DBRS, Inc. (DBRS Morningstar) upgraded the Republic of Argentina’s Long-Term Foreign Currency – Issuer Rating to CCC from Selective Default (SD) and Short-Term Foreign Currency – Issuer Rating to R-5 from SD. DBRS Morningstar also upgraded the Republic of Argentina’s Long-term Local Currency – Issuer Ratings to CCC (high) from CC and confirmed the Short-Term Local Currency – Issuer Rating at R-5. The trend on all Issuer Ratings is Stable. In addition, DBRS Morningstar has discontinued and withdrawn ratings on all of the Republic’s bonds that were eligible for restructuring.
KEY RATING CONSIDERATIONS
The upgrade follows the closing of two debt restructuring agreements between the Argentine government and private creditors. The first restructuring involved $65 billion in foreign-law bonds. The deal achieved the requisite participation necessary to trigger the collective action clauses and finalize the restructuring on 99% on the aggregate principal outstanding of eligible bonds. In coordination with the deal on foreign-law bonds, the Argentine government concluded a deal to restructure $41 billion in foreign currency local-law bonds in a manner that broadly preserved equal treatment across creditors. Ninety-nine percent of outstanding aggregate principal of eligible securities under Argentine law participated in the exchange. Give the high level of participation, DBRS Morningstar is withdrawing its ratings on all securities that were eligible as part of the exchange. The issuer ratings will apply to all new securities.
Collective action clauses were not triggered in the USD Par 2038 Bonds II and III and the Euro Par 2038 Bonds II and III. Although DBRS Morningstar has withdrawn ratings on these and other securities that were eligible for restructuring, a failure to pay or settle the remaining untendered bonds could make it more difficult to restore market access and finance the fiscal deficit.
The debt restructurings conclude a prolonged default and provide the government with substantial principal and interest payment relief over the next four years. This improvement in the near-term financing outlook is reflected in a one-category uplift in the “Debt and Liquidity” building block assessment relative to our last review on July 13, 2020.
Notwithstanding the successful conclusion of the debt restructuring process, the CCC / CCC (high) ratings reflect the ongoing and significant economic and policy-related challenges facing Argentina. The economy is being badly battered by the coronavirus shock. The IMF projects GDP growth of -9.9% for 2020, making Argentina one of the hardest hit economies in the region. While a rebound in activity appears to be underway, the pace of recovery is highly uncertain due to the spread of the virus and the potential for further weakness in global demand.
Argentina is also seeking a new agreement with the International Monetary Fund (IMF) to replace the canceled 2018 Stand-by Agreement. Obligations to the IMF amount to $44 billion, with major repayments coming due in 2022 and 2023. Striking a deal could allow Argentina to rollover its maturing debt with the IMF; however, Argentina would likely need to commit to a macroeconomic program that aims to lower inflation through tighter fiscal and monetary policies. Without multilateral support, we consider the probability of a successful macroeconomic adjustment to be low.
The Fernández administration has not yet outlined a clear plan to address the country’s macroeconomic imbalances and poor medium-term growth prospects. Argentina has not grown over the last eight years – a direct result of fiscal and monetary policy weaknesses that have deterred investment. Fiscal consolidation remains a major political challenge, exacerbated by the ongoing pandemic. Inflation is high and risks are tilted to the upside, as the central bank is the primary source of financing for the government’s widening fiscal deficit. At the same time, reserve levels are low and declining. The imposition of capital controls could provide some short-term relief for the currency but will likely end up damaging prospects for a strong and durable recovery over time. Moreover, the government debt-to-GDP ratio will still be high after the debt restructuring, thereby leaving public finances vulnerable to market shocks. With limited reserves and a large share of public debt denominated in foreign currency, the sustainability of public debt will depend on the implementation of a credible macroeconomic plan that restores market confidence.
DBRS Morningstar rates the Long-Term Foreign Currency – Issuer Rating one notch lower than the Long-Term Local Currency – Issuer Rating to reflect additional risks that stem from Argentina’s limited access to foreign exchange and the high share of government debt denominated in foreign currency.
The ratings could be upgraded if the government implements a credible macroeconomic program that durably lowers inflation and puts fiscal accounts on a sustainable path. Reforms that increase investment and productivity growth would also be credit positive.
The ratings could be downgraded if the government fails to reach a restructuring agreement with the IMF and faces difficulties financing fiscal deficits.
Human Capital & Human Rights (S), Bribery, Corruption & Political Risks (G), and Governance & Transparency (G) were among key drivers behind this rating action. Similar to many emerging market peers, per capita GDP is relatively low, at US$9.7k (US$20.1k on a PPP basis). According to World Bank Governance Indicators, Argentina ranks in the 54th percentile for Control of Corruption, the 67th percentile for Voice & Accountability, the 46th percentile for Rule of Law, and the 55th percentile for Government Effectiveness. These considerations have been taken into account within the following Building Blocks: Fiscal Management & Policy, Economic Structure & Performance, and Political Environment.
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.
For more information on the Rating Committee decision, please see the Scorecard Indicators and Building Block Assessments: https://www.dbrsmorningstar.com/research/366571.
All figures are in USD unless otherwise noted. Public finance statistics reported on a general government basis unless specified.
The principal methodology is the Global Methodology for Rating Sovereign Governments,
https://www.dbrsmorningstar.com/research/364527/global-methodology-for-rating-sovereign-governments July 27, 2020.
For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.
The primary sources of information used for this rating include Ministry of Economy, INDEC, BCRA, IMF, World Bank, UN, Ambito, EconViews, and Haver Analytics. DBRS Morningstar 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 not participate in the rating process for this rating action. DBRS Morningstar did not have access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.
This is an unsolicited credit rating.
For more information on this credit or on this industry, visit www.dbrsmorningstar.com.
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