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April 2003

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

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April 2003

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  1. 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

  2. OUTLINE i. Brazil Recent Developments Debt Dynamics Liquidity Analysis ii. Argentina Recent Developments Debt Restructuring, Debt Dynamics and Bank Solvency

  3. 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 Lula’s Policy Iniciatives

  4. OUTLINE i. Brazil Recent Developments Debt Dynamics Liquidity Analysis ii. Argentina Recent Developments Debt Restructuring, Debt Dynamics and Bank Solvency

  5. 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%

  6. Public Debt Dynamics: Benchmark Scenario Primary Balance 4.30 4.25 4.20 4.15 4.10 4.26% 4.25% % GDP 4.05 4.00 4.08% 3.95 * Required Target Observed *Last 12 months ending in January 2003

  7. Public Debt Structure January 2003 Fixed Rate 1% Others 18% Indexed to the Interest Rate 42% External or FX indexed Public Debt 39% Public Debt Stock: US$ 252.1 billion (55.9% of GDP)

  8. External Financial Conditions and the Exchange Rate exchange rate basis points R$ per dollar EMBI+ Brazil

  9. External Financial Conditions and Domestic Interest Rates (C-Bond Spread in b.p. and 360-day Interest Rate Swap in %) interest rate Interest Rate C-Bond Spread C-Bond spread

  10. Fiscal Impact of: 10% real depreciation 10.3% 2.5% +0.1% 57.3% 1% increase in the domestic interest rate 10.8% 2.5% +0.3% 55.9% 1% reduction in the growth rate 10.3% 1.5% +0.6% 55.9% Debt Dynamics: Sensitivity Analysis Public Debt (% of GDP) Interest Rate Growth Rate Incremental Fiscal Effort

  11. Public Debt Composition (in % of total, January 2003) External 26% Domestic 74%

  12. Domestic Public Debt by Holder (31st January 2003, % of total) Other 4% Banks 34% Non-financial private sector 8% Reserve Requirements 20 % Investment Funds 34%

  13. Banks’ Exposure to the Public Sector Public Bond Holdings, March 2002 350% 300% 250% 200% 150% 100% 50% 0% In % of Banks’ Assets In % of Banks’ Net Worth Source: JP Morgan

  14. OUTLINE i. Brazil Recent Developments Debt Dynamics Liquidity Analysis ii. Argentina Recent Developments Debt Restructuring, Debt Dynamics and Bank Solvency

  15. Liquidity Requirements of the Public Sector (Billions of US dollars) 2003 I. FISCAL DEFICIT (est.) 17.8 86.8 II. PUBLIC DEBT AMORTIZATIONS* Domestic Debt 64.7 External Debt 22.1 III. POTENTIAL LIQUIDITY REQUIREMENTS (I +II): 104.6 Total Available Liquid Funds of the public sector in % of Potential Liquidity Requirements 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

  16. 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 62.8 III. Total Available Liquid Funds ( I+II) In % of Liquidity Requirements 60% Note: Under the new IMF agreement there is an agreed floor for reserves of US$ 5 billion

  17. 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

  18. Total Liquidity Requirements (billions of US dollars) 2003 I. PUBLIC SECTOR BORROWING REQUIREMENTS 104.6 Fiscal Deficit (est.) 17.8 86.8 Public Debt Amortizations 17.0 II. PRIVATE SECTOR EXTERNAL DEBT AMORTIZATIONS III. TOTAL POTENTIAL LIQUIDITY REQUIREMENTS (I +II) 121.6 Total Available Liquid Funds of the public sector in % of Potential Liquidity Requirements 52%

  19. OUTLINE i. Brazil Recent Developments Debt Dynamics Liquidity Analysis ii. Argentina Recent Developments Debt Restructuring, Debt Dynamics and Bank Solvency

  20. Nominal Exchange Rate Pesos per Dollar, Free Exchange Rate Market 4 3.5 3 2.5 2 1.5 04-Jul-02 29-Jul-02 16-Dic-02 11-Jun-02 15-Ene-02 09-Ene-03 31-Ene-03 04-Oct-02 29-Oct-02 13-Feb-02 07-Mar-02 24-Feb-03 18-Mar-03 12-Sep-02 22-Nov-02 03-Abr-02 25-Abr-02 20-May-02 21-Ago-02

  21. Currency Forward Premium 1 year NDF 180% 160% Financial Crisis 140% 120% 100% 80% 60% 40% 20% 0% 02-Jul-01 02-Jul-02 02-Mar-01 02-Mar-02 02-Mar-03 02-Nov-01 02-Nov-02 02-May-01 02-May-02 02-Ene-01 02-Sep-01 02-Ene-02 02-Sep-02 02-Ene-03

  22. Cavallo and De La Rúa resign Repayment to IMF of US$ 1 bn. Liquid International Reserves of the C.B IMF disbursement of U$S 4 bn. 27,000 Implementation of the “Corralito” 24,000 21,000 18,000 US$ millions 15,000 12,000 9,000 US$ 10,515 million 6,000 31-Jul-01 16-Jul-02 13-Nov-01 29-Oct-02 09-Oct-01 03-Dic-02 18-Dic-01 17-Abr-01 02-Abr-02 06-Feb-01 13-Mar-01 26-Feb-02 11-Feb-03 18-Mar-03 26-Jun-01 11-Jun-02 02-Ene-01 20-Ago-02 24-Sep-02 04-Sep-01 22-Ene-02 07-Ene-03 22-May-01 07-May-02

  23. Interest Rate Time deposits, 30 days 62% 52% 42% 32% 22% 12% 2% Jul-01 Jul-02 Oct-01 Nov-01 Oct-02 Nov-02 Abr-01 Dic-01 Abr-02 Dic-02 Mar-01 Jun-01 Feb-02 Mar-02 Jun-02 Feb-03 Ene-01 Ene-01 Ago-01 Sep-01 Ene-02 Ago-02 Sep-02 Ene-03 May-01 May-01 May-02

  24. Total Deposits: Evolution since Implementation of the Corralito - AR$ 23,396 million 86500 + AR$ 8,443 million 80500 74500 A$ millions Implementation of the Corralito 68500 62500 1-Jun-02 8-Nov-02 2-Abr-02 3-Dic-01 1-Feb-02 8-Mar-03 11-Jul-02 31-Jul-02 9-Sep-02 7-Ene-03 28-Nov-02 23-Dic-01 21-Jun-02 18-Dic-02 22-Abr-02 21-Feb-02 13-Mar-02 16-Feb-03 28-Mar-03 19-Oct-02 12-Ene-02 20-Ago-02 29-Sep-02 27-Ene-03 12-May-02

  25. Consumer Price Inflation (Yearly and annualized monthly rates) yearly rate annualized monthly rate 45% 250% 40% 200% 35% 30% 150% yearly rate 25% 20% 100% annualized monthly rate 15% 50% 10% 5% 0% 0% -5% -50% Jul-01 Jul-02 Ene-01 Ene-02 Ene-03 Mar-01 Mar-02 Mar-03 Sep-01 Nov-01 Sep-02 Nov-02 May-01 May-02

  26. Industrial Production(s.a. index, 3-month moving average, June 1998=100) 102 Financial Crisis 98 94 90 86 Russian Crisis 82 78 74 70 Oct-98 Oct-99 Oct-00 Oct-01 Oct-02 Jun-98 Jun-99 Jun-00 Jun-01 Jun-02 Feb-99 Feb-00 Feb-01 Feb-02 Feb-03

  27. Consumer Confidence Index (Capital Federal) Financial Crisis Source: Universidad Torcuatto Di Tella

  28. 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

  29. 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

  30. Amortization Schedule with Multilaterals (in millions of US$, previous to IMF agreement) Jan-03 Feb-03 Mar-03 III-03 IV-03 2003 II-03 1093 83 3232 Multilaterals 2336 4606 2479 13829 1056 0 3081 o/w IMF 640 4303 752 9831 81 118 26 World Bank 832 228 843 2128 33 11 1 IADB 773 74 793 1684

  31. OUTLINE i. Brazil Recent Developments Debt Dynamics Liquidity Analysis ii. Argentina Recent Developments Debt Restructuring, Debt Dynamics and Bank Solvency

  32. Federal Public Debt plus Contingent Liabilities (in billions of US$, September 2002) Sept 02 Federal Government Debt 129.8 Contingent Liabilities 4.9 Compensation to Banks 4.1 Asymetric indexation* 2.6 Amparos* 1.5 Bond for restitution of 13% salary & pension cut* 0.8 Federal Government Debt including contingencies (1) 134.7 * = in the process of recognition (1) does not include federalization of Provincial Debt estimated at US$ 13.6 billion 13.6

  33. Argentina’s Public Debt and the Equilibrium Real Exchange Rate (% of GDP) 180 167 160 148 140 127 120 100 Debt (%GDP) 80 60 40 20 0 2.5 2.0 1.5 Equilibrium Real Exchange Rate

  34. Federal Government Debt Structure September 2002 BODEN12% Bonds 41% Guaranteed loans 17% Multilaterals 29% Other 1% In default: US$ 52.1 billion* * LMW estimate

  35. VM VM EL = 1 - = 1 - c 1 VF Ts=1 + (1+i)s (1+i)T Implied Expected Loss (EL) in Bond Prices VMVF•(1-EL) Definition: where: • VMis 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 cuntil its maturity at time T: where i is the risk free interest rate.

  36. Yield Curve of EL on External Bonds February 2003 90% Weighted average 85% 80% Expected Loss 75% 70% 65% 2008 2010 2027 Global Bond

  37. Argentina’s Public Debt After a Hypothetical 70% Haircut on Defaulted Debt (% of GDP) 140 124 120 111 98 100 80 Debt (%GDP) 60 40 20 0 2.5 2 1.5 Equilibrium Real Exchange Rate

  38. Interest Payments on Public Debt After a Hypothetical 70% Haircut on Defaulted Debt (% of GDP) 130 7.1% 125 120 115 6.3% 110 Debt (%GDP) 105 5.4% 100 95 90 85 80 2.5 2 1.5 Equilibrium Real Exchange Rate Note: Imputed interest rate of 5.6%

  39. Debt Sustainability (required primary surplus in % of GDP, with 70% Haircut on Defaulted Debt) Real Exchange Rate 1.5 2 2.5 0% 5.4% 6.3% 7.1% Growth Rate 2% 3.3% 4.0% 4.6% 4% 1.4% 1.8% 2.1%

  40. Best Case "Corralón" 2.6% 8.0 16.6 24.6 11.5 (in billions of AR$) "Corralón" 11.5 (in billions of AR$) 37.0 54.9 17.9 6% Intermediate Case Transactional"Corralito” 14.3 (in billions of AR$) Dollar deposits 46.7 (as of Jan 02 before pesific., in billions of US$) 129.6 42.3 13% Worst Case 87.3 Accumulated "Amparos” (in billions of US$) -3.3 Redollarization Costs: Alternative Scenarios Elegible for Elegible for Contingent Contingent redollarization redollarization Liability in Liability in (at 1.4 plus CER) (at current XR)* AR Pesos % of GDP (a) (b-a) (c) (b) * The XR prevailing in April 1 st (2.98 Pesos per Dollar) was used in these calculations.

  41. Debt Sustainability (required primary surplus in % of GDP, with 70% Haircut on Defaulted Debt, includes redollarization costs under worst case scenario) Real Exchange Rate 1.5 2 2.5 0% 5.8% 6.8% 7.8% Growth Rate 2% 3.6% 4.3% 4.9% 4% 1.5% 1.9% 2.2%

  42. Fiscal Revenues under Alternative Recovery Scenarios (in real terms, Feb 01=100) 110 total revenues with full recovery 105 100 95 90 85 primary expenditures 80 total revenues with no recovery 75 70 Jun-01 Jun-03 Jun-98 Jun-99 Jun-00 Jun-02 Oct-03 Oct-98 Feb-99 Oct-99 Feb-00 Oct-00 Feb-01 Oct-01 Feb-02 Oct-02 Feb-03

  43. 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 Full recovery of revenues to Feb 2001 levels * Primary expenditures at current levels

  44. Assets of Argentina’s Financial System August 2002 Total assets: ARG$155.800 millions Other net assets Claims on to the 5% public sector 57% Reserves 6% Loans 32%

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