LATIN AMERICA
Ecuador, Argentina and the IMF
The price of pride
Sep 10th 2009 BUENOS AIRES AND QUITO
From The Economist print edition
Life outside the system becomes a bit harder
WHEN the world economy was booming and prices for South America’s commodities were high, several left-wing governments in the region liberated themselves from what they denounced as the oppressive tutelage of the IMF, and embarked on a dash for growth powered by big increases in public spending. In today’s straitened times, such policies are harder to finance.
First to find this out is Ecuador. High oil prices allowed Rafael Correa, its socialist president, to ramp up spending on social programmes and to win a second term at an election in April. But oil output and remittances from Ecuadoreans abroad are both falling. Despite better tax collection, the budget deficit is heading for around $1.5 billion this year. Since Ecuador adopted the dollar as its currency after a financial meltdown in 1999, the government must borrow this money and cannot print it.
It risks running out of willing lenders. In December and March it defaulted on bonds totalling $3.2 billion, which it argued were “illegitimate and illegal”. It then bought most of them back for only about a third of face value. It thus has no immediate prospect of issuing new bonds in international markets. The government has pocketed its $400m share from the recapitalisation of the IMF, but refuses to contemplate swallowing its pride and seeking loans from the fund or the World Bank (with which Mr Correa also quarrelled).
Instead it is tapping regional lenders and others farther afield. Ecuador has borrowed as much as it can from the Andean Development Corporation, but it hopes for another $500m from the Inter-American Development Bank. The Latin American Reserve Fund has provided $480m. China has offered $1 billion at 7.25% (three times the rate demanded by the IMF) in return for future oil shipments. This is a “commercial operation” by Petroecuador, the state oil company, rather than a government loan, says María Elsa Viteri, the finance minister. Officials hope for €100m ($145m) from Iran’s Export Development Bank (whose assets in the United States were frozen last year because of its alleged funding of nuclear programmes).
With reserves falling (see chart), Mr Correa tried to stop capital flight. He has forced banks to hold at least 45% of their deposits at home. He wants to double the capital-export tax to 2%, and to increase corporate taxes. He has already tapped the social-security fund. But the government may merely be buying time at the risk of exacerbating its problems. Already the president has had to apologise to the police and army for delays in paying their salaries, and public investment has been cut. Jaime Carrera of the Fiscal Policy Observatory, an NGO in Quito, reckons that the government will find it even harder to finance next year’s deficit, which he forecasts at 2.5% of GDP. The government is betting on a higher oil price and on new hydroelectric plants, which will cut spending on subsidies for imported energy. But neither may have much effect before 2011.
Like Ecuador, Argentina quarrelled with the IMF and defaulted on its bonds. But the government of President Cristina Fernández has more options than Mr Correa’s—and it is showing a little bit more flexibility. The economy minister, Amado Boudou, said at a meeting of finance ministers from the G20 countries on September 5th that Argentina would, in principle, open its books to the IMF. If that happens, it will be the fund’s first assessment of the country’s economy since 2006, when Néstor Kirchner, Ms Fernández’s husband and predecessor, broke with it.
Mr Boudou is not asking for a loan from the fund. The Kirchners are unlikely to nibble humble pie unless Argentina is starving, which it is not—nor is it likely to for the foreseeable future. But the public finances are under pressure. The primary fiscal surplus (ie, before debt payments) has shrunk, probably to little more than 1% of GDP. (That looks good compared with many countries—but Argentina lacks their scope to borrow in international markets.) Ms Fernández is unpopular, making it harder for her to raise taxes or cut subsidies.
But there are signs of recovery. Miguel Kiguel, an economic consultant in Buenos Aires, estimates that the economy is now growing at an annualised rate of about 2%. Confidence is starting to return. The Central Bank has intervened less to prop up the peso and capital flight is easing. That means Mr Boudou’s flirtation with the fund is unlikely to go very far.
To qualify for the fund’s new flexible credit line, Argentina would have to clean up its statistics office, which is run by nominees of Mr Kirchner, not the economy minister. It would also have to reach a deal with the holders of some $20 billion of bonds who held out against a tough debt restructuring in 2005. Barring a renewed deterioration in Argentina’s fortunes, it is likely to be left to Ms Fernández’s successor to restore the country’s financial ties to the outside world.
Copyright © 2009 The Economist Newspaper and The Economist Group. All rights reserved.
Ecuador, Argentina and the IMF
The price of pride
Sep 10th 2009 BUENOS AIRES AND QUITO
From The Economist print edition
Life outside the system becomes a bit harder
WHEN the world economy was booming and prices for South America’s commodities were high, several left-wing governments in the region liberated themselves from what they denounced as the oppressive tutelage of the IMF, and embarked on a dash for growth powered by big increases in public spending. In today’s straitened times, such policies are harder to finance.
First to find this out is Ecuador. High oil prices allowed Rafael Correa, its socialist president, to ramp up spending on social programmes and to win a second term at an election in April. But oil output and remittances from Ecuadoreans abroad are both falling. Despite better tax collection, the budget deficit is heading for around $1.5 billion this year. Since Ecuador adopted the dollar as its currency after a financial meltdown in 1999, the government must borrow this money and cannot print it.
It risks running out of willing lenders. In December and March it defaulted on bonds totalling $3.2 billion, which it argued were “illegitimate and illegal”. It then bought most of them back for only about a third of face value. It thus has no immediate prospect of issuing new bonds in international markets. The government has pocketed its $400m share from the recapitalisation of the IMF, but refuses to contemplate swallowing its pride and seeking loans from the fund or the World Bank (with which Mr Correa also quarrelled).
Instead it is tapping regional lenders and others farther afield. Ecuador has borrowed as much as it can from the Andean Development Corporation, but it hopes for another $500m from the Inter-American Development Bank. The Latin American Reserve Fund has provided $480m. China has offered $1 billion at 7.25% (three times the rate demanded by the IMF) in return for future oil shipments. This is a “commercial operation” by Petroecuador, the state oil company, rather than a government loan, says María Elsa Viteri, the finance minister. Officials hope for €100m ($145m) from Iran’s Export Development Bank (whose assets in the United States were frozen last year because of its alleged funding of nuclear programmes).
With reserves falling (see chart), Mr Correa tried to stop capital flight. He has forced banks to hold at least 45% of their deposits at home. He wants to double the capital-export tax to 2%, and to increase corporate taxes. He has already tapped the social-security fund. But the government may merely be buying time at the risk of exacerbating its problems. Already the president has had to apologise to the police and army for delays in paying their salaries, and public investment has been cut. Jaime Carrera of the Fiscal Policy Observatory, an NGO in Quito, reckons that the government will find it even harder to finance next year’s deficit, which he forecasts at 2.5% of GDP. The government is betting on a higher oil price and on new hydroelectric plants, which will cut spending on subsidies for imported energy. But neither may have much effect before 2011.
Like Ecuador, Argentina quarrelled with the IMF and defaulted on its bonds. But the government of President Cristina Fernández has more options than Mr Correa’s—and it is showing a little bit more flexibility. The economy minister, Amado Boudou, said at a meeting of finance ministers from the G20 countries on September 5th that Argentina would, in principle, open its books to the IMF. If that happens, it will be the fund’s first assessment of the country’s economy since 2006, when Néstor Kirchner, Ms Fernández’s husband and predecessor, broke with it.
Mr Boudou is not asking for a loan from the fund. The Kirchners are unlikely to nibble humble pie unless Argentina is starving, which it is not—nor is it likely to for the foreseeable future. But the public finances are under pressure. The primary fiscal surplus (ie, before debt payments) has shrunk, probably to little more than 1% of GDP. (That looks good compared with many countries—but Argentina lacks their scope to borrow in international markets.) Ms Fernández is unpopular, making it harder for her to raise taxes or cut subsidies.
But there are signs of recovery. Miguel Kiguel, an economic consultant in Buenos Aires, estimates that the economy is now growing at an annualised rate of about 2%. Confidence is starting to return. The Central Bank has intervened less to prop up the peso and capital flight is easing. That means Mr Boudou’s flirtation with the fund is unlikely to go very far.
To qualify for the fund’s new flexible credit line, Argentina would have to clean up its statistics office, which is run by nominees of Mr Kirchner, not the economy minister. It would also have to reach a deal with the holders of some $20 billion of bonds who held out against a tough debt restructuring in 2005. Barring a renewed deterioration in Argentina’s fortunes, it is likely to be left to Ms Fernández’s successor to restore the country’s financial ties to the outside world.
Copyright © 2009 The Economist Newspaper and The Economist Group. All rights reserved.
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