Executive summary
The year 1998 ended with uncertain expectations regarding a possible global economic recovery and/or the terms of trade in raw materials. In addition to the turbulence caused by the crises in East Asian countries and Russia’s debt default, the worsening recession in Brazil was added in a context of exchange rate uncertainty. In Argentina, this context led to a sharp drop in the level of economic activity induced by a revision of the investment, consumption and production plans of economic agents.
In the last quarter of 1998, Argentina returned to the international capital markets. Although the average spread for new debt grew compared to 1997, sovereign risk fell significantly compared to the previous quarter. The lower price of commodities, together with high interest rates, an adverse international context and the economic slowdown, had an impact on the growth expectations of companies, which was reflected in a fall in the Merval index.
Despite the adverse international situation, deposits increased slightly during the last quarter. Apart from isolated problems in some local entities, credit did not stop, although it slowed its growth rate. The lower cost of money for financial institutions was not accompanied by a fall in interest rates on loans, leading to an increase in the spread between active and passive interest rates. Despite the adverse real situation and the slowdown in the growth of total monetary resources (M3*), the economy continued its monetization process and international reserves ended with a slight increase at the end of the quarter.
With respect to the banking system, the increase in bank capitalization and the additional liquidity generated by the relaxation of regulations on liquidity requirements in December allowed the flow of credit into the economy not to be interrupted. The profitability of private banks, although lower than in the previous quarter, was well above that recorded during the first half of 1998. Finally, portfolio quality indicators experienced a slight but unequivocal deterioration, as a result of both a stagnation in financing and an increase in the non-performing portfolio.
