Sunday, February 3, 2013

3/2/2013: Argentina v Chile: Government & External Balances

In the previous post I looked at the real economy comparatives between Latin America's best-in-class Chile and worst-in-class Argentina.

As promised, now a quick look at the Government and external balances.

If in terms of real economy comparatives, Argentina hardly significantly underperformed Chile since the mid 2000s, in terms of straight down the line General Government Deficits the country is a veritable basket case:

Just as in the case of the real economy, Chile moved dramatically away from Argentina in terms of gross deficits in 1996-2008, outperforming Argentina over that period of time in every year. After 2010, the same picture repeats. On a 5-year average basis, in 1996-2000, average General Deficit in Argentina stood at -3.0%, rising to 6.13% in 2001-2005, declining to -1.74% in 2006-2010 and rising again to -2.83% for 2011-2015 (based on IMF forecasts). Over the same periods of time, Chile recorded average surpluses in every 5 year period: +0.37% in 1996-2000, +0.90% in 2001-2005, +3.03% in 2006-2010 and forecast +0.02% in 2011-2015.

However, much of the headline deficit underperformance by Argentina relates directly to the burden of debt servicing. In this context, Primary Deficits are much more benign to Argentina's case, as illustrated in two charts below:

Again, consider 5-year periods in average annual terms. Due to lack of comprable data for Argentina for 1996-2000, let's omit this subperiod. In 2001-2005, Argentina's primary balance was on average in a surplus of 3.60%, with surplus declining to +2.26% in 2006-2010 and turning a deficit of -0.38% in 2011-2015 forecast period. Meanwhile, Chile enjoyed lower surplus of 1.38% in 2001-2005 epriod, higher surplus of 2.92% in 2006-2010 and a surplus of +0.17% in 2011-2015 period. So while overall Chile did show stronger performance, Argentina's primary deficits were hardly a substantial issue over the period of 2001-present.

Of course, Argentina's debt mountain is legendary... or should it be 'was legendary'?

Argentina's Government Debt/GDP ratio has peaked at 165% in the crisis year of 2002. So much is true. However, overall, the ramp up of debt (dynamics of debt accumulation) and the reduction in debt ratio to economy since the peak have been more than telling. In 1996-2000 Argentina's Government debt/GDP ratio averaged 40.6% - hardly a significant drag on either growth or public finances. In 2001-2005 the same stood at 114.44% of GDP - clearly well in excess of the known bounds for debt sustainability. With debt restructuring and return of economic growth, Argentina's Government debt/GDP ratio fell to 61.99% average for 2006-2010 period and is now on track to hit 43.42% average for 2011-2015. In other words, the country is expected to basically return to pre-crisis levels of Government debt burden by the end of 2015, some 13 years after the crisis.

Over the same period of time, Chile showed exemplary debt performance. Government debt/GDP ratio stood at 13.29% on average during 1996-2000 period, falling to 11.91% in 2001-2005 period and to 5.65% in 2006-2010. Since the devastating earthquake in 2010, debt/GDP ratio notched up to 12.09% for 2011-2015 period.

On external account side, Chile has been a recipient of the strong capital inflows from abroad over recent decades, the position that allowed the country to run significant deficits on trade side. Despite this, overall exports in both countries have been growing roughly-speaking in tandem, with slightly higher volatility for Argentina:

Thus, cumulated current account deficits in the case of Chile run at -104.2% of GDP over 1980-2017 period, against a cumulated deficit of just 24.54% for Argentina. Since 1990 through 2017, Argentina's current account deficits on a cumulated basis will amount to 4.43% of GDP against Chile's 36.62%. And over the period 2000-2017, the IMF is projecting cumulated current account deficit of 9.91% for Chile and a surplus of 20.62% for Argentina.

On the net, excluding fiscal performance and inflation, and keeping in mind that some of the official stats from Argentina are rather dodgy, there is little evidence to suggest that Argentine economy is a 'veritable basket case'. Instead, it is rather an economy struggling with Government debt overhang and fiscal situation whereby benign primary deficits are simply overwhelmed by debt servicing costs. In that sense, Argentina is closer to Italy (correcting for differences in growth rates) than to the 1990s crisis-stricken HIPCs.

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