ARGENTINA-ECONOMY: Inflation Eases but Foreign Debt Increases

By Marcela Valente Reprint | | Print |

ANALYSIS - Marcela Valente

BUENOS AIRES, Feb 28 1996 (IPS) - Argentina has emerged from the nightmare of hyper-inflation but an increasing foreign debt burden threatens new horrors for the nation’s economy.

Free convertibility of the peso has stabilized prices and reduced inflation from nearly five percent in 1989 to 1.6 percent last year. But while the new economic model has kept the government from issuing unbacked money, it sets no limits to its fevered search for external financing.

“Borrowing now allows the Argentine government to cover up the fiscal hole at the cost of currency depreciation,” said economist Eduardo Curia. “It’s true that there’s almost no inflation today, but we’re preparing the ground for a future outbreak by increasing foreign debt to a worrisome level that will reach its limits before long.”

Curia pointed out that Argentine’s total foreign debt of more than 100 billion dollars amounts to five times the value of the country’s total annual exports. Official statistics show the public sector share of the debt is 87.1 billion dollars while private foreign indebtedness amounts to some 15 billion dollars.

Much of the new debt is devoted to servicing Argentina’s existing debt obligations. The nation must pay back 11.7 billion dollars in interest and principal this year, 14.4 billion dollars in 1997 and 13.316 billion dollars in 1998.

But new financing is also needed to cover a public budget deficit that exceeded 2 billion dollars in 1995 in 1995 and is forecast to reach 3 billion dollars this year. Analysts see this growing dependence on external financing as a serious weakness in Argentina’s economic model.

Economist Angel Broda, a prominent business consultant who closely monitors public accounts, warns that the problem must be quickly addressed.

“Public sector financing appears to be following a reverse order of cause and effect — the government is looking at the availability of borrowing funds in the market to set its budgetary and financing policy,” he remarked.

“When access to the credit market is easier, fiscal policy is less austere,” Broda explained. He warned that the government’s reluctance to rely on savings left it dependent on fickle external borrowing conditions.

Meanwhile, public spending continues to grow. It rose 67 percent between 1991 and 1995 despite government personnel reductions, the privatization of public enterprises, and little improvement in inefficient government services, particularly education and health.

Analysts say shows Argentina has a chronic financing problem that the government is attempting to neutralize by increasing the foreign debt – a less visible and contentious alternative to the daily price rises that result from inflationary financing.

“It is true that our debt level is not high relative to the GDP (Gross Domestic Product), but the emphasis should be placed on our export capacity, since that is how hard currency is earned,” Curia remarked.

Kristin Lindow, principal Argentine analyst for the Moody bond- rating service, agreed that “the debt level is very high relative to the capacity to pay, which is measured by total exports.”

Argentine exports rose 30 percent last year over 1994, but both Curia and Lindow said this percentage increase was still lower than that of the foreign debt.

“I don’t see the risk of a short-term default, but it won’t look good if the government frequently tries to borrow large sums,” the Moody’s analyst warned.

In its 1994-95 Economic Study of Latin America and the Caribbean, the Economic Commission for Latin America included Argentina among the countries that significantly increased their foreign debt in 1994. Argentine debt rose 10 percent, compared to 16 percent for Colombia, 11 percent for Chile and 10 percent for Bolivia.

But unlike Colombia and Chile, whose public debts fell while their private ones grew, the public debt rose in Bolivia and Argentina.

New York bond traders report that the Argentine government led all of Latin America in debt issues for the third consecutive year in 1995.

Debt issues doubled in 1995 to 4.409 billion dollars compared to 2.121 billion dollars the previous year. The government had forecasted floating 4.5 billion dollars in debt bonds this year but has already issued 3.4 billion dollars worth in the first 45 days.

Brazil also borrowed a great deal of money in 1995 and, unlike its Argentine Common Market of the South (Mercosur) partner, devoted much of the funds to financing foreign trade and new investment. Argentina veered closer to Mexico’s rocky road, using the money to repay older foreign debt and to cover the budgetary shortfall.

The government’s voracious appetite for debt, meanwhile, is crowding private firms out of the credit market and hindering economic recovery from last year’s 2.5 percent GDP decline, analyists said.