DBRS Upgrades Argentina to “B” on Positive Growth Outlook; Trend Revised to Stable

DBRS Inc. (DBRS) has today upgraded its ratings on the Republic of Argentina’s long-term foreign and local currency securities to “B” from B (low). The trends have been revised to Stable. Underpinning the upgrade is the progress made in clearing debt arrears and Argentina’s positive growth outlook, with what appears to be a strong recovery in GDP growth in 2010 and continued high growth expected in 2011. Accommodative fiscal and monetary policies are likely to continue, with presidential and congressional elections scheduled for October 2011. Strong growth in neighboring Brazil, Argentina’s main trade partner, and highly favourable world agricultural commodity prices have contributed to the strong recovery. Nonetheless, there are risks of overheating as the official estimate of monthly growth for the first six months of 2011 was 8.8%, comparable with 2010’s 9.2% GDP growth rate. Additionally, inflationary expectations remain high at 25%. Furthermore, increasing downside risks in advanced economies have the potential to cause a significant adverse external shock to the Argentine economy.

Despite a favourable growth performance, the following three considerations limit Argentina’s creditworthiness: (1) taxation and expenditure policies lack a long-term economic management framework. As a result, the country is reliant on high export taxes, a financial transactions tax, and transfers of Central Bank (BCRA) profits and reserves for additional resources. If commodity prices were to fall sharply, the ensuing adjustment could be difficult as access to external market financing is likely to remain limited and expensive. (2) There are large subsidies in place with an unclear economic rationale and a high financial transaction tax. These interventions may distort investment incentives in key sectors and constrain the already limited development of the financial sector, reducing potential GDP growth. (3) Doubts over inflation reporting persist, calling into question the accuracy of official statistics and the credibility of macroeconomic policies.

The government is meeting its financing needs through a number of domestic sources, including the Central Bank. In addition to high fiscal revenues, these sources have been sufficient to accommodate substantial increases in primary spending. Adjusting revenues for the transfer of profits from the Central Bank, revenues from the financial assets of Argentina’s national social security program (ANSES), and the 2010 primary surplus of 1.74% of GDP, falls to a small primary deficit of 0.28% of GDP. The brisk increase in primary spending has continued in 2011, with nominal spending during the first seven months of 2011 exceeding the same period last year by 33.6%. Nevertheless, revenue growth has risen by 28.9% over the same period.

Over the medium term, Argentina’s growth prospects appear good, partly because of its relatively well-educated workforce, a positive growth outlook for Brazil, which generates demand for Argentine transportation equipment, and high agricultural commodity prices. If favourable terms of trade persist, this would bode well for export revenue growth while limiting external financing requirements. Nevertheless, a reversal of the positive terms of trade position could lead to an abrupt and potentially difficult adjustment as access to external financing would likely be limited. A scenario with a large adverse external shock has become more probable as the downside risks to growth in advanced economies have increased. Given this environment, should there be a restoration of confidence in inflation reporting and a more prudent policy stance, with renewed access to market financing, Argentina’s foreign and local currency ratings could come under strong upward pressure.

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

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

The sources of information used for this rating include the Ministerio de Economía y Producción, BCRA, INDEC and the International Monetary Fund. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

Lead Analyst: Pedro Auger
Rating Committee Chair: Alan G. Reid
Initial Rating Date: 6 September 2007
Most Recent Rating Update: 19 October 2010

For additional information on this rating please refer to the linking document under Related Research.