DBRS Confirms Argentina at ‘B’, Trends Remain Under Review with Negative Implications

DBRS Inc. (DBRS) has confirmed the Republic of Argentina’s long-term foreign and local currency issuer ratings at ‘B’. In addition, the short-term foreign and local currency issuer ratings have been confirmed at R-4. All long-term and short-term issuer ratings remain Under Review with Negative Implications (URN).

The URN reflects the near-term risk that the U.S. Court of Appeals will affirm a New York District Court ruling that seeks to compel Argentina to repay in full its past due debts to holdout creditor NML Capital Limited (NML) the next time Argentina makes a payment on its restructured bonds. A hearing is scheduled for February 27, 2013 but the exact timing of a final ruling is uncertain. The U.S. Supreme Court could also decide to hear the case before the final ruling takes effect. However, if the ruling (as clarified by the District Court) is affirmed by the Court of Appeals, DBRS sees a very high risk that Argentina will selectively default on its restructured bonds rather than be forced to pay NML. In the event of an adverse court ruling, DBRS would consider any actions or statements by Argentina that appear to jeopardize the timely servicing of its performing debt to be sufficient reason for a downgrade of the foreign currency rating, likely to CCC or lower.

In addition to the risks associated with New York litigation, DBRS believes that significant strains are emerging from Argentina’s inconsistent mix of fiscal, monetary, trade, and exchange rate policies. Particularly since late 2011, the Argentine government’s unpredictable policy actions have had a negative impact on economic activity and have weakened consumer and investor confidence. Fiscal performance is deteriorating, though a lack of available external financing may tighten constraints on expenditure growth going forward. Alternatively, greater reliance on domestic financing sources to cover a growing fiscal deficit could exacerbate inflationary pressures and increase the risks to macroeconomic stability. High inflation already appears to be entrenched and Argentina has been formally censured by the IMF for inaccuracies in its price and GDP statistics.

In spite of these growing challenges, Argentina’s relatively modest levels of public debt, adequate reserves, and robust terms of trade provide the government with sufficient flexibility to meet its obligations over the next several years. The government is meeting its financing needs through a number of domestic sources, including the Social Security Institute (ANSES) and the Central Bank.

The central government holds significant sway over the economy, including through wages, subsidies, prices, import licensing, and foreign exchange controls. It remains unclear how the government will respond to growing economic pressures. Controls may continue to expand, even while the implementation of existing controls may be adjusted to reduce their negative impact on the economy. In this environment, a commodity price shock or a sustained deterioration in the growth outlook could result in downward pressure on Argentina’s credit ratings. Conversely, continued high agricultural commodity prices, a stronger recovery in Brazil, steps to improve relations with creditors, or a shift in policies toward a more open and market-driven economy could substantially improve Argentina’s outlook.

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 Finanzas Públicas, BCRA, INDEC, the International Monetary Fund, the World Bank, and various private sector research analysts. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

Lead Analyst: Thomas Torgerson
Rating Committee Chair: Alan G. Reid
Initial Rating Date: 6 September 2007
Most Recent Rating Update: 17 December 2012

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