9/9/18: IMF and Argentina: New Old Saga

My Twitter comments on Argentina and IMF rescue package were picked up by the folks at ZeroHedge https://www.zerohedge.com/news/2018-08-30/some-observations-argentinas-imf-sponsored-collapse

15/4/15: S&P Ukraine Ratings and Reality Check on IMF Programme

S&P Ratings Services cut long-term foreign currency sovereign credit rating on Ukraine to CC from CCC- with negative outlook and held unchanged the long-term local currency sovereign credit ratings at CCC+.

Per S&P release: "The downgrade reflects our expectation that a default on foreign currency central government debt is a virtual certainty." S&P also warned that any 'exchange offer' - an offer mandated under the IMF latest loan package to Ukraine (http://trueeconomics.blogspot.ie/2015/03/16315-ukraines-government-debt.html) - will constitute default. "Once the distressed exchange offer has been confirmed, we would likely lower the foreign currency ratings on Ukraine to SD and the affected issue rating(s) to D".

Per S&P: "The Ukraine ministry of finance’s debt operation is guided by the following objectives: (i) generate $15 billion in public-sector financing during the program period; (ii) bring the public and publicly guaranteed debt-to-GDP ratio under 71% of GDP by 2020; and (iii) keep the budget’s gross financing needs at an average of 10% of GDP (maximum of 12% of GDP annually) in 2019–2025… The treatment of the eurobond owed to Russia (maturing in December 2015) is likely to complicate matters. The Ukrainian government insists it will be part of the talks, while the Russian government insists that the bond, although issued under international law, should be classified as "official" rather than "commercial" debt given the favorable interest rate and the fact that it was purchased by a government entity. …if Ukraine has to pay the $3 billion in debt redemption this year, it will make it very difficult for Ukraine to find the $5 billion in expected debt relief in 2015 that underpins the IMF’s 2015 external financing assumptions."

Forbes labeled the new rating for Ukraine as "super-duper junk" (http://www.forbes.com/sites/kenrapoza/2015/04/10/ukraine-debt-rating-now-super-duper-junk/)

Beyond the restructuring threat, there is economic performance that is not yielding much consolation: "The negative outlook reflects the deteriorating macroeconomic environment and growing pressure on the financial sector, as well as our view that default on Ukraine’s foreign currency debt is virtually inevitable,”

S&P forecast is for the economy to shrink 7.5% in 2015, following the decline of 6.8% in 2014. The S&P forecasts Ukrainian GDP to grow by 2% in 2016, 3.5% in 2017 and 4% in 2018. Inflation is expected to peak at 35% this year from 12.2% in 2014 and fall to 12% in 2016 and 8% in 2017. Government debt is set to rise from 40.2% of GDP in 2013 to 70.7% of GDP in 2015 and to 93% of GDP this year, declining to 82.6% in 2018.

Meanwhile, ever cheerful IMF is projecting Ukrainian GDP to shrink by 'only' 5.5% in 2015, and grow at the rates similar to those forecast by S&P between 2016 and 2018. IMF sees inflation rising to 33.5% this year. Government debt projections by the IMF are only marginally more conservative than those by the S&P.

Meanwhile, lenders to Ukraine have already pushed out a tough position on talks with the Government: http://www.bloomberg.com/news/articles/2015-04-09/ukraine-creditors-fire-opening-salvos-before-restructuring-talks

As I noted before, this an extraordinary 10th IMF-assisted lending programme to Ukraine since 1991. None of the previous nine programmes achieved any significant reforms or delivered a sustainable economic growth path. In fact, the IMF presided, prior to the current programme over nine restrcturings of the Ukrainian economy that produced more oligarchs, more corruption at the top of the political food chain and less economic prosperity, time after time.

Meanwhile, over the same period of time, world's worst defaulter, Argentina, has managed to have just three IMF-supported lending programmes. Argentine bag of reforms has been mixed, but generally-speaking, the country is now in a better shape than it was in the 1990s and is most certainly better off than Ukraine, as the relative performance chart of two economies over time, based on IMF WEO (April 2015) data, indicates:

Somewhere, probably in the basement of the 700 19th St NW, Washington DC, there exists a data wonk that truly believes that Ukrainian debt is 'sustainable' and that this time, things with 'structural reforms' will be different from the previous nine times. I would not be surprised if the lad collects Area 51 newspapers clippings for a hobby. He's free to do so, of course. But the Ukrainian economy is not free when it comes to paying for the IMF's bouts of optimism. And with it, neither are the Ukrainian people.

What the Ukrainian economy really needs right now is a combination of pragmatic political reforms to bring about real stabilisation, root-and-branch clearing out of corrupt elites, including business elites and not withstanding the currently empowered elites, assistance to genuine (as opposed to corrupt rent-seeking) entrepreneurs, all supported by assisted and properly structured FDI, direct development aid and a real debt writedown. The IMF-led package does not deliver much on any of these objectives. If anything, by passing the cost of reforms onto ordinary residents, it does the opposite - drains investment, saving and demand capacity from the economy, imperilling its ability to create new growth and enterprises.

12/12/2013: BlackRock Institute Survey: S. America & Asia-Pacific, December 2013

BlackRock Investment Institute released its latest Economic Cycle Survey for EMEA region was covered here: http://trueeconomics.blogspot.ie/2013/12/12122013-blackrock-institute-survey.html.

Survey results for North America and Western Europe region were covered here: http://trueeconomics.blogspot.ie/2013/12/12122013-blackrock-institute-survey-n.html


Now: Asia-Pacific and Latin America.

"This month’s Asia Pacific Economic Cycle Survey presented a mixed outlook for the region. Out of the 14 countries covered, only India is currently described to be in a recessionary state; however over
the next 2 quarters it is expected to transition to an expansionary phase.

With regards to China, over the next 12 months, a net of 24% of 21 economists expect the economy to
weaken compared to 30% in the October."

Note: The red dot represents Hong Kong, Japan, Malaysia, New Zealand, Singapore and the Philippines, where no economists describe the country at hand to be in a recessionary state at present or over the next 6 months.

"This month’s Latin America Economic Cycle Survey presented a mixed outlook for the region.
Brazil, Colombia, Peru, Mexico, Brazil and Chile are described to be in expansionary phases of the cycle and expected to remain so over the next 2 quarters, while Argentina’s growth is expected to deteriorate from expansion to contraction over this horizon."

"Venezuela is described by the consensus to be in a recessionary state, with no improvement to this outlook at the 6 month horizon."

The global growth outlook remains positive from both regions analysts' perspective, though Asia-Pacific analysts are more bullish on global recovery than Latin America's analysts.


Note: these views reflect opinions of survey respondents, not that of the BlackRock Investment Institute. Also note: cover of countries is relatively uneven, with some countries being assessed by a relatively small number of experts.

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.

2/2/2013: Argentina v Chile: Real Economy Side

Can't say much, but some debate has rekindled earlier today on twitter about the merits or failures of the Argentine model. In part, this revival of interest stems from the IMF issuing another Executive Board statement on the country (here) basically confirming Argentina's continued failure to implement measures to bring the country back on track with the IMF programme. In part, the said interest has been kept alive by various economics commentators, most notably Paul Krugman (see example here), putting Argentina forward as some sort of a maverick economy with miraculous escape velocity from the clutches of the IMF.

I am of no camp on Argentina. It has made hash of long term macroeconomic management, and had seen virtually no structural change on its erroneous ways of the past. On the other hand, by many macro aggregates, the country is muddling through its perpetual crisis rather well. Yet, some indicators point to very deep problems, namely: inflation, and government spending. It's a mixed bag and I have never advocated its mode of policy choices as a road for anyone to copy.

So with this rather neutral stance, here are some comparatives between Argentina and the strongest economy in the region, Chile (now, Chile is in many ways an example of policy reforms I do like and do put forward occasionally as an example for other countries to pursue).

Let's start from the top: real GDP growth:

All in, based on 5 year averages, Argentina's economy expanded at the average rates of 4.78% in 1991-1995, 2.66% in 1996-2000, 2.35% in 2001-2005, 6.78% in 2006-2010 and expected to grow at 4.47% in 2011-2015 period. At the same time, Chilean economy grew, respectively at 7.88%, 4.21%, 4.4%, 3.86% and 4.91%. Thus, Argentina managed to outperform Chile in growth terms only in one five-year period, namely in 2006-2010 period. How much of this outperformance was due to potentially 'massaged' figures from Argentina on inflation and growth, no one knows.

To make the growth comparatives more clear, let's create two indices, setting GDP at 100 for 1990 and for 2000 for both countries and then computing cumulated path of GDP. It is clear that Chilean economy relative outperformance during the 1990s is the core driver for cumulated differences between the two economies, with that difference becoming virtually zero on aggregate during the 2000-2013 period.

GDP at an aggregate level can present a distorted picture of actual activity, due to a number of demographic factors and price comparatives differentials. Here is what has been happening in the two countries in terms of PPP-adjusted (controlling for price and FX rates differentials) GDP per capita.
Per chart below, the comparatives are sensitive to the specific sub-period:

In absolute terms, per capita income in both countries is tracing relatively similar path, although Chile is running slightly ahead of Argentina since 2012 and this is expected to amplify slightly in 2013-2017. However, the starting point for these comparatives was a significant gap between Chile and Argentina in incomes in the 1980s that became erased by 2000. To see this better, consider the index of GDP epr capital, PPP-adjusted that normalises both countries incomes to 100 in 1980:

Since parity in the 1980 (imposed by assumption here) two countries' incomes closely matched each other until ca 1987. There after, Chile saw dramatic uplift in income per capita, while Argentina experienced relative stagnation until roughly 2001-2002. Since 2002, however, both countries income per capita are growing in relatively parallele fashion, although Chile remains an out-performer compared to Argentina.

Relative differences between the countries in terms of income per capita dynamics are closely matched to difference in savings and investment:

Chile strongly outperformed Argentina in terms of gross national investment in 1991-2005 with average investment rate (by 5 year averages) running at 17.23% in 1991-1995, 19.36% in 1996-2000 and 15.98% in 2001-2005 for Argentina, against 27.46%, 26.84% and 22.33% for Chile. In 2006-2011 this was reversed, with Argentina's gross investment running at 23.56% against 22.19% in Chile. In 2011-2015 it is forecast that Argentina's investment rate will remain at high 24.87% while Chile's investment rate is expected to rise to even more robust 25.53% of GDP.

Identical to investment dynamics are traceable across Gross National Savings:

Thus, there were few notable differences in the savings/investment gap between the two countries, with exception for the period of immediate default in Argentina. Both countries reliance on borrowing and external investment was roughly identical in the period 2006-2010, with weaker reliance in Chile in 1996-2005 and stronger reliance in Chile prior to 1995.

Per unemployment - another variable heavily 'massage-able' by the Governments (and Argentina had quite a share of accusations here):

It is very clear that for Argentina, sky-high rates of unemployment that were present in 1994-2004 period have been declining over time, with 2008-2013 unemployment rates virtually identical for both Chile and Argentina. There is little drama here, as far as we can trust Argentine numbers.

I will focus my attention on comparatives between two countries in terms of fiscal and external balance in the next post, but so far, there is little evidence to suggests hugely dramatic underperformance of Argentine economy in recent years compared to 'best-in-class' case of Chile - a country that as it happens is similar to Argentina in terms of income per capita (which is, of course, a major reason why Argentina should not be compared directly with Brazil).

Stay tuned for more.