New York, March 06, 2017 — Moody’s Investors Service has today changed the outlook on the Government of Argentina’s rating to positive from stable and affirmed the issuer rating at B3, senior unsecured ratings at B3 and Ca, senior unsecured shelf and MTN program at (P)B3 and (P)Ca, short term ratings at NP and global MTN program at (P)NP.
The key drivers of today’s rating action are:
(1) Argentina’s improved policy stance which supports a return to economic growth in 2017;
(2) Moody’s expectation that faster economic growth will allow Argentina’s government to begin reducing its high fiscal deficit in 2018.
Moody’s made no changes to Argentina’s country ceilings. Argentina’s foreign currency bond ceiling remains unchanged at B2 and the foreign currency deposit ceiling at Caa1. The long term local currency bond and deposit ceilings stay at Ba3. The short-term foreign-currency bank deposit ceiling, the short-term foreign-currency bond ceiling, and the short term local currency bond and deposit ceilings all remain unchanged at NP.
RATIONALE FOR CHANGING ARGENTINA’S RATING OUTLOOK TO POSITIVE FROM STABLE
Over the past fourteen months, a number of policies have been introduced which have laid the ground for future improvements to Argentina’s economic and fiscal strength, and for a reduction in its exposure to shocks. The positive outlook reflects the rising likelihood that those policies, and the improvements in Argentina’s institutional strength which they illustrate, will be sustained and bring about lasting improvements in Argentina’s credit profile.
FIRST DRIVER: IMPROVED POLICY STANCE SUPPORTS GROWTH IN THE NEXT TWO YEARS
The first driver supporting the positive outlook is Moody’s forecast that Argentina’s economy will return to growth in 2017 and 2018, supported by the government’s improved policy mix which has sought to reduce inflation and increase investor confidence. After reporting virtually no growth since 2011, we expect Argentina’s economy to grow 3% on average this year and next, driven by greater consumption as inflation falls and increased public and private investment.
In its first year in power Argentina’s Macri administration has successfully implemented policies meant to address some, but not all, of the major macroeconomic imbalances and microeconomic distortions it inherited. This represents a major policy break with the prior government, and the positive outlook reflects Moody’s view that the credit positive change in the overall policy stance will remain in effect at least during the current administration’s mandate which ends in 2019.
In the six months to January 2017 inflation fell to less than 17% on an annualized basis, compared to 40% for 2016 as a whole. Moody’s expects that lower inflation will boost real wages and consumption, and the disinflationary process supports Argentina’s central bank’s target of single digit inflation by 2019.
The Macri administration has also reversed the prior government’s practice of misreporting basic macroeconomic data and new leadership in the official statistics institute is now producing credible information, increasing economic transparency. The improvement in data collection led the IMF Board of Directors last November to lift a censure on Argentina’s government in place since 2013.
More generally, the government has sought to break with the confrontational approach of the prior administration and has actively courted international investments. International capital inflows have boosted the central bank’s official international reserves, which today stand at over $51 billion compared to less than $25 billion in December 2015.
SECOND DRIVER: FASTER GROWTH WILL SUPPORT FISCAL CONSOLIDATION IN 2018
The second driver supporting the positive outlook is Moody’s expectation that in 2018, with the economy growing once again, and the October 2017 midterm elections over, the government will reduce the deficit by at least 1% of GDP vs 2017’s results, and that a similar fiscal consolidation will continue in 2019.
After the 3.9% of GDP deficit in 2015, the fiscal balance finished at close to 4.6% of GDP last year, and we expect a similar result in 2017. The main reason for the continued high deficits is the government’s decision to maintain the historically high spending levels it inherited from the previous administration.
But with the economy recovering, the government recently announced fiscal targets until 2019, aiming for the deficit to fall by roughly 1% of GDP per year, assisted by lower subsidy spending. The overall debt level of 53% of GDP is comparable to peers and most of the government debt is to either to multilaterals or is intra-public sector debt (mainly to the social security administration and to the central bank). Debt owed to the private sector remains below 20% of GDP and foreign currency debt owed to the private sector below 15% of GDP. Increased reliance on international capital markets will increase those numbers in the next few years, but Argentina’s rollover risk will still remain lower than its headline debt numbers suggests.
RATIONALE FOR AFFIRMING ARGENTINA’s RATING AT B3
Moody’s affirmation of Argentina’s B3 government bond rating is supported by the country’s high economic development relative to rating peers, moderate roll-over risk as a high proportion of government debt is owed to other public entities and multilateral banks, and a shift toward more sustainable economic policies by the Macri administration. Key credit challenges include a high fiscal deficit, high levels of inflation, and improving the country’s institutional framework.
Argentina’s economic strength is bolstered by its $20,499 GDP per capita (2015, PPP basis), significantly higher than the $6,958 median for B-rated sovereigns. Argentina’s $575 billion (2017 estimate) economy is many times larger than the $22 billion peer median. A weak institutional strength is a key ratings constraint for Argentina, and reflects years of inconsistent macroeconomic policymaking. Argentina’s low fiscal strength reflects a rising debt burden and a high share of foreign currency debt. The rating agency estimates that foreign currency debt will be over 70% of all government debt this year, a ratio higher than that of most other B-rated sovereigns, and a feature that exposes the government’s balance sheet to exchange rate risk.
WHAT COULD CHANGE THE RATING UP/DOWN
A positive rating action is dependent on a continuation and deepening of the credit positive policy stance that the Macri administration began implementing in December 2015. Among other things, that should support continued and sustainable improvements in Argentina’s fundamentals, including progress in reducing currently high fiscal deficits and inflation.
A negative rating action could result from sustained high fiscal deficits that significantly increase the country’s debt burden, or an increase in external vulnerabilities including a sharp drop in available official international reserves.
GDP per capita (PPP basis, US$): 20,499 (2015 Actual) (also known as Per Capita Income)
Real GDP growth (% change): -2.2% (2016 Actual) (also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 40% (2016 Actual)
Gen. Gov. Financial Balance/GDP: -4.6% (2016 Actual) (also known as Fiscal Balance)
Current Account Balance/GDP: -2.7% (2015 Actual) (also known as External Balance)
External debt/GDP: 27% (2015 Actual)
Level of economic development: Low level of economic resilience
Default history: At least one default event (on bonds and/or loans) has been recorded since 1983.
On 01 March 2017, a rating committee was called to discuss the rating of the Argentina, Government of. The main points raised during…