DBRS Confirms Argentina at B, Stable Trend

DBRS, Inc. has confirmed the long-term foreign currency issuer rating on the Republic of Argentina at B and the long-term local currency issuer rating at B (high). The short-term foreign and local currency issuer ratings were confirmed at R-4. The trend on all ratings remains Stable.

Argentine authorities are making significant progress on their reform agenda and the economy appears to have emerged from recession. The new monetary policy framework has been largely successful in reducing inflation thus far. The government has also expanded its sources of domestic and external financing. Nevertheless, the deficit remains large and fiscal discipline will be essential to restoring macroeconomic stability. Risks on the horizon include continued political and social pressures for higher spending and a potential decline in political support for the Macri government. External developments could also weigh on growth prospects and increase the cost of funding.

Argentina benefits from a diverse economy, an educated population, a highly productive agricultural sector, and abundant natural resources. Real growth has averaged 2.5% over the past twenty years, in spite of the deep, multi-year recession between 1999 and 2002 and the more recent period of stagflation. Argentina exhibits relatively high levels of productivity compared to other emerging economies in the region, with per capita output measured in PPP terms estimated at over $20,000. Preferential access to the regional Mercosur market has also been an important strength, though largely self-imposed restrictions have limited the benefits from trade and Brazil’s current economic situation lends little support to an Argentine recovery. The change in Argentina’s administration nonetheless puts the country in a position to expand its ties within the region and capitalize on its strengths.

Argentina’s 2005 and 2010 exchange offers combined with a sustained period of negative real interest rates and use of non-market sources of financing have left the public sector with relatively low levels ofdebt. This has enabled the new administration to return to international markets and undertake a gradual fiscal adjustment. Although limited financial intermediation in the economy acts as a constraint on investment, the low degree of leverage has insulated the Argentine economy from the potentially adverse impact of global financial shocks.

In spite of these strengths, fiscal performance has deteriorated significantly over the past half-decade and the current administration may face continued political pressure to increase spending. The previous administration held utility tariffs stable amid high inflation, forcing the Macri administration to increase prices significantly to curb rising subsidy costs. Public sector employment increased markedly under the previous administration, though the new administration is undertaking reviews of staffing levels and functions in an effort to roll back past excesses. Social spending has risen as a share of GDP and continued to rise in 2016 due to the regularization of pension arrears. The current administration is planning a multiyear consolidation effort to reduce the deficit which could have adverse effects on the economic recovery.

Although the new government and the central bank (BCRA) have already demonstrated a strong commitment to tighter fiscal and monetary policies, the devaluation of the peso and need to increase administrative prices initially caused inflation to accelerate. The political cost of achieving durably lower inflation may be significant, particularly if unemployment and labor unrest increase. The BCRA is making progress toward its goals and the economy has begun to recover in spite of higher real interest rates. Nonetheless, a failure to durably reduce inflationary pressures could gradually weaken the currency, with negative consequences for public external debt sustainability.

Notwithstanding positive signals from the Macri administration, Argentina suffers from a weak investment climate and the economic policy framework remains unpredictable. Heterodox tax and regulatory policies have generated widespread distortions within the economy. The President has traditionally exercised substantial influence over important domestic institutions, including, at times, the central bank and judiciary. The country has generally stable political institutions, which have allowed for a peaceful transition of power, but trust in government officials and in the integrity of core institutions is low. Ongoing investigations into alleged corruption on the part of current and former officials may increase polarization and limit progress on reforms.

RATING DRIVERS
Sustained progress on fiscal consolidation and disinflation is likely to lead to further rating upgrades. A continuation of reforms to durably strengthen Argentina’s political and economic policy institutions and promote good governance could also have a positive impact on Argentina’s ratings. Conversely, a failure to curb expenditure growth and rein in inflationary pressures could lead to downward pressure on the ratings. External shocks that raise the cost of funding could also have an adverse impact in the absence of appropriate policy adjustments.

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

The principal applicable methodology is Rating Sovereign Governments, which can be found on the DBRS website under Methodologies. The principal applicable rating policies are Commercial Paper and Short-Term Debt, and Short-Term and Long-Term Rating Relationships, which can be found on our website under Rating Scales. These can be found at http://www.dbrs.com/about/methodologies.

The sources of information used for this rating include Ministerio de Hacienda, Ministerio de Finanzas, BCRA, INDEC, Ciudad de Buenos Aires, Provincia de San Luis, IMF, UN, World Bank, BIS, Haver Analytics. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

This rating was not initiated at the request of the rated entity.

The rated entity or its related entities did participate in the rating process. DBRS did not have access to the accounts and other relevant internal documents of the rated entity or its related entities.

For further information on DBRS’ historic default rates published by the European Securities and Markets Administration (“ESMA”) in a central repository see http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.

Generally, the conditions that lead to the assignment of a Negative or Positive Trend are resolved within a twelve month period while reviews are generally resolved within 90 days. DBRS’s trends and ratings are under constant surveillance.

Lead Analyst: Thomas R. Torgerson, Senior Vice President, Global Sovereign Ratings
Rating Committee Chair: Roger Lister, Managing Director, Chief Credit Officer – Global FIG & Sovereign Ratings
Initial Rating Date: 10 September 2007
Last Rating Date: 13 May 2017