Download Special Focus: Brazil and Argentina - Inter

Special Focus:
Brazil and Argentina
April 2003
Prepared for presentation at the XVIII Meeting of the Latin American
Network of Central Banks and Finance Ministries
OUTLINE
i.
Brazil
Recent Developments
Debt Dynamics
Liquidity Analysis
ii.
Argentina
Recent Developments
Debt Restructuring, Debt Dynamics and
Bank Solvency
Lula’s Policy Iniciatives
Macroeconomic policies

Primary surplus target increased from 3.75% of GDP to 4.25% for 2003

Benchmark interest rate hiked from 25% to 26.5% by the COPOM since the
beggining of Lula’s administration

Revenue raising iniciatives such as the renewal of the CPMF
Structural Reforms

Social Security reform in order to reduce the deficit of Public Sector Social
Security System (currently at 4.1% of GDP )

Foster Central Bank autonomy
Social Policies

“Zero Hunger” (“Fome Zero”) social plan, cost limited to BRL 2 billion
(0.15% of GDP) in 2003 budget

Employment plans mainly aimed at young people
OUTLINE
i.
Brazil
Recent Developments
Debt Dynamics
Liquidity Analysis
ii.
Argentina
Recent Developments
Debt Restructuring, Debt Dynamics and
Bank Solvency
Debt Dynamics: Benchmark
Scenario
Assumptions
 Domestic real interest rate: 13%
 Interest rate on external debt: 11.3%
 Average real interest rate on public debt: 10.3% (includes monetary base)
 Growth rate: 2.5%
 Target surplus: 4.25% of GDP
 Initial debt ratio in Jan-03: 55.9%
Public Debt Dynamics: Benchmark
Scenario
Primary Balance
4.30
4.25
4.20
% GDP
4.15
4.10
4.26%
4.25%
4.05
4.00
4.08%
3.95
Required
*Last 12 months ending in January 2003
Target
Observed*
Public Debt Structure
January 2003
Fixed
Rate
1%
Others
18%
External or FX
indexed Public Debt
Indexed to the
Interest Rate
42%
39%
Public Debt Stock: US$ 252.1 billion (55.9% of GDP)
10-Mar-03
1.7
9-Ene-03
2.2
11-Nov-02
16-Sep-02
22-Jul-02
23-May-02
25-Mar-02
23-Ene-02
26-Nov-01
21-Sep-01
20-Jul-01
15-May-01
09-Mar-01
02-Ene-01
R$ per dollar
4.2
3000
3.7
2500
3.2
2000
exchange rate
2.7
1500
EMBI+
1000
Brazil
500
basis points
External Financial Conditions and the
Exchange Rate
External Financial Conditions and Domestic
Interest Rates
(C-Bond Spread in b.p. and 360-day Interest Rate Swap in %)
35
2300
25
1300
20
800
15
C-Bond spread
2-Mar-03
2-Ene-03
2-Nov-02
2-Sep-02
2-Jul-02
2-May-02
2-Mar-02
2-Ene-02
2-Nov-01
2-Sep-01
2-Jul-01
2-May-01
10
2-Mar-01
300
Interest Rate
interest rate
1800
2-Ene-01
C-Bond Spread
30
Debt Dynamics: Sensitivity Analysis
Public Debt
(% of GDP)
Interest
Rate
Growth
Rate
10% real
depreciation
57.3%
10.3%
2.5%
+0.1%
1% increase in the
domestic interest
rate
55.9%
10.8%
2.5%
+0.3%
1% reduction in the
growth rate
55.9%
10.3%
1.5%
Incremental
Fiscal Effort
Fiscal Impact of:
+0.6%
Public Debt Composition
(in % of total, January 2003)
External
26%
Domestic
74%
Domestic Public Debt by Holder
(31st January 2003, % of total)
Other
4%
Banks
34%
Non-financial
private sector
8%
Investment Funds
34%
Reserve
Requirements
20 %
Banks’ Exposure to the Public Sector
Public Bond Holdings, March 2002
350%
300%
250%
200%
150%
100%
50%
0%
In % of Banks’ Assets
Source: JP Morgan
In % of Banks’ Net Worth
OUTLINE
i.
Brazil
Recent Developments
Debt Dynamics
Liquidity Analysis
ii.
Argentina
Recent Developments
Debt Restructuring, Debt Dynamics and
Bank Solvency
Liquidity Requirements of the
Public Sector
(Billions of US dollars)
2003
I. FISCAL DEFICIT (est.)
II. PUBLIC DEBT AMORTIZATIONS*
Domestic Debt
External Debt
III. POTENTIAL LIQUIDITY REQUIREMENTS (I +II):
Total Available Liquid Funds of the public sector
in % of Potential Liquidity Requirements
17.8
86.8
64.7
22.1
104.6
60%
Note: Total Available Liquid Funds are International Reserves plus expected disbursements
under the IMF agreement
*Amortizations were converted to dollars at an XR of 3.6 Reales per dollar
Liquid International Resources of the
Public Sector
(billions of US dollars)
2003
I. International Reserves (January 2003)
38.8
II. IMF Disbursements under the new
agreement (during 2003)
24.0
III. Total Available Liquid Funds ( I+II)
62.8
In % of Liquidity Requirements
60%
Note: Under the new IMF agreement there is an agreed floor for reserves of US$ 5 billion
Liquidity Requirements of the
Private Sector
(billions of US dollars)
2003
EXTERNAL DEBT AMORTIZATIONS
17.0
Medium and Long Term
12.4
Short Term
4.6
Total Liquidity Requirements
(billions of US dollars)
2003
I. PUBLIC SECTOR BORROWING REQUIREMENTS
104.6
Fiscal Deficit (est.)
17.8
Public Debt Amortizations
86.8
II. PRIVATE SECTOR EXTERNAL DEBT AMORTIZATIONS
17.0
III. TOTAL POTENTIAL LIQUIDITY REQUIREMENTS (I +II)
121.6
Total Available Liquid Funds of the public sector in
% of Potential Liquidity Requirements
52%
OUTLINE
i.
Brazil
Recent Developments
Debt Dynamics
Liquidity Analysis
ii.
Argentina
Recent Developments
Debt Restructuring, Debt Dynamics and
Bank Solvency
18-Mar-03
24-Feb-03
31-Ene-03
09-Ene-03
16-Dic-02
22-Nov-02
29-Oct-02
04-Oct-02
12-Sep-02
21-Ago-02
29-Jul-02
04-Jul-02
11-Jun-02
20-May-02
25-Abr-02
03-Abr-02
07-Mar-02
13-Feb-02
15-Ene-02
Nominal Exchange Rate
Pesos per Dollar, Free Exchange Rate Market
4
3.5
3
2.5
2
1.5
02-Mar-03
02-Ene-03
02-Nov-02
02-Sep-02
02-Jul-02
02-May-02
02-Mar-02
02-Ene-02
02-Nov-01
02-Sep-01
02-Jul-01
02-May-01
180%
160%
140%
120%
100%
80%
60%
40%
20%
0%
02-Mar-01
02-Ene-01
Currency Forward Premium
1 year NDF
Financial Crisis
6,000
02-Ene-01
06-Feb-01
13-Mar-01
17-Abr-01
22-May-01
26-Jun-01
31-Jul-01
04-Sep-01
09-Oct-01
13-Nov-01
18-Dic-01
22-Ene-02
26-Feb-02
02-Abr-02
07-May-02
11-Jun-02
16-Jul-02
20-Ago-02
24-Sep-02
29-Oct-02
03-Dic-02
07-Ene-03
11-Feb-03
18-Mar-03
US$ millions
Liquid International Reserves of the C.B
27,000
24,000
21,000
18,000
15,000
IMF
disbursement
of U$S 4 bn.
Implementation of the
“Corralito”
Cavallo and De
La Rúa resign
Repayment to IMF of
US$ 1 bn.
12,000
9,000
US$ 10,515 million
2%
Ene-01
Ene-01
Mar-01
Abr-01
May-01
May-01
Jun-01
Jul-01
Ago-01
Sep-01
Oct-01
Nov-01
Dic-01
Ene-02
Feb-02
Mar-02
Abr-02
May-02
Jun-02
Jul-02
Ago-02
Sep-02
Oct-02
Nov-02
Dic-02
Ene-03
Feb-03
Interest Rate
Time deposits, 30 days
62%
52%
42%
32%
22%
12%
62500
28-Mar-03
16-Feb-03
8-Mar-03
27-Ene-03
18-Dic-02
7-Ene-03
8-Nov-02
28-Nov-02
80500
29-Sep-02
19-Oct-02
20-Ago-02
9-Sep-02
11-Jul-02
31-Jul-02
21-Jun-02
12-May-02
1-Jun-02
2-Abr-02
22-Abr-02
21-Feb-02
13-Mar-02
12-Ene-02
1-Feb-02
68500
23-Dic-01
3-Dic-01
A$ millions
Total Deposits: Evolution since
Implementation of the Corralito
- AR$ 23,396 million
86500
+ AR$ 8,443 million
74500
Implementation of
the Corralito
Consumer Price Inflation
(Yearly and annualized monthly rates)
yearly rate
annualized monthly rate
45%
250%
200%
30%
150%
25%
20%
100%
15%
50%
10%
5%
0%
0%
Mar-03
Ene-03
Nov-02
Sep-02
Jul-02
May-02
Mar-02
Ene-02
Nov-01
Sep-01
Jul-01
May-01
-50%
Mar-01
-5%
Ene-01
yearly rate
35%
annualized monthly rate
40%
Industrial Production
(s.a. index, 3-month moving average, June 1998=100)
102
Financial Crisis
98
94
90
86
Russian Crisis
82
78
74
Feb-03
Oct-02
Jun-02
Feb-02
Oct-01
Jun-01
Feb-01
Oct-00
Jun-00
Feb-00
Oct-99
Jun-99
Feb-99
Oct-98
Jun-98
70
Source: Universidad Torcuatto Di Tella
Mar-03
Feb-03
Ene-03
Dic-02
Nov-02
Oct-02
Sep-02
Ago-02
Jul-02
Jun-02
May-02
Abr-02
Mar-02
Feb-02
Ene-02
Dic-01
Nov-01
Oct-01
Sep-01
Ago-01
Jul-01
Jun-01
May-01
53
Abr-01
Mar-01
Feb-01
Consumer Confidence Index
(Capital Federal)
Financial Crisis
48
43
38
33
28
Argentina’s Letter of Intent with the IMF
Macroeconomic Assumptions


Real GDP growth rate of 2% to 3% in 2003 (compared with an expected decline of
11% in 2002).
Consumer Price inflation at 35% yoy in 2003 (implied average inflation rate of 26%).
Fiscal Targets
 Federal Government: Primary surplus of 2.1% of GDP for 2003.

Provinces: Primary surplus of 0.5% of GDP for 2003.
Monetary Targets

Net International Reserves (floor): US$ -3,900 million (gross reserves of US$ 10 bn.)

Net Domestic Assets of CB (upper limit): AR$ 51,415 at end June.

The XR will continue to float but the BCRA will intervene to avoid excessive
volatility.
*Quasimonies are estimated at AR$ 7,450
Argentina’s Letter of Intent with the IMF
Other Conditions
 Gradual elimination of exchange rate controls.
 Debt restructuring with the technical assistance of the IMF and the aid
of an external advisor.
 Financial System Reform (including measures designed to deal with
problem banks). A new specialized unit will be created for bank
restructuring.
 Tax System Reform (including elimination of tax excemptions and
preferences, suspension of the remaining competitivity plans,
substantial reduction in the regional promotion regimes and other
measures)
 Reform of intergovernmental relationships.
 During the program period no new laws nor judicial instruments that
amount to involuntary suspensions of creditor rights will be passed (the
Government will implement a program to backup extrajudicial
agreements between creditors and debtors).
 Independence of BCRA
Amortization Schedule with Multilaterals
(in millions of US$, previous to IMF agreement)
Jan-03 Feb-03 Mar-03
II-03
III-03
IV-03
2003
Multilaterals
1093
83
3232
2336
4606
2479
13829
o/w IMF
1056
0
3081
640
4303
752
9831
World Bank
26
81
118
832
228
843
2128
IADB
11
1
33
773
74
793
1684
OUTLINE
i.
Brazil
Recent Developments
Debt Dynamics
Liquidity Analysis
ii.
Argentina
Recent Developments
Debt Restructuring, Debt Dynamics and
Bank Solvency
Federal Public Debt plus Contingent
Liabilities
(in billions of US$, September 2002)
Sept 02
Federal Government Debt
129.8
Contingent Liabilities
4.9
Compensation to Banks
Asymetric indexation*
Amparos*
Bond for restitution of 13% salary & pension cut*
Federal Government Debt including contingencies (1)
4.1
2.6
1.5
0.8
134.7
* = in the process of recognition
(1) does not include federalization of Provincial Debt estimated at US$ 13.6 billion
13.6
Argentina’s Public Debt and the
Equilibrium Real Exchange Rate
(% of GDP)
180
167
160
148
Debt (%GDP)
140
127
120
100
80
60
40
20
0
2.5
2.0
Equilibrium Real Exchange Rate
1.5
Federal Government Debt Structure
September 2002
BODEN
12%
Bonds
41%
Guaranteed
loans
17%
Multilaterals
29%
Other
1%
In default: US$ 52.1 billion*
* LMW estimate
Implied Expected Loss (EL) in Bond Prices
Definition:
VM  VF • (1-EL)
where:
VM is the market value of a risky bond
VF is the discounted present value of the risky bond
assuming both coupon and principal are fully paid
Example: Bond which pays constant coupon payments c until
its maturity at time T:
EL = 1 -
VM
VF
VM
=1 T
c
s=1
where i is the risk free interest rate.
(1+i)s
+
1
(1+i)T
Yield Curve of EL on External Bonds
February 2003
90%
Weighted average
Expected Loss
85%
80%
75%
70%
65%
2008
2010
Global Bond
2027
Argentina’s Public Debt After a
Hypothetical 70% Haircut on Defaulted Debt
(% of GDP)
140
124
Debt (%GDP)
120
111
98
100
80
60
40
20
0
2.5
2
Equilibrium Real Exchange Rate
1.5
Interest Payments on Public Debt After a
Hypothetical 70% Haircut on Defaulted Debt
Debt (%GDP)
(% of GDP)
130
125
120
115
110
105
100
95
90
85
80
7.1%
6.3%
5.4%
2.5
2
Equilibrium Real Exchange Rate
Note: Imputed interest rate of 5.6%
1.5
Debt Sustainability
(required primary surplus in % of GDP, with 70% Haircut on
Defaulted Debt)
Growth Rate
Real Exchange Rate
1.5
2
2.5
0%
5.4%
6.3%
7.1%
2%
3.3%
4.0%
4.6%
4%
1.4%
1.8%
2.1%
Redollarization Costs: Alternative Scenarios
"Corralón"
11.5
Contingent
Liability in
% of GDP
(c)
16.6
24.6
8.0
2.6%
37.0
54.9
17.9
6%
87.3
129.6
42.3
13%
Intermediate
Case
(in billions of AR$)
"Corralón"
Worst Case
Best
Case
Elegible for
Elegible for
Contingent
redollarization redollarization Liability in
(at 1.4 plus CER) (at current XR)* AR Pesos
(a)
(b-a)
(b)
Dollar deposits
11.5
(in billions of AR$)
Transactional "Corralito” 14.3
(in billions of AR$)
(as of Jan 02 before
pesific., in billions of US$)
46.7
Accumulated "Amparos”
(in billions of US$)
-3.3
* The XR prevailing in April 1 st (2.98 Pesos per Dollar) was used in these calculations.
Debt Sustainability
(required primary surplus in % of GDP, with 70% Haircut on
Defaulted Debt, includes redollarization costs under worst case
scenario)
Growth Rate
Real Exchange Rate
1.5
2
2.5
0%
5.8%
6.8%
7.8%
2%
3.6%
4.3%
4.9%
4%
1.5%
1.9%
2.2%
Fiscal Revenues under Alternative
Recovery Scenarios
(in real terms, Feb 01=100)
110
105
total revenues with
full recovery
100
95
90
85
primary expenditures
80
Oct-03
Feb-03
Oct-02
Jun-02
Feb-02
Oct-01
Jun-01
Feb-01
Oct-00
Jun-00
Feb-00
Oct-99
Jun-99
Feb-99
Oct-98
Jun-98
70
Jun-03
total revenues with
no recovery
75
Primary Surplus under Alternative
Recovery Scenarios*
(% of GDP)
6.0%
5.0%
4.0%
3.0%
2.0%
1.0%
0.0%
No recovery of revenues
* Primary expenditures at current levels
Full recovery of revenues
to Feb 2001 levels
Assets of Argentina’s Financial System
August 2002
Total assets: ARG$155.800 millions
Other net assets
5%
Claims on to the
public sector
57%
Reserves
6%
Loans
32%