needed liquidity for the remainder of the year but require strict abidance with the new zero deficit policy.  As a result, Argentina has received a short-term reprieve for its debt burden but will have to apply further fiscal cuts or renegotiate changes to the current revenue sharing scheme with the provinces.

Government secures International Monetary Fund (IMF) support.  On 7 September, the IMF board approved the increase in Argentina’s stand-by credit from the US$ 14.0 billion approved on 12 January of this year to US$ 21.6 billion.  Of the total credit facility, US$ 6.3 billion is available immediately.  Furthermore, of the US$ 7.6 billion in new funds, US$ 5.0 billion will be provided upfront and the balance will be disbursed later this year following another IMF review.  If the government decides to proceed with another voluntary debt swap programme, an additional US$ 3.0 billion in funds may be brought forward.  However, the IMF support is conditioned on further strengthening the fiscal adjustment process.  The government has committed to implement the ‘zero deficit’ law, which institutes an automatic mechanism to adjust the federal government’s primary spending to actual monthly fiscal revenue inflows.  In addition, authorities announced to improve tax collection and to reform the current federal co-participation revenue sharing arrangements with provinces.  International and domestic markets reacted favourably to the IMF support package.  The Argentine country risk premium, as measured by the spread of the benchmark Brady FRB over the comparable US Treasury, narrowed to 2,046 basis points by 7 September as investor await results.  This is still at a prohibitively high level to allow for access to international capital markets but the government now has sufficient funding through October 2002 to sit out the current spike before re-entering the international capital markets again next year for some US$ 2.1 billion in funding requirements.

Government pledges further fiscal adjustment but upcoming elections render negotiations with provinces difficult.  The government has pledged to make the necessary fiscal adjustments to meet this year’s fiscal deficit target of US$ 6.5 billion (2.3% of GDP) and to lower the fiscal imbalance to US$ 2.3 billion (0.8% of GDP) next year.  According to the Economy Ministry, tax collection dropped 3.4% in August over the same month last year, an improvement from the 8.7% contraction observed in July and well below the government’s initial estimate of a 7% drop.  Key behind the contraction was a 17.3% decline in value-added tax collection over the same month last year, the fourth consecutive double-digit contraction.  The drop in VAT reflects the continued slump in economic activity, which is likely to decline further amid the additional fiscal cutbacks.  The 13% cut in wages and pensions of state employees in August is expected to have garnered some US$ 1.3 billion in savings but an additional US$ 900 million will have to be slashed to meet the zero deficit commitments for this year.  The government is likely to have to renegotiate with the nation’s 24 provinces to trim the US$ 1.4 billion in monthly co-participation revenue flows, which federal authorities may try to change from the current fixed monthly amount with payments that vary with tax collection inflows.  However, the government will be hard pressed to convince the governors to renegotiate.  Most governors belong to the opposition Peronist party and will be keen to abstain from unpopular cutbacks prior to the 14 October parliamentary elections.  Therefore, the fiscal balances are likely to benefit only from a recovery in the economy, which is expected to remain in recession this year.  Consensus Forecast participants expect the government to overshoot the fiscal deficit target. 

Industrial production remains sluggish and outlook provides little hope for short-term recovery.  The severe fiscal cutbacks applied by the government have taken the society to the brink of social unrest and there seems to be no additional room to further trim spending.  Thus, recovery in fiscal balances will hinge on a rebound in economic activity and improved tax collection.  However, recent economic indicators show that the economy remains mired in a deep recession.  In July, industrial production dropped 2.6% in July over the same month last year.  With the exception of a brief 0.1% year-over-year uptick in April, industrial production has contracted every month since July last year.  On a seasonally adjusted basis, industrial production declined 2.1% compared to June 2001.  This month’s Consensus Forecast confirms that activity in industry is likely to remain subdued this year.  The government hopes that the elimination of tariffs on capital good imports from non-Mercosur countries and the new trade based exchange rate would give industry a strong boost.  However, any positive effects are likely to be squashed by the downturn in the global economy.  Output is expected pick up by the end of this year but to remain moderate through the first half of next year. 

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