Analysis of Argentina Balance of Payments

The economic situation of Argentina was interesting between 1998 and 2007. However, it can be assumed that the worst year of the Argentinean economy was 2002. Before 1998, some factors such as a huge debt reaching 55% of the GDP, a currency pegged to the US $, the â€Å"Tequila† crisis in 1995, the devaluation of Mexican and Brazilian currencies, were responsible of the crisis Firstly we compared trade and GDP, to obtain the trade openness ratio. It increased strongly in 2002, due to a high increase in trade (133% 2001 to 2002) compared to the GDP that declined 11bp. The relatively high level of trade openness registered in 2002: 10. 08%, is based on the steep drop in imports 56%, related to the peso devaluation. As the peso stabilized and GDP undertook an ascending trend trade openness bounced back to low level again. Secondly, the balance of payments of Argentina can be analyzed in order to compare the exports to the GDP. The trade index of the country is under 20% until 2005, which is lower than the Global Trade Index at this time (30%). Nevertheless, it increased to reach a better level in 2007 (25%). For the valuation of the liquidity level, we compared the reserves to the imports, in volume and number of days. Since 1998, it is decreasing, sharply in 2001 and 2002, then recovering a better level between 20% and 30%. Therefore we can not consider that 4 months of reserves to be sufficient for maintaining a good level of liquidity, it’s a bit lower than the 6 months objective. In 2006, reserves influenced by the crisis in Mexico, dropped to 10%. To assess the debt service, we assumed a 5% interest rate, applied to interest payments and exceptional financing. Debt declined in terms of export multiplies especially due to the rise in exports and not to reimbursements. The highly indebted Argentina actually resorted to IMF financing and additional loans in 2001, when confronted with $3bn capital flight. Fluctuating between 900% in 1998 and 380% in 2007, the debt service ratio, far away from the optimal level of 33% , clearly emphasizes the state’s debt burden. The interest ratio is high, but still decreasing jointly with the debt, reaching a sane level below 0,25 in 2006 and 2007. Still this figure is actually deceiving, the interest ratio plunging due to ascending exports and not decreasing debt service. All liquidity indicators point out to a disappointing position for Argentina, still the reimbursements made in the recent years and the IMF account clearing entice improvements at this level. We can notice a huge change, in the current account since 2002. The negative current account which lasted for several years, had been replaced by a positive one in 2002. This change was attributable to the big decision of switching from a pegged currency (to the US$), to a floating currency. Consequently, the Argentinean peso was devalued. On a current account view, this means less imports, and an increase of the exports. Actually the volume of the exports didn’t take off the day when the decision of devaluating the Argentinean peso, but 2 years after. This phenomenon could be explained by the J curve theory. 2001 was a turning point in the history of Argentina. Forecasting the devaluation of the peso, investors revised their position towards the Argentinean market, foreign direct investment dropping by 80% from 2000 and 2001. This way FDI decreased drastically its role as a financing source (before 2001, Argentina was financing between 5 and 10% of its debt by the Foreign Direct Investment). Faced with such a drastic cut in foreign direct investment and portfolio investment, Argentina issued additional debt worth $ 10 bn. Over the last ten years Argentina experienced serious turbulence in its financial position that has negatively impacted its state rating and fuelled even more financial distress. Still, in recent years, rescue came and it was in the form of economic growth. This restored investors’ confidence, translating into higher absolute FDI inflows, and allowed for debt restructuring. With an outstanding debt of $6 bn towards the Venezuelean government, obligations of $ 500 m in the international debt market and a state rating of B (Moody’s), any investment in the Argentinean market will carry high risk that might not necessarily be offset by a high return. For the time being, we recommend not investing in Argentina.