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Government completes swap but IMF withdraws support in face of fiscal
incompliance and threatens prospects for second phase of debt
restructuring
The government has stated that the US$ 6.5 billion
(2.4% of GDP) fiscal target established under the terms of the stand-by
agreement with the International Monetary Fund (IMF) is unlikely to be met
with the actual figure coming closer to US$ 7.8 billion (2.8% of GDP). In
November, total tax collection dropped for the eighth time this year,
declining 11.6% over the same month last year. Net sales tax revenues,
dropped 27.8%, evidencing plummeting consumption. Participants have again
revised the growth figure for this year downward by 0.2 percentage points
to a 2.2% contraction. More importantly, panellists now expect the
Argentine economy to remain in recession next year, with economic activity
dropping another by 0.2%, compared to 0.7% growth expected last month.
As a result of low growth, fiscal performance remains
very weak and the new market restrictions are unlikely to foster any
improvement. Both, the new measures and fiscal incompliance, have
prompted the IMF to withhold the US$ 1.24 billion disbursement due in
December, which in turn will complicate the government’s ability to
execute the second phase of the debt restructuring with international
bondholders and to make some US$ 2.8 billion in amortization payments due
by the end of the year. Finance authorities had successfully completed
the domestic portion of debt restructuring on 30 November, whereby US$ 50
billion in outstanding bonds and provincial loans were swapped with local
financial institutions for new debt obligations bearing a reduced 7%
interest rate. The transaction is expected to lower interest payments for
2002 by US$ 3.5 billion. While the government is also likely to have
financed some interest payments for the end of this year, covering the
remaining financing needs will prove difficult.
The government has announced its intention to dig into
pension funds to free up some US$ 3.2 billion in resources to service bond
obligations, if the IMF does not provide the funds and may consider
dipping into Central Bank reserves if required. Both Moody’s and Fitch
have decided to follow the Standard and Poor’s decision last month to
lower their country ratings on Argentina’s sovereign debt to default
status or Caa3 (Moody’s) and DDD (Fitch). Even though the market has
already priced the probability of a further worsening of the Argentine
situation into risk spreads, the J.P. Morgan sovereign bond composite EMBI+
spread over comparable US treasuries on Argentine sovereign debt widened
further by 805 basis points between 30 November and 7 December. On 7
December, the spread reached 4,149 basis points, the highest in the world,
which places Argentine debt quality well below Nigeria’s and Ecuador’s
spreads of 1,612 and 1,396 basis points respectively.
Note:
The above text is an abridged version of the LatinFocus Consensus Forecast
briefing on Argentina. For more details please click here.
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