The issue of public debt has been installed for weeks. Many have hinted that it is a bomb destined to explode. Is this really your destiny?
The latest data on the national treasury debt dates back to the end of 2022. Its value amounts to 394,000 million dollars and is equivalent to 62% of GDP. Since about 155,000 million dollars of that total is in the hands of the same public sector, the related debt – net of that share – is equal to 38% of GDP.
Most are denominated in foreign currency, mainly dollars. As a result of this aspect, the evolution of the debt/GDP ratio is sensitive to exchange rate fluctuations. For example, debt may shrink relative to GDP if the exchange rate lags prices in the rest of the economy or, conversely, rise due to real devaluation. To neutralize the effect of exchange rate fluctuations, we estimate the debt/GDP ratio using the average real exchange rate for the period 1970-2022, which is close to the equilibrium exchange rate. Thus, we get the most precise measure of the size of the net public debt: 43% of GDP.
Is 43% of GDP a lot or a little?
If we analyze it from a historical perspective, the current size is much lower than that reached in the years preceding the convertibility crisis (between 57% in 1999 and 86% in 2001, respectively), but higher than the 31% it had reached in 2017. , before the debt market was closed to the government of Mauricio Macri. It’s also slightly above the 40% that IMF debt sustainability analyzes suggest as ideal. A first evaluation suggests, therefore, that the size of the debt is probably higher than recommended, but not excessively.
The market’s concern regarding Argentine debt appears not to be so much its current size, but rather how will the movie continue from here on out.
There are three key elements to this point:
– the future stream of deadlines;
– He future growth of the economy and exports,
– the future evolution of fiscal deficit.
As regards the first point, the maturities of net foreign currency debt between now and the end of 2026 are relatively low: they average $10,000 million a year and only $5,200 million correspond to debt to private creditors ( without IMF and international organizations). . Measured as a percentage of total exports from 2023 to 2026, they would be between 9% and 12% (and between 3% and 8% with private exports), if it is assumed that the nominal value of exports will increase during that period of a modest 5% per year (something more than reasonable given the context of inflation in dollars that is going through the world). Only after 2027 will maturities in hard currency increase (above $17 billion annually), but would remain relatively low relative to exports (less than 19%). All of these percentages are much lower than those observed between 2017 and 2020 (between 32% and 45%), precisely because global inflation is (and will continue to) liquefy our foreign currency debt.
However the biggest fear of the market is linked to debt in pesos.
A worrying element is that around the 80% of current stock – $16 trillion in today’s market prices – matures before October election. But let’s look carefully. Just over 50% of that debt (and just over 60% of the total stock) is in public hands; so there shouldn’t be any major problems to refinance it. Almost 20% is owned by private banks, with which both the government and some opposition figures have dialogued to ensure their normal treatment and refinancing until 2024 and 2025. The same amount is in the hands of companies that access to the MULC — and who, therefore, cannot buy finance dollars or insurers whose investment alternatives are limited by strict exchange controls. Thus, refinancing risk is primarily related to a small group of firms or individuals other than those listed that hold approximately $3 billion in bills or securities, or 15% of total peso debt. Is this 15% enough to cause a market crash, knowing that the central bank will act as a buyer of last resort to avoid a skyrocketing Treasury borrowing cost and potential default? Never say neverThat doesn’t seem like the most likely scenario.
It seems reasonable to conclude the analysis with the following balance: the size of the public debt is not ideal, but neither is it excessively high; the flow of foreign currency maturities in the coming years appears low, especially when considered in relation to exports; and, although peso debt maturities are highly concentrated in the short term, there are reasons to believe that the refinancing will be accomplished for most holders —public and private— and that, in the event of financial stress, the BCRA will step in to avoid disruption of the market and of the payment system.
In short, the analysis does not allow us to conclude that the dynamics of the debt is a time bomb. We believe that the main reason behind the low valuation of the Argentine debt market — and, therefore, the high country risk premium — is associated the uncertainty around two elements that we mentioned above: the future evolution of the fiscal deficit and exports. There is no argument that the deficit must be eliminated and then transformed into a surplus, nor that the economy and exports must grow sustainably. For this reason, the best strategy for reducing uncertainty about debt sustainability is not to sound bomb alarms for which there is no clear evidence, but to build a political consensus that makes credible a trajectory that combines fiscal correction with growth in the economy and exports.
Source: Clarin
