New York, July 12, 2019 -- Moody's Investors Service ("Moody's") has today changed the outlook for
the Government of Argentina to negative from stable. Concurrently,
Moody's has affirmed the B2 foreign-currency and local-currency
long-term issuer and senior unsecured ratings. The senior
unsecured ratings for shelf registrations were also affirmed at (P)B2.
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.
Moody's decision to change the outlook to negative for Argentina's
B2 ratings reflects:
1. Increased uncertainty regarding the continued implementation
of policies that, by addressing Argentina's fundamental imbalances,
restore reliable access to international capital markets and contain the
risk of further damaging currency shocks.
2. And, relatedly, the rising risk that policy uncertainty
itself leads to a material, sustained shift in sentiment that increases
financing pressures and erodes buffers.
The B2 rating affirmation reflects Moody's central expectation that
Argentina's core credit metrics will not worsen materially still
further over the coming period. The rating level balances a rising
debt burden and a history of economic volatility with comparatively high
economic development and support from the International Monetary Fund
(IMF).
Argentina's long-term foreign-currency bond ceiling
remains unchanged at B1 and the foreign-currency deposit ceiling
unchanged at B3. The local-currency country ceilings for
bonds and bank deposits remain unchanged at Ba2. The short-term
foreign-currency bank deposit ceiling and the short-term
foreign-currency bond ceiling remain unchanged at Not Prime (NP).
RATINGS RATIONALE
RATIONALE FOR CHANGING THE OUTLOOK TO NEGATIVE FROM STABLE
INCREASED UNCERTAINTY REGARDING CONTINUED IMPLEMENTATION OF POLICIES THAT
WILL RESTORE RELIABLE ACCESS TO INTERNATIONAL CAPITAL MARKETS AND REDUCE
THE RISK OF FURTHER CURRENCY SHOCKS
The structural reform program initiated by President Macri's government,
and the accelerated fiscal consolidation efforts that sit at its core,
have played a crucial role in restoring a modicum of credit stability
after last year's severe currency shocks. They have done
so both by reassuring investors as to the government's medium-term
objectives; and by allowing the government to reach a three year,
$57 billion Stand By Arrangement (SBA) with the IMF, which
has been a key liquidity support. The government aims to end 2020
with a 1% of GDP primary surplus, which it expects will support
a return to the international capital markets in 2020 or 2021.
In the meantime, IMF lending will provide over 60% of Argentina's
medium and long-term funding in 2019. And even though the
importance of IMF funding will fall in 2020 and 2021, strong relations
with the IMF will remain vital if financial and exchange rate stability
is to be sustained over the next few years.
However, the government's ability to continue to implement
its desired policies and to sustain its commitment to reform over the
medium term is increasingly uncertain. Rising domestic discontent
at the near-term impact of government policies on growth and living
standards is raising the prospect of a different, and potentially
credit negative, policy path in the period following the national
elections in October. Argentina has a long history of policy changes
following changes in government. The main opposition candidates
have raised questions about commitments made as part of the IMF program.
They have not ruled out seeking to renegotiate some or all of the SBA
conditions and pursuing alternative fiscal strategies and monetary policies
that could complicate the country's relationship with the IMF.
But whatever the result of the upcoming elections, shifts in the
domestic political environment suggest that the future path of policy
is increasingly uncertain. The risk is rising of changes or potentially
reversals to a fiscal consolidation program that Moody's currently
estimates will reduce the government's primary balance to a 0.5%
of GDP deficit in 2019 from a 4.2% of GDP deficit in 2016.
A significant reversal of these targets could threaten the continuation
of the SBA program and close the door on international market funding.
That funding will be needed to meet the government's financing requirements
from 2021 onwards. The absence of it would put significant pressure
on the liquidity position of the government and increase the possibility
of a debt restructuring in the next two or three years.
RISING RISK THAT POLICY UNCERTAINTY ITSELF LEADS TO A SUSTAINED SHIFT
IN SENTIMENT THAT INCREASES FINANCING PRESSURES AND ERODES BUFFERS
Recent months have illustrated Argentina's vulnerability to vicious
cycles of worsening investor sentiment, exchange rate depreciation,
rising inflation expectations, rising interest rates, falling
growth, rising debt and falling debt affordability. Since
April of last year Argentina has gone through several exchange rate shocks,
which have left most credit metrics significantly weaker than when the
country's rating was upgraded to B2 in 2017. Government debt
will reach 76% of GDP this year, up from 50% in 2017.
Over the same time period interest payments have jumped to 17%
of revenues from 11%. Both debt and interest payments are
now higher than the median for B2 and B3-rated sovereigns.
The exchange rate shocks have also pushed inflation close to 60%
over the last twelve months and will result in two consecutive years of
falling economic output.
Moody's decision to affirm the B2 rating reflects its central expectation
that core metrics will not materially worsen still further. However,
the negative outlook reflects balance of risk to the downside and the
country's vulnerability to unpredictable shifts in sentiment.
In the last two months, exchange rate pressures have eased and sovereign
spreads have fallen. But volatility remains high, and much
rests on the administration's policy credibility after many years
of highly idiosyncratic policymaking. Concerns on the part of investors
and consumers, before or after the elections, about the likely
emergence and consequences of a credit negative policy shift could lead
to a fresh vicious cycle triggered by a new round of currency devaluations
which would further worsen already weak credit metrics. Another
sudden and sharp devaluation would push inflation still higher,
ending the nascent economic recovery and delaying still further the recovery
from recession, and rapidly worsen the debt burden and debt affordability.
RATIONALE FOR AFFIRMING THE RATINGS AT B2
The affirmation of the B2 rating reflects Moody's central expectation
that Argentina's core metrics will not materially worsen still further
and that support from the IMF will sustain the issuer until it is able
to regain affordable access to international capital markets. Notwithstanding
the rise in the government's debt and interest burdens, the sovereign
benefits from its strong commitment to consolidation under its IMF program
to date. This should, provided policy continuity persists,
see domestic and external imbalances continue to adjust, with IMF
financing shielding the government from external refinancing risks through
2019. As confidence returns, so should growth, allowing
Argentina to build on fundamental strengths including a large, highly
developed and comparatively wealthy economy.
WHAT COULD CHANGE THE RATING UP
Although a rating upgrade is unlikely in the near future, a return
to a stable outlook could result if it becomes clear that fiscal consolidation,
central bank independence, and continued support from the IMF will
be sustained in the coming years.
WHAT COULD CHANGE THE RATING DOWN
The rating would likely be downgraded were Moody's to observe a
further material worsening in Argentina's fiscal strength and a
heightened exposure to domestic or external financing shocks, or
were it to conclude that the risk of such an outcome had materially risen.
Such a conclusion would likely be driven by revised assumptions around
the future path of government economic and fiscal policy, particularly
if supported by a worsening in relations with the IMF and by a further
erosion in financial buffers.
GDP per capita (PPP basis, US$): 20,537 (2018
Actual) (also known as Per Capita Income)
Real GDP growth (% change): -2.5% (2018
Actual) (also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 47.6%
(2018 Actual)
Gen. Gov. Financial Balance/GDP: -5.2%
(2018 Actual) (also known as Fiscal Balance)
Current Account Balance/GDP: -5.4% (2018 Actual)
(also known as External Balance)
External debt/GDP: 53.5% (2018 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 09 July 2019, 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 decreased. The issuer's
institutional strength/framework, have materially decreased.
The issuer's fiscal or financial strength, including its debt profile,
has materially decreased. The systemic risk in which the issuer
operates has materially increased. The issuer has become increasingly
susceptible to event risks.
The principal methodology used in these ratings was Sovereign Bond Ratings
published in November 2018. 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
Yves Lemay
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
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
