Argentina’s government plans to trim its dependence on central bank reserves to pay debt next year after tapping savings to slow a depreciation in the peso, according to its draft 2012 budget.
The government aims to use $5.7 billion in reserves to make debt payments in 2012, down from $7.5 billion this year, according to a copy of the budget posted on Congress’s website. Central bank reserves have tumbled 5.7 percent this year to $49.2 billion while countries from Brazil to Mexico have boosted savings.
“We foresee the continuity of the fund to reduce debt as a way to ensure the government’s capacity to pay maturating debt even in adverse scenarios, without the need of alternatives that would cut the freedom of national economic policies,” the draft bill said.
President Cristina Fernandez de Kirchner has said it’s cheaper for South America’s second-biggest economy to pay debt with reserves than return to international debt markets for the first time in a decade. Argentine dollar bonds yield 10.9 percent, compared with yields of 4.8 percent and 4.5 percent for Brazilian and Mexican dollar bonds, respectively, according to JPMorgan Chase & Co.
Argentina, which hasn’t sold debt abroad since 2001, also plans to buy back 14.3 billion pesos ($3.4 billion) of debt in 2012 using government funds, according to the draft bill.
Global Environment
The use of reserves to pay debt may undermine the central bank’s capacity to manage the exchange rate if turbulence in global markets reduces dollar inflows to the country, said Daniel Volberg, an economist at Morgan Stanley in New York.
“If there’s enough income, it won’t be dangerous but it seems that the global environment won’t be very good,” Volberg said. “That’s why the exchange market is passing through a difficult time and also inflation is eroding the real exchange rate.”
The International Monetary Fund today cut its forecast for global economic growth and predicted “severe” repercussions if Europe fails to contains a widening debt crisis or of U.S. policy makers reach an impasse over a fiscal plan. Global growth will be 4 percent this year and next, the IMF said, down from forecasts of 4.3 percent in 2011 and 4.5 percent in 2012.
Capital Flight
Argentine central bank reserves fell from a record $52.6 billion in January as the bank stepped up sales of dollars and capital flight accelerated to as much as $3 billion per month, according to Banco de la Ciudad de Buenos Aires. Individuals and companies pulled $9.8 billion from the economy in the first six months of the year compared with $11.4 billion in all of 2010, central bank data show.
The peso has fallen 5.4 percent so far this year, the third-biggest drop after Brazil’s real and the Mexican peso. The currency rose 0.2 percent to 4.1973 per dollar at 11:07 a.m. New York time. It will fall to an average 4.4 per dollar in 2012, the budget proposal forecast.
Consumer prices will rise 9.7 percent by year end, half of what private economists estimate, and 9.4 percent in 2012, the bill says. The economy will grow 5.1 percent in 2012 while the trade surplus narrows to $8.6 billion from $9 billion this year.
Next year’s primary surplus, which excludes interest payments, will be 2.5 percent of gross domestic product while the overall surplus will be 0.2 percent of GDP, the bill said.
To contact the reporter on this story: Eliana Raszewski in Buenos Aires at eraszewski@bloomberg.net.
To contact the editor responsible for this story: Joshua Goodman at jgoodman19@bloomberg.net.
Source: bloomberg.com