Argentina may have to turn to global credit markets next year for the first time since a 2002 default as its fiscal accounts worsen and excess foreign reserves a key source of financing dry up.
The central bank’s “available” or excess reserves which surpass the amount needed to back the country’s monetary base shrank to $8.71 billion in June from $16.89 billion a year earlier, according to local bank Banco Mariva.
The government earmarked about $12 billion in reserves to pay private creditors in 2010 and 2011. But the reserves available for use are dwindling as the monetary base expands by nearly 40 per cent year-on-year, private estimates show.
At the same time, the trade surplus in Latin America’s No. 3 economy is shrinking as strong domestic demand and high inflation stoke imports, threatening to erode reserves and the current account balance of payments.
Analysts say reserves alone will not be enough to cover the nearly $9 billion financing gap seen next year, which could widen if the government seals a deal to repay up to $9 billion in defaulted debt to the Paris Club of creditor nations.
At the same time, economic growth is seen slowing from its current sizzling pace of around 9 per cent annually.
Banco Mariva analysts said recently that excess reserves could run out, making the government’s return to voluntary debt markets next year look “increasingly likely.”
Some international banks say Argentina could seek up to $3 billion from global creditors after December, when either President Cristina Fernandez or a new leader will take office.
But Gabriel Rubinstein, a local economist, said the country has a number of options.
“The government will have to explore alternatives. One is turning to global or local markets, especially by placing bonds with (local) banks. The other is to devalue to have more excess reserves at the central bank,” he said.
Argentina’s peso is heavily regulated and a depreciation would shrink the monetary base as measured in dollars.
For its part, the government has shown it prefers to rely on public-sector financing and reduce its debt load as a per centage of gross domestic product rather than tap markets, partly because it perceives this as more popular politically.
The country scrapped a $1 billion issue of new global 2017 bonds last year, originally planned in conjunction with a $12.2 billion defaulted debt swap. It opted instead to use the reserves and borrow from state agencies and banks.
“When Argentina resorted to capital markets, things went badly,” Deputy Economy Minister Roberto Feletti said via Twitter earlier this month, referring to heavy indebtedness in the 1990s that precipitated the $100 billion default in 2002.
The government says it can meet its needs comfortably with average debt-servicing costs estimated at 2.8 per cent of GDP a year through 2015, and with payments to private creditors representing just 1.5 per cent of GDP.
About half of the country’s gross debt of $173.15 billion is held by public-sector entities like the central bank, Banco Nacion and the Anses state pensions agency. The country’s debt represented 46.3 per cent of GDP as of March 31.
The government says debt payments whose refinancing is subject to “market risk” represent 16.7 per cent of GDP one reason why Ricardo Delgado at Analytica consulting group thinks Argentina will not have trouble financing itself next year.
“I think the debt will continue to be paid out of reserves. If the current government stays in power, this scheme will remain in place and they will continue (relying on) the Anses and local debt issues,” Delgado said.
Barclays Capital expects a bigger primary budget deficit next year, excluding central bank profits and transfers from the Anses, which the government includes in its calculations. It also foresees 4.3 per cent economic growth in 2012 nearly half what the government predicts for 2011.
Finally, the bank predicts foreign reserves will fall by about $4 billion next year due to a current account deficit, capital outflows and debt payments. Argentina’s total reserves currently stand at around $52 billion.
“We expect the country to lose reserves in 2011 and again in 2012, meaning Argentina’s external situation is not that comfortable,” said Sebastian Vargas, an analyst at Barclays.
From/ Gulf Today