DBRS Changes Argentina’s Trend to Positive on Debt Progress and Growth Prospects

DBRS has today changed the trend on the B (low) long-term foreign and local currency securities ratings of the Republic of Argentina to Positive from Negative. Progress in clearing debt arrears, growth prospects that appear good and the economic and financial resilience shown during the international financial crisis support the Positive trends. “An upgrade in the ratings is dependent on Argentina’s continuing improvements in its medium-term growth prospects,” says Pedro Auger, DBRS’s Argentina analyst.

Argentina held a debt exchange in May 2010 that improved its creditworthiness. The exchange on $18.3 billion of principal and unpaid interest of foreign currency debt in arrears, held by international “holdout” investors who did not accept the terms of a January 2005 exchange, reached an acceptance rate of 67%. Including the results from the January 2005 exchange, this brings the overall acceptance rate to 91%. Argentina’s creditworthiness would further improve with regained access to international debt markets, which would expand the government’s financing options and bring to an end a prolonged period of reliance on domestic sources.

Argentina is recovering well from the effects of the global recession. After undergoing a sharp reduction in economic activity, growth is resuming at a fast pace. It is expected to be 7.5% this year and 4% in 2011, helped in part by accommodative fiscal and monetary policies, an end to a drought, strong manufacturing exports, high consumer demand and favorable world commodity prices. Over the medium term, Argentina’s growth prospects also appear good, partly because of a positive long-term growth outlook for Brazil and a highly productive agricultural sector.

However, the following three considerations continue to limit creditworthiness: (1) Taxation and expenditure policies lack a long-term economic management framework. Expansionary fiscal and monetary policies have the potential to lead to excessive demand pressures, particularly if investments in key sectors such as energy lag, impairing potential output. (2) The government is reliant on high export taxes and a financial transactions tax to finance expenditures, including large subsidies with an unclear economic rationale. These interventions distort investment incentives in key sectors and constrain the development of an already limited banking system. (3) Inflation reporting continues to be inadequate, calling into question the accuracy of official statistics and the overall credibility of macroeconomic policies.

Since the onset of the global financial crisis, the government has largely met its financing needs from a number of domestic sources. Combined with high export and other tax revenues, the use of Central Bank financing has improved the government’s financing flexibility. However, these additional sources of financing have at the same time accommodated substantial increases in primary spending through the first half of 2010. DBRS believes that with presidential elections scheduled for October 2011, this trend is likely to persist.

A full normalization of the debt profile, continuing improvements in its growth prospects, a more prudent fiscal policy stance with a long-term economic management vision and credible inflation reporting and control could create strong upward pressure on Argentina’s ratings.

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.