DBRS Confirms Argentina Ratings and Waits for Debt Exchange Results

DBRS has today confirmed its ratings on the Republic of Argentina’s foreign and local currency securities at B (low). The trends remain Negative. A return to Stable trends is pending the outcome of a new, recently launched debt exchange. DBRS’s rating on $30 billion of foreign currency bonded debt in arrears, held by international “holdout” investors who did not accept the terms of a January 2005 debt restructuring, remains D.

“A good faith clearing of debt arrears and a return to international capital markets would be very positive for Argentina’s credit profile,” says Fergus McCormick, DBRS’s Argentina analyst. “However, further improvements in the ratings will depend on whether Argentina uses its greater financing flexibility to support a more prudent fiscal policy and better inflation reporting.”

If the new exchange clears Argentina’s debt in arrears and is perceived to be in good faith, DBRS may withdraw its D rating and review the foreign and local currency ratings. A further positive step for Argentina would be regaining access to international debt markets, which would expand financing options. The debt exchange accounts for 24% of the original external debt in default that was outstanding prior to a 2005 exchange. The outstanding principal amount that is eligible for the current exchange is $17.6 billion. If successful, the exchange would bring to an end a prolonged period of default, which has lasted since January 2002.

Aside from the exchange, the following three considerations continue to constrain creditworthiness: (1) Taxation and expenditure policies that lack a long-term economic management framework. (2) Over reliance on high export taxes and a financial transactions tax to fund expenditures, including large subsidies with an unclear economic rationale. These interventions distort longer-term investment incentives in key sectors, and limit the development of the banking system. (3) Inadequate control over inflation and unclear inflation reporting, which call into question the credibility of macroeconomic policies and the accuracy of official statistics. Uncertain inflation statistics also damage the credibility of inflation-linked debt instruments as a future funding vehicle.

Since the onset of the global financial crisis, the government has met its financing needs from a number of domestic sources and from multilateral development banks. In addition to high fiscal revenues, these sources have been sufficient to accommodate substantial increases in primary spending. The brisk pace of primary spending growth reached a record high of 30% of GDP at the end of 2009. As the presidential elections in October 2011 approach, there may be some additional uncertainty with respect to the country’s fiscal stance. If the government uses its greater financing flexibility to support further fiscal expansion, then Argentina’s creditworthiness will continue to be adversely affected and rating upgrades will not be forthcoming.

DBRS notes that Argentina is recovering well from the effects of the global recession. After undergoing a sharp reduction in economic activity, growth is expected to resume this year at a good pace, helped in part by robust fiscal spending, favorable terms of trade, an end to the drought that affected agricultural production, strong manufacturing exports and favorable world commodity prices. Over the medium term, Argentina’s growth prospects appear good, partly because of its relatively well-educated workforce, a positive growth outlook for neighboring Brazil and a highly productive agricultural sector. Given this environment, if a normalization of the debt profile and a restoration of confidence in inflation reporting are accompanied by a more prudent policy stance, Argentina’s foreign and local currency ratings could come under strong upward pressure.

Note:
All figures are in U.S. dollars unless otherwise noted.

The applicable methodology is Rating Sovereign Governments, which can be found on our website under Methodologies.

This is a Corporate (Public Finance) rating.