New York, November 29, 2017 -- Moody's Investors Service ("Moody's") has today upgraded the Government
of Argentina's local and foreign currency issuer and senior unsecured
ratings to B2 from B3. The senior unsecured shelves were upgraded
to (P)B2 from (P)B3. The outlook on the ratings is stable.
At the same time Argentina's short-term rating was affirmed at
Not Prime (NP). The senior unsecured ratings for unrestructured
debt were affirmed at Ca and the unrestructured senior unsecured shelf
affirmed at (P)Ca .
The key drivers of the upgrade of the rating to B2 are:
1) A record of macro-economic reforms that are beginning to address
long existing distortions in Argentina's economy.
(2) The likelihood that reforms will continue and in turn sustain the
recent return to positive economic growth.
The stable outlook on Argentina's B2 ratings balances Argentina's
credit strengths of its large, diverse economy and moderate income
levels against the credit challenges posed by still high fiscal deficits
and a reliance on external financing, which increases its vulnerability
to external event risk.
Moody's has also raised Argentina's foreign currency bond ceiling to B1
from B2 and the foreign currency deposit ceiling to B3 from Caa1.
The long term local currency bond and deposit ceilings were raised to
Ba2 from 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.
RATINGS RATIONALE
RATIONALE FOR THE UPGRADE TO B2
CREDIT POSITIVE POLICY REFORMS
Since December 2015 the Macri administration has implemented several policies
addressing economic distortions that had constrained Argentina's
credit profile. The reforms include a free-floating exchange
rate, an open capital account, an independent central bank
with multi-year inflation targeting, and more credible public
statistics. The combination of these reforms have bolstered economic
growth prospects. The government further aims to reduce the fiscal
deficit in 2018 and 2019.
Moody's expectation is that reforms will likely continue as midterm
elections have strengthened the government's political position.
President Macri's Cambiemos coalition won almost 42% of all
votes for the lower House of Congress, the largest single party
share of the national vote. The Cambiemos coalition still lacks
a majority in Congress, but it has expanded its presence in both
congressional chambers. The increased number of Cambiemos legislators
in Congress provides the Macri administration with stronger political
support which we expect will facilitate the approval of additional credit-positive
policy reforms.The Macri administration has announced tax,
pension and labor reforms following its electoral win in October's
legislative midterms.
The reforms announced include reducing certain corporate taxes to improve
competitiveness; labor reform aimed at lowering the cost of hiring
in Argentina and increasing the share of formal employment; and a
change in how pension outlays are calculated, which will help reduce
pension payments and in turn reduce the fiscal deficit. The government
is also continuing to reduce energy subsidies to better reflect real production
and distribution costs.
The reforms aim to bolster the economic recovery by promoting increased
private investment while continuing the process of macroeconomic stabilization.
The authorities' also aim to gradually reduce the fiscal deficit
starting in 2018. The government has formally targeted the primary
deficit, which will reach 4.2% of GDP this year,
to fall by 1% of GDP annually in 2018 and 2019. However,
higher interest payments mean that the financial deficit will make only
moderate progress on this front, and fiscal deficits in the order
of 5% of GDP will remain a key credit constraint. Fiscal
consolidation will require a period of sustained growth, and a reduction
in government expenditures, such as on energy-related subsidies.
IMPROVED MACROECONOMIC PROSPECTS
Economic growth appears to be more sustainable than prior consumption-led
booms, as reforms continue to be implemented. After years
of stop-and-go economic growth Argentina is poised to grow
two years in a row in 2017-18, the first time since 2011.
We expect the economy will grow 3% this year and 3.5%
in 2018, after contracting 2.3% in 2016. The
improvement is the result of a combination of factors, including
increased business and consumer confidence and higher investment rates.
Gross fixed capital formation rose 7.7% in the second quarter
and we expect investment to continue to rise even as it remains lower
than most other Latin American countries. We estimate Argentina's
investment-to-GDP will reach 17.2% in 2017,
an increase from the 16.4% of GDP in 2016, but lower
than the 21% median of Latin American sovereigns. Investment
should continue to rise next year and end closer to 18% of GDP.
Faster economic growth has started to positively affect socio-economic
indicators. Poverty has fallen. Employment data show increased
job creation in the private sector that is starting to make up for the
job losses suffered last year. Wage increases are boosting private
consumption. Overall, we expect these trends to continue
and deepen in 2018 and 2019, leading to increased political support
for the governing administration.
Stronger and balanced growth, if sustained, and accompanied
by an increase in external competitiveness could over time strengthen
Argentina's fiscal and external positions, by raising government
revenues, exports and foreign investment. Inflation still
remains high, and will end close to 23% this year.
But the central bank's anti-inflation stance is gradually
reducing core inflation and we expect consumer prices to fall to around
15% in 2018 and to continue falling after that.
RATIONALE FOR THE STABLE OUTLOOK
The stable outlook balances recent improvements to the economy and the
country's policymaking with still high fiscal deficits that are
mostly funded in foreign currency and growing external imbalances.
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. Particularly important will be continued
and sustainable reduction in the fiscal deficits and inflation.
A negative rating action could result if fiscal deficits do not reverse
their upward trend, or an increase in external vulnerabilities including
a sharp drop in available official international reserves.
GDP per capita (PPP basis, US$): 20,053 (2016
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: -5.9%
(2016 Actual) (also known as Fiscal Balance)
Current Account Balance/GDP: -2.7% (2016 Actual)
(also known as External Balance)
External debt/GDP: 33.2% (2016 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 27 November 2017, a rating committee was called to discuss the
rating of the Argentina, Government of. The main points raised
during the discussion were: The issuer's economic fundamentals,
including its economic strength, have materially increased.
The issuer's institutional strength/framework, have materially increased.
The issuer's governance and/or management, have materially increased.
The issuer has become less susceptible to event risks.
The principal methodology used in these ratings was Sovereign Bond Ratings
published in December 2016. Please see the Rating Methodologies
page on www.moodys.com for a copy of this methodology.
The weighting of all rating factors is described in the methodology used
in this credit rating action, if applicable.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt,
this announcement provides certain regulatory disclosures in relation
to each rating of a subsequently issued bond or note of the same series
or category/class of debt or pursuant to a program for which the ratings
are derived exclusively from existing ratings in accordance with Moody's
rating practices. For ratings issued on a support provider,
this announcement provides certain regulatory disclosures in relation
to the credit rating action on the support provider and in relation to
each particular credit rating action for securities that derive their
credit ratings from the support provider's credit rating. For provisional
ratings, this announcement provides certain regulatory disclosures
in relation to the provisional rating assigned, and in relation
to a definitive rating that may be assigned subsequent to the final issuance
of the debt, in each case where the transaction structure and terms
have not changed prior to the assignment of the definitive rating in a
manner that would have affected the rating. For further information
please see the ratings tab on the issuer/entity page for the respective
issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit
support from the primary entity(ies) of this credit rating action,
and whose ratings may change as a result of this credit rating action,
the associated regulatory disclosures will be those of the guarantor entity.
Exceptions to this approach exist for the following disclosures,
if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
Gabriel Torres
VP - Senior Credit Officer
Sovereign Risk Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
Atsi Sheth
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
