Argentina - Memorandum on economic position and prospects

FTr. I UNIN TO STRI I UNN TORESTRICTED WITHIN v rnPV ReDort No. WH-108a a AAAAA %OVA A ONE WEEK This-report was prepared for use within the Bank. It may not be published nor may i Im naenesA no rm,fte.anAn the Bank'. Th . - ... - no . - I - - . .* r** * * e p e s e n i n gr t h e U M B E T h V a n k au c cU e p t e g v responsibility for the accuracy or completeness of the contents of the report. TMT1PQMATTOMAT W RAMIC V AN WVROMCTDTPTT0TTn AMTV TPVPT APMVNT 'k rT%XS--%l A %T'%V 0 AVtW ARGENTINA'S ECONOMIC POSITION AND PROSPECTS Testea 10i 10A1 Western Hemisphere Introduction 1. The purpose of this memorandum is to review briefly, in the light of recent developments, the appraisal of Argentina's economic problems and prospects that was set forth in the last economic report on Argentina (WH-97a, June 23, 1960). This appraisal was summarized in that report (page 7) as follows: "The problems besettin! the Argentine economy. particularly the heavy burden of the public external debt and the uncertain fiscal outlook. though not amenable to easy solution, are not so crave as to mar the growth prospects of the Argentine economy and to endanger its external viability. In its structure. in its institutions and. above all, in the availability of entrepreneurial ability, managerial com- nPtnnnP and techninAl qkills Arppntina is not. An underdevelonPd country... "The economic policies which the Frondizi Government has stead- f.q.q+.1r niirni o --- hnva 'r nrl-i ml inbnn n OaVniI+.aal nrl a nd vfn an indication of the responsiveness of the Argentine economy to rational and snond nnlicies * They have c+ +ha c+n n remino+n of the growth of the economy. The expectation may be justified that economy may quickly regain momentum and confidence in its own capa- the last 15 years. There is no assurance that this will happen, and _LL1 se m _L_L1.e_L UiLCL U OV)II L. .L X .L UJLZ2 VO-L..LJ. con-Li U uk.1 U U F-a6J- Uilt; Argentine economy for a long time. But in view of the accomplish- ments of te stabiization program and the fundamental hnuges in basic policies which went with it, a cautiously optimistic appraisal ol .ne gro-IN prupecUt uf tUe al'rgentinU ec;U1iUt1y alu U -Lub exueila-L viability appear warranted." 2. Developments during the past year confirm and reinforce these -IIugments. . The immediate objectives of Argentinais stabilizat:on program, which was initiated in December 1958 and whose early progress was described in the last economic report, have by now been fairly well ac1eved. 4. After years of unbalance contained by controls, the balance of international payments is in equilibrium. The official intornational re- serves increased by about $540 million between December 19' and April 1961. In 1960, when '250 million were drawn in stabilization credits, gold and foreign exchange reserves increased by over 4300 million. he- serves have continued to rise in 1961 by another .$20 million, though there have been no further drawings on stabilization credits. On April 30, 1961, - 2 - Argentina's gross gold and foreign exchange reserves amounted to $720 million, equivalent to over 8 monthst impor;s at the 1960 rate. The unified free market rate of exchange has remained stable around 83 pesos per U.S. dollar since September 1929. 5. After years of inflation, internal price stability is being steadily regained. During 1960 the wholesale price index remained vir- tually unchanged; retail prices have continued to increase, but at a markedly denlinino ratp- In 198. the cost of livin index increased by 50%, and following the radical readjustments to the stabilization programj it increased h 7% during the first. -ir months of 199. y contrast. during the second half of 1959 the cost of living index increased by 15%; rlnrinm+ i,h. 'noln of 1PAn hv 124'* nnd lirinc +.hA firs+.four nont.hn of 61 by an even lesser rate. 6. These improvements in the financial environment were made possible by her+ g reanli z-; c- new& i-'1 sna - n- iAi nh dev1n7r1nr- f+wte l n1 tnl a rate structure and trade controls were abolished, by allowing flexible nr4nac + nn+rr1 aon~v'n all~oation,- in MoSt+-C fields 0- g.roni-ing ,nre- straint, and by the marked monetary restraint which is now being observed. ±The Gov r--1en Wad t..ILILU fl UX l JA mnn tar- aLLa -LU L- 4-4 - a - - ,4-- - A 4- 1-, l 4 - L bank credit expansion within the limits agreed under the stabilization Ft'-'U dil dlle Vi ul oLt ~.I L ±lItl. tnUtL CI ±1± " Ili[ J±dG±_ UJC211A 1_1 _ U A'-V be available for private sector financing. 7. Perhaps the most striking indication of the improvement in the financial environment wnich has taken place since the stabilization program was introduced has been the revitalizing of long-dormant financial markets. The restoration of stability and confidence and more realistic interest rates in some markets have stimulated flows of transferable savings through these markets. The Treasury has begun borrowing increasingly in the pri- vate market, and is now preparing to borrow again on its own c;redit in European and United States financial markets. The National Yortgage Bank's recent domestic issue of long-term paper is a first step toward re-estab- lishing a mortgage money market. New domestic stock sales by Drivate com- panies have been increasing rapidly. New direct foreign Thvesents have also been increasing rapidly. The expanson of domestic financial markets may not be large in amount as yet, but they represent the beginning of new savings flows which, if continued, would contribute importantly to the flexibility and future growrth of the Argentine economy. 8. But there is one respect in which financial market developments may give rise to difficult problems. The recent rapid expansion of durable goods production, and especially of automobiles and tractors, has created a very large demand for funds to finance their sale. The conmercial banks have not been able to satisfy this new demand from their loanable funds, and a 10% interest charge ceiling on bank loans has prevented them from bidding for funds currently held outside the banking system. New non-bank financial intermediaries, to which the loan rate ceilings and the cash - 3 - reserve requirements of the commercial banks do not apply, have accordingly grown up in the past year or so to service this intense demand. Providing instalment financing at a cost of up to 2 and 3 percent per month, they have been able to bid effectively for private funds, including some funds formerly held in banks. Commercial bank liquidity has been correspondingly compressed. The resulting credit "shortage" is reportedly beginning to hamper normal economic activity, and is giving rise to pressure for enlarging the lending capacity of the comfercial banks by relaxing their cash reserve reauirements. Relaxinz bank reserve requirements alone would not, however, alter the present relative attractiveness of the bank and non-bank money markets whence much of the commercial credit shortage reportedly originates. It is not yet. clear what measures will be taken to deal with this new prob.- lem of monetarv management. Q_: Tn the nrAsPnt. limate of nonfidpnnp. high non-bank interest rates have also been attracting substantial amounts of short-term money from ahroad Were +.he funds for any reason niddenly to s.k to move abroad again, pressures on the exchange market could result; as yet, £1.4VC i., U11C..LS O L111U £X .. 6a . 4LU. c,0 oc k.U .0 p' -.iACtZI 10, On the whole, the improvements in the financial environment that 1-lave be;en O O reajzed drng 'h p1 a s t 0 T.n irnnro - linrn on+i ofjS - rnc+ nVflr%+fl. tions. Financial reconstruction is not yet complete. The economic cis- correct, and intermittent financial pressures -- in the form of wage prob- _L 1, U U~ 1.4 - obleh, . 1- prob.lhenis -- maci LJe ex ee as I - - iU process proceeds. Political developments could well make these problems eeC eding'011 (..LiJLQU-LU. DUU.114-LUiL _LV0j~. eA ~ u.1 ..IUI both in the export sector and in the home market, and with the growing awareness of the relation between financial stability, economic expansion, and the preservation of hard-won but still delicate political stability, there is ground for expecting the financial environment to continue to improve. Economic Expansion 11. The difficult adjustments to the sharp increases in the real prices of many goods which accompanied the early pnases of the stabilzzation program and which, for a while, were reflected in output declines, are now over. In contrast to 1955, the year of cutting national expenditures to sustainable levels, in which gross national production fell by almost 5%, 1960 was a year of expansion: total output increased by over 4o and indus- trial output increased by over 9%, much faster than in any recent year. 12. The prospects for continued expansion are good. Real investment expenditures in 1960 were one-fourth higher than in 1959. The proportion of total investment spent on equipment and machinery to raise productivity and expand capacity also increased sharply. Machinery accounted for over 40 percent of total imports in 1960 compared to one-fourth of total imports in 1959. For the most part, this accelerated investment activity repre- sented the response of private investors in both industry and agriculture to improved incentives and expectations. With continued stability, this process of renewing and enlarging the capital stock of the economy should continue. Decades of capital consumption have to be made good. 13. Industrial exoansion prosoects would be greatly enhanced were the cost levels that have developed behind the very high protection in force for many vars to h r(chieH Arrinultural Pxnansion nrosnects would also be enhanced with lower equipment and material costs. Some reductions in coma+.y be ehpendn+.r to ore wit.h .hp rqnifly inr ring scale of industrial production. But high steel costs could limit this process as several years w.il nn before the ner nvernmen+ te+el mill nowr onming into production will be equipped to operate at planned capacity with minimum average costs. TPh0 Govrrm,e-4- isnJ. ~ p~,n n,,'~o' ^i.cia roupi +n +iiA%r +h-o fiill range of present problems and the potential and most suitable directions lated policies that would help realize these potentials. 14. Nhereas industrial development has been encouraged actively for UUeCoAes, agi_UUJ_UL'U LidZ5 Ut:!01 _Lrg ,Uy 11eg±.LtUL,s. IU aI dercUU IL ias even been forced to subsidize industrial development by consuming highly pro- tlected niaterials and equipment -uhil.1e seUl_LLILg cUt,_ lar ul atu-L woldakt prce and even at less than world market prices during the state trading period. agriculture is still regarded by some as an "inderior" activiry. But there is a growing awareness of the importance of agricultural development. Argentina's exports are virtually all agricultural products, and industrial activity and expansion are in many fields still largely dependent on the imported materials and equipment which only these exports can now maKe available. The steady shrinkage over the years of the export sector in relation to the rest of the economy -- Argentina is exporting no more now in current dollar values than in the late 1920's -- has for some years made the balance of payments one of the most serious limiting factors to sconomi.c expansion. Though the success of the oil prograr has now made Argentina self-sufficient in petroleum and thereby enlarged import margins sub- stantially, an expanding agricultural economy and expanding exports remain emong the most important requirements for sustainable economic growth in the years ahead. Exports 15. The prospects for exports, which consist overwhelmingly of food grains and meat products, are good: they remain substantially as described in the Appendix A to the last economic report. From a *1l.l billion level in 1960, equivalent to about 12 percent of G.N.P., total exports are ex- pected to increase to a $1.4 billion level by 1965, and comparable further increases are possible in the second half of the decade. Increasing sales of cattle products will account for virtually all of these increases. Ex- ports of grain; which now account for almost half of total export earnings, are no expectea to increase suostantially. Tnis appraisal reliectb prima- rily world market prospects for grains and meat products. Argentine supplies of all these products could be increased substantially; current output is well below past peak levels. 16. The buoyant outlook for meat reflects primarily the expectation that expanding incomes in western European countries will in the years ahead enlarge the demand for meat substantially more, and more rapidly, than European suppliers can expand, and that Argentina is peculiarly well situated and well endowed to fill the gap. Exports of meat products cur- rently account for only about one-fourth of total meat production. Me4t exports could double in the next ten years,and present levels of meat con- sumption could be maintained for a population that should increase by some 20 percent in this period,with total production increasing only by some 60 percent. 17. If meat markets develop as expected, the responses of farmers should readily bring about these increases in production. Argentina's highly developed agricultural economy is flexible and highly responsive to price incentives. For the moment, however, producerst expectations are clouded by the fact that drought in some parts of the country has led many farmers to ship cattle to market this year ahead of schedule, weakening prices, while grain supplies have declined. Were breeding cattle to begin to be sold for beef, the rebuilding of herds that has been going on during the past two years could be reversed and expected export increases post- poned for several years. 18. With present plans to expand and improve the cattle industry. much larger output would be feasible over the longer term. Beef and grains have traditionally been concentrated in and comneted for the rich lands of the Argentine pampas. A program is now.under way to show farmers how to develon artificial nat.ure for cattle breedin, in marginal horthern lands not suitable for other purposes and use the rich pampa lands so released from pasture more intensively. for fattening. Increasingly. grains could be produced for animal feed and exported in the form of high value animal protein instead of in low value bulk as at nresent. This more rational use of land could increase the productivity of agriculture very substantially. 19. Transport limitations must be overcome, however, if meat export notential. ar to he fu'lly rPq1ije.ai The rilronds. one ffficient. Pnr self-supporting, have become run-down and disorganized during the past 15 vears to the point where thy are now phyica1y unable o+. nrovide adunnate services in many areas. The highways have not been designed to carry the +traffic which the inadeunate rail service has thrustupon it. Transport within the interior -- as opposed to between the interior and the ports -- dvl e1 n1 r A r at ci nA re n A a+nd- fattenig I re ini nd a domestic-M development of separate cattle breeding and fattening regions and a domestic -6- Publ Ti Goveriwnerntiq inflTnanc+ mn te pace and dirctinn of Pnnnmir expansion is varied. Through tariffs, taxes and its general financial incentives which are now again the principal determinants of private economic decisions in Argentina Tho,4+ it-ran4v --4-A ~ , established in an earlier era, it also enters markets directly. The general pO±±-L 01 LI: _ UV~ 1t~i L 0 UIJ LsLO 1110A c~~SIJy W. UIU O_ as possible to the private sector, although progress in some instances may be slow. Th11rough1 a variety ocf state enelrss,te GoUvernmen)t:I is also the principal provider of basic transportation, energy -- gas, oil, electric power -- anu cmuicav±ons services. Xui: te years aheau, UIIe U_uY v. the Government to improve and extend these basic services will deteniine in very large degree the rate at wich the economy can grow. 21. Comment on the probable total Investment expnditures in Lne pulic sector and on the ability of the Government and the state enterprises to finance these expenditures cannot be made because of lack of information. Within the field of transportation and electric power, however, it would appear that some $2,000 million worth of investments in transportation and some $500 million worth of investments in electric power are now likely to go forward during the next ten years as part of the economic reconstruction program that has been getting under way since the stabilization program was initiated. Of this total, which would represent an annual expenditure equiv- alent to some 2 to 3 percent of G.N.P., only thenationalroad program, which will amount to some $900 million over the next ten years, is now fully fi- nanced by assigned revenues and by some $130 million of external loans al.- ready available or under negotiation. Even with additional external borrow- ing, new financing margins will have to be created in the Central Govern- ment's budget for much of the remaining investments. 22. These margins do not exist at present. The Central Government's cash budget has been and continues to be in su7stantia. doLicit. The cash flow deficit for the 1960 fiscal year (November 1, 1951"; to Qetaber 31, 1960) amounted to 21 billion pesos, equivalent to over 20% of total revenue. Not- withstanding a 17% increase in revenue this year, the deficit for 1961 is expected to be 24 billion pesos, equivalent to approximately one-fourth of total revenue. (Increasingly, these deficits are being financed ite1rna.lly in a non-inflationary manner through the social insurance funds and The private capital market; though difficult financing problems still remain.) 23. Nonetheless, funds for new public investments could materialize in substantial amounts were the very large deficits of the major state en- terprises, and especially of the national railroads and the Buenos Aires Transoort. brought under control: for these deficits now constitute a charge on the Central Government and alone account for virtually all of the Govern- mpnt.'s rash dpfinit_ In 1960- transfprs to the railroads amounted to 13 billion pesos and to the Buenos Aires Transport, 3 billion pesos. The - 7 - amounted bud-eted for transfer to th-e ranilroads Jn 1961 -1 and the actual amount may be even higher. The gross operating revenues of th I. I d J v e. vnc vvr a cer,w , ec- , s"n other± Opeatige- penditures. Total budget transfers to state enterprises are larger, about J) L 4=D1jJ aJ kIlLO ~Yt::L-L LU U ULM; U_LL. LU : _U1QL±UUt:: U V(fJE-1111V,11 4LJV UL-' ments such as in steel and the Dock Sud power station and a variety of smaller and more manageable subsidies to. other enterprises. The hard core of the present budget problem, and the key to' rea1izing the- sayings potential in tne CenurL GovuremenT-a own budget, is the resolution of the railrnad and urban transport problem. 24. The Government is beginning to take active steps to deal with the railroad deficit. Early in May a special decree was issued vesting the Minister of Public Works and the Secretary of Transport with authority to rationalize all aspects of the railways- organization and adninistration and to modify rates. As a first step toward the elimination of uneconomic lines, plans are being drawn for the immediate elimination of some 4,000 kilometers of track and related installations, i.e., about 10% of the total railway network. Steps have already been taken to transfer some services now being provided by the railroads to private hands. The implementation of these measures, which will involve substantial transfers of redundant staff, will no doubt encounter difficulties. But the Government has ex- pressed repeatedly in recent weeks its firm determination to come to full grips with this problem without further delay. If the program is pursued as planned, important improvements in the public finances could. begin to appear within the next year or two, Creditworthiness 25. Annual service payments on Argentina's present external public indebtedness outstanding are very high. Even after the substantial relief provided by the recent stretch-out of repayments on stabilization credits and on the Paris Club debts (which arose from the funding of earlier com- mercial indebtedness to several countries), annual debt service ranges between 3220 and 3280 million through 1964, and will absorb 20% or mre of gross annual exchange earnings from exports at least through 1963. 26. This burden reflects the terms of indebtedness more than its level, however. Were the average maturity of these debts to be extended by further stretching of some debts and by replacing old debts now being paid off ra- pidly with new debt at much longer term, service of the present indebtedness of $1.3 billion, while not low, would be much less burdensome than at present. especially with rising export earnings in prospect. Some *$900 million of the present debt will be repaid within the next 5 years. If the erounds for sustained economic expansion and for correcting the present transport system's drain on the Governrent's budget are to be firmly laid, new borrowing in substantial amount over the next few years is required. - 8 - 27, Large amounts of new public borrowing are, in fact, under active negotiation and in prospect. Argentina is preparing to enter external fi- nancial markets once again, initially with 15 year bond issues which, it is hoDed. may anoroach a total of 860 million. For the highway program, some $130 million of loans from the U.S. Government and the IBRD are being readied. Assistance in financing the comnletion of the Dock Sud nower plant has also been requested from the Bank. Substantial further borrowing coid mtri_-i.P or th nyr. HPnidp for f.hp -rihhilittion of the rail- roads, ports and urban transport; for provincial and municipal government programs; for airport construction, honuing, land devpinment.and hnl education; and for the equipment of the San Nicolas steel mill to its or not1~e sbtn.+I a"r,. new 4 exv'e,-I bor-ing - at- cn re~nt nfl- term would be prudent will depend in large part on its timing. The public the burden of peak payments andextend the average maturity of the present iLndI_eedness. Project commitments so timed thatc" ful-l Ser-,ice would begin only after present payment schedules decline sharply should be readily manageaue. 'FUll ourvic u1 n LSui kI__ T un3n _uw ._ puae wuu veg only after the peak service payments of the next few years will have fallen SubstanUtally. But the pace anu vUlume f new Uebt commitents should be kept under continuing review to prevent present peak service payments fron being extended unduly into the Iuture. 9. With good phasing of new debt commitments and provided that te political environment encourages continued good economic and financial management and thus helps realize the country's substantial growth potential, Argentina should be able to manage the borrowings now being contemplated. Without the more urgently needed of these borrowings, the country's economic growth would. almost certainly be very seriously retarded. SUIMARY DATA Area 1.1 million sq. miles (78% arable and pastoral) Population mid-1960: 21 million average annual increase, 1954-60: 1.8% Per Capita Product 1960: U.S.$ 400-450 (estimate) Gross National Product 1960: 785 billion pesos = U.S.$ 9.5 billion 1960 GNP in 1950 orices was 4.2% above GNP of 1959. Origin of Gross Domestic Product (percentages) Mining & Industry 16.0 24.4 22.4 n 'st,.., t i ^- 1- 0') Services 56.1 52.6 51.1 Use of Gross National Product (percentages) onuumiposun - Priae (OU U).r 80.3' - Public 10.1 12.) Gross Domestic investment 1u.o 21 . 21.2 Net Foreign Investment .5 ,6 - lo5 Balance of Payments (millions of U.S. $) Current Account - Exports 1,000.6 1,079.2 imports 983.6 1,189 17.0 - 110.3 Services - 1.8 - L0,5 15.2 50 Unilateral Transfer Account - 3.2 - 7.0 Capital Account - 10.9 160.3 Errors and Omission - 1.1 - 2.5 -2- Mninr ERnnrt.et tto .nt.CIl prni-t-q) 1971 1959 Wheat 17 13 Heat 13 26 Tdnal -1 T1 Hides 9 7 Quebracho Extract 3 2 Major Imports ( of total imports) Fuel and Petroleum 1_ 21 13 Machinery 15 26 43 Metals and Products 21 25 21 Textiles 9 4 3 Chemicals 8 7 5 Timber 8 6 4 Other 24 11 12 100 100 100 Gross Gold and Foreign Exchange Reserves (millions of dollars at end of period) 1958 179 1959 397 1960 703 1961 (April) 719 Central Government Cash Budget (billions of pescs) 1960 (Tdu'Tl95 (e-'-imatEIq Revenue 6.7 98.8 Expenditure Central Administration and Debt Service 68.1 88.0 Transfers to state enter- prises, other government agencies & local governments 37.0 105,1 34,9 122 9 (da inita rnfer to, fic yas -3- Budget Transfers to State (billions of pesos) Enterprises 1960(actual) 1961(bud_eted) Transportation 17.3 22.4 Railroads -12.7 -8.9 Buenos Aires Transport - 31 00 River Fleet - 0.3 0M6 Buses - 0.2 /1 Shipyards /1 01 Airlines 1.0 1.0 Energy 6.6 2.7 Coal - 0.6 0.2 Power 2.4 1.2 Petroleum 1.2 - Gas 2, 1.3 Communications 1.3 - Steel h.h h.0 Total 29.6 29.1 (data refer to fiscal years) /1 Less than 0.05 Money and Prices (/ increase during period) 1959 1960 1961 Money Supply 44% 257 3.0%1 Cost of Living 102% 12% /a January-M'1arch. /o January-April. External Public indebtedness Outstanding April 1, 1961 1 ,3 billion Service Payments (millions of dollars) 1961 224 1962 248 1963 278 1964 223 1965 155 1966 113 1967 55 1968 30