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Argentina: Staff Technical Note on Public Debt Sustainability

Core Content

This IMF Staff Technical Note on Argentina's public debt sustainability, prepared in March 2020, evaluates the feasibility of a macroeconomic framework and the required level of debt relief to restore debt sustainability with high probability. It is based on the information available at the time and does not represent the views of the IMF's Executive Board. The report focuses on the challenges posed by Argentina's deteriorating debt situation, the impact of the COVID-19 pandemic, and the need for a coordinated approach with private creditors.

Main Views and Key Information

1. Argentina's Public Debt Situation

• Argentina's public debt is unsustainable, with the debt-to-GDP ratio reaching nearly 90% at end-2019, up from projections made in July 2019.
• Gross Financing Needs (GFNs) in 2020 are estimated at $49 billion, equivalent to 6.1% of GDP, and are expected to remain high due to the large share of foreign-currency denominated debt.
• The Federal Government debt at end-2019 is $323.4 billion, with $206.5 billion held by official and private creditors (about 56% of GDP).
• Non-residents hold about 60% of private debt, with foreign-law debt accounting for $73.1 billion (19.8% of GDP) and domestic-law debt for $60.3 billion (16.4% of GDP).

2. Conceptual Framework for Debt Sustainability

• A feasible macroeconomic framework is necessary to support a debt restructuring that restores sustainability with high probability.
• The IMF's definition of public debt sustainability emphasizes debt stabilization and manageable rollover risks.
• GFN targets are set to ensure that Argentina's financing needs remain within acceptable levels, with a focus on medium-to-long-term projections.

3. Key Debt Sustainability Targets

• GFN target: No more than 5% of GDP after 2024, and not exceeding 6% in any year.
• Foreign-currency debt service: No more than 3% of GDP after 2024.
• These targets aim to improve Argentina's resilience to liquidity shocks and ensure gradual debt reduction.

4. Feasible Macroeconomic Scenario

• The scenario assumes a moderate economic recovery after the adverse effects of the pandemic subside, with a gradual disinflation and fiscal consolidation.
• Real GDP growth is estimated at 1.5%, consistent with Argentina's historical average.
• Real Effective Exchange Rate (REER) is expected to remain stable to support a trade surplus.
• Inflation is projected to decline, supported by reduced monetary financing, positive real interest rates, and a gradual crawl of the nominal exchange rate.
• Primary fiscal balance is expected to improve from a deficit of 1.6% of GDP in 2020 to a surplus of 0.8% of GDP by 2023, and then to 1.3% of GDP in 2025.

5. International Reserves and Financial Stability

• International reserves are expected to gradually increase, supported by a trade surplus and modest FDI inflows.
• This would strengthen Argentina's resilience to shocks and improve the Central Bank of Argentina (BCRA)'s balance sheet.
• Reserve coverage is projected to rise to over 70% of the ARA metric in the medium term.

6. Debt Restructuring and Policy Implementation

• The authorities have indicated a preference for a collaborative solution with private creditors, aiming for high participation in the restructuring.
• They have remained current on debt service obligations, including domestic-law debt.
• The framework is not based on fully articulated policies but assumes that a combination of policies aligned with the authorities' broad announcements can be implemented.

7. Risks and Uncertainties

• The feasible macroeconomic framework is subject to important downside risks, particularly from prolonged and severe adverse effects of the pandemic.
• Uncertainty over the terms of post-restructuring borrowing and the implementation of policies could affect the success of the restructuring.
• The framework may need to be revisited if the pandemic's impact is deeper or longer than expected.

Summary of Key Tables and Figures

• Table 1 outlines Argentina's public debt and debt service obligations from 2019 to 2024, showing the breakdown by creditor type and currency.
• Figure 1 shows the EMBI sovereign spread and its significant increase in 2020.
• Figure 2 presents GFN levels in past restructuring cases, averaging 5.8% of GDP and peaking at 7.6% of GDP.
• Figure 3 compares exports to GDP among selected emerging markets, highlighting Argentina's low and volatile export base.
• Figure 4 shows the size of domestic bank assets in relation to GDP, indicating that Argentina's banking system is relatively small.
• Figure 5 presents the cumulative change in primary balance during past restructurings, showing a gradual improvement over time.

Conclusion

This note outlines a feasible macroeconomic framework and debt relief envelope to restore Argentina's public debt sustainability. It emphasizes the need for collaboration with private creditors, fiscal consolidation, and gradual disinflation. However, it also highlights the importance of policy implementation and the risks posed by the pandemic. The targets for GFNs and foreign-currency debt service are set at manageable levels, with a declining debt-to-GDP ratio expected over the medium-to-long term.