DBRS Sovereign Methodology Update Has No Impact on Argentina's Ratings

DBRS, Inc. (DBRS) has determined that changes to its sovereign methodology, Rating Sovereign Governments, have no impact on the Republic of Argentina’s Long-Term Local Currency – Issuer Rating (B (high) with Stable Trend), Long-Term Foreign Currency – Issuer Rating (B with Stable Trend), or Short-Term Local and Foreign Currency – Issuer Ratings (R-4 with Stable Trend). Rating drivers also remain unchanged from DBRS’s last rating report on Argentina (see http://www.dbrs.com/issuer/12140).

On October 10th, 2017, DBRS requested comments on an update to its sovereign methodology. Following the conclusion of that comment period, the final methodology was published on November 27. As noted in the October 10th press release, the updated methodology revises the approach used to determine whether a differential between foreign and local currency issuer ratings is warranted. As a result of the methodology change, DBRS expected that there would be only a limited number of cases among its existing sovereign ratings where local and foreign currency issuer ratings would differ. Consequently, the October 10th press release indicated that these refinements might have an impact on the ratings of Argentina, Brazil, Colombia, Mexico, and Turkey, most likely affecting the local currency issuer rating.

Applying the revised methodology, the one notch differential between Argentina’s Foreign and Local Currency – Issuer Ratings remains appropriate. In the event of a deterioration in credit fundamentals or in the external environment, DBRS considers it likely that Argentina would face material constraints on its access to foreign exchange. This reflects the extent of foreign currency borrowing within the economy and the likely use of foreign exchange reserves to support the peso. In addition, evidence suggests that Argentina would be reasonably likely to differentiate between its local currency and foreign currency debts. Although domestic financial repression (characterized by severely negative real interest rates) has eased significantly under the current administration and new central bank leadership, the value of most local currency debt has been gradually eroded by past (underreported) inflation and is held predominantly by public sector entities and other domestic banks. Accordingly, DBRS considers the risk of a default on Argentina’s foreign currency debt to be somewhat higher than the risk of a default on local currency debt.

A change in the relative default risk between foreign and local currency debt could lead to a change in the differential between the Foreign and Local Currency – Issuer Ratings. Factors underlying such a change could include, for example, a stronger external position combined with sustained disinflation, reducing the risk of material constraints on Argentina’s access to foreign exchange.

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, Central Bank of Argentina (BCRA), INDEC, IMF, 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, Co-Head of Sovereign Ratings, Global Sovereign Ratings
Rating Committee Chair: Roger Lister, Managing Director, Chief Credit Officer, Global Financial Institutions Group and Sovereign Ratings
Initial Rating Date: 10 September 2007
Last Rating Date: 13 May 2017

Information regarding DBRS ratings, including definitions, policies and methodologies, is available on www.dbrs.com.