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The government has finally received support
from the International Monetary Fund (IMF). The approval of the three-year
credit by the IMF paves the way for the long awaited debt restructuring
negotiations with investors. However, if the negotiations over debt
restructuring are drawn out, the current economic recovery could suffer,
as the healthy investment rebound is likely to abate quickly. |
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Government secures medium-term IMF support
On 10 September, Argentine finance officials reached an agreement with
the International Monetary Fund (IMF) for a three-year, US$ 12.6 billion
stand-by credit. Under the terms of the new arrangement, the government
pledges to raise the consolidated primary fiscal surplus from 2.5% of
GDP this to 3.0% next year. In addition, officials have committed to
generate a budget surplus in 2005 and 2006 sufficient to cover debt
service payments on renegotiated and performing debt. The authorities
further promised to introduce tax and political reforms to Congress,
which would be implemented in the 2005 budget. Furthermore, the
government considers moving from the current monetary policy that
targets monetary base growth to an explicit inflation targeting regime
by the end of 2004. Authorities have also pledged to strengthen the
ailing financial system by implementing banking system reforms and
compensating banks for the losses incurred as the result of peso-ization
and indexation in 2002. Finally, officials have committed to seek
renegotiation of public utility concessions and to permit tariff
increases. The IMF approved the new programme on 20 September but has
been criticized for being soft on Argentina in the negotiations,
particularly in terms of fiscal and public utility tariff demands.
Nevertheless, the approval now paves the way for private and public debt
restructuring negotiations, which have remained a major shadow over
investor confidence and the sustainability of the current economic
recovery.
Terms
of debt restructuring proposed but rapid progress unlikely
On 22 September, the government offered its terms for the debt
restructuring with private creditors. Finance officials offered debt
holders a pay back of 25% of the nominal principal amount of eligible
debt outstanding (US$ 94.3 billion), proposed that accrued interest from
January 2002 (US$ 11 billion) be written off and insisted on an
extension of existing maturities at lower rates. Bondholders have
rejected the government’s offer, claiming the size of the cut in
principal is unacceptable. The Argentine debt principal reduction is
well above the 35% Russian offer in 1998 and also exceeds the 40% cut
adopted by Ecuador in 2000. The negotiations are expected to be
protracted, as many investors are currently unwilling to accept the
government’s proposal and could decide to pursue recourse by legally
induced seizures of Argentine public assets abroad. On the other hand,
the current macroeconomic fundamentals in Argentina do not provide the
government with significant leeway to revise the current proposal.
Substantial delay in the negotiations could undermine the current
recovery, as the investment rebound is likely to abate quickly.
Healthy rebound confirmed for second quarter
Gross domestic product (GDP) expanded 7.6% in the second quarter over
the same quarter last year. The second quarter result was slightly above
the 7.4% suggested by the monthly data set reported earlier and
confirmed the trend of successive improvements in economic activity, as
the growth rate was up from the 5.4% pace observed in the first quarter.
Investment expands at a robust pace
The robust growth experienced by investment activities in the first
quarter (+21.7% year-on-year), accelerated to 31.7% year-on-year growth
in the second quarter. Similarly, growth in consumption more than
doubled from 2.6% in the first to 6.4% in the second quarter. Household
consumption growth was up 3.8 percentage points over the previous
quarter, while public consumption rose 3.9 percentage points. Finally
export growth accelerated further, despite the currency strengthening
observed in the second quarter, rising from a 5.1% expansion in the
first to 8.7% growth in the second quarter.
Aside from the financial and fishing sector, where activity remained
depressed with a 12.8% contraction and a 9.9% drop respectively over the
second quarter last year, all sectors experienced positive growth. The
strongest expansions were observed in construction (+28.5%
year-on-year), manufacturing (+13.8% yoy) and agriculture (+11.4% yoy).
Compared to the prior quarter, growth in the agriculture sector
accelerated 15.2 percentage points and the construction sector added
12.3 percentage points. Manufacturing activity, on the other hand,
decelerated by 4.6 percentage points.
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