Overview

  • On Aug. 28, following the continued inability to place short-term paper with private-sector market participants, the Argentine government unilaterally extended the maturity of all short-term paper. This constituted a default under our criteria, and yesterday we lowered our foreign and local currency sovereign credit ratings to 'SD'.
  • The amended terms and conditions for the short-term debt became effective immediately, which cured the default. We are now raising our long-term sovereign credit ratings on Argentina to 'CCC-' and our short-term sovereign credit ratings to 'C'.
  • As the Macri Administration is sending legislation to Congress seeking support from the Argentine political class to engage in a re-profiling of its long-term commercial debt, in local and foreign currency, there is heightened risk of a default under our criteria, consistent with a 'CCC-' rating.
  • The negative outlook reflects the prospects that the Macri Administration might gain political backing and engineer a re-profiling this year, or that ongoing market turbulence amid political uncertainty or inaction could compromise timely debt service capacity under the current or next administration.

Rating Action

On Aug. 30, 2019, S&P Global Ratings raised its foreign and local currency sovereign credit ratings on Argentina to 'CCC-/C' from 'SD'. The outlook on the long-term ratings is negative. In addition, we raised our short-term issue ratings to 'C' from 'D'. We also raised the national scale rating to 'raCCC-' from 'SD'.

Outlook

The negative outlook reflects the prominent downside risks to payment of debt on time and in full per our criteria over the coming months amid very complex political, economic, and financial market dynamics. The Macri Administration may advance a restructuring during its current term in office if it garners support from the Argentine Congress. Alternatively, the outlook reflects risks associated with failure to advance such a restructuring proposal and the prospects for ongoing stressed market dynamics before and after the Oct. 27 national elections, and with it, risk of a missed payment on Argentina's debt obligations.

We could lower the long-term ratings to 'CC' over the coming months if the government advances negotiation with bondholders for a potential debt exchange that could be characterized as a distressed exchange based on our methodology as we see the most likely scenario would be an extension of maturities, which will not be compensated by the issuer.

Alternatively, absent backing for a re-profiling, we could lower the rating should additional economic and financial stresses threaten timely debt service under the current or next administration.

Liquidity is extremely tight, and prospects for the fifth disbursement under the IMF Stand-By Arrangement as well as the direction of economic policies post the national elections both remain uncertain.

We could revise the outlook to stable over the coming months if policy signals and execution start to successfully turn around or stabilize private-sector confidence, market turbulence subsides, and the government regains market access for government financing.

Rationale

The 'CCC-/C' ratings on Argentina reflect pronounced credit vulnerabilities and heightened risk of non-payment. The government has defaulted for the third time since 2001, under our methodology. The absence of confidence in the financial markets about policy initiatives under the next administration--complicated by the fact elections are several months away and a new administration assumes office only in December-–has severely compromised the ability of the Treasury to roll over commercial debt and the central bank to manage volatility in the peso.

Against the backdrop of declining international reserves, an inability to place paper in the market prompted Argentina's recent and possible forthcoming debt re-profiling. The immensely stressed debt dynamics amid a depreciating exchange rate, a likely acceleration in inflation, and a deepening economic recession all weigh on Argentina's credit profile. Marked liquidity pressures have materialized, which, coupled with the risk of not receiving the fifth disbursement from the IMF, weigh on our external and liquidity assessments. Severe challenges confront the ability of both the current administration and the leading presidential candidate to contain market volatility and restore financial and economic stability.

Please see our recent research update on Argentina, titled "Argentina Long-Term Sovereign Ratings Lowered To 'B-' As Market Turbulence Weakens Creditworthiness; Outlook Negative," published Aug. 16, 2019.

Key Statistics

Table 1

Argentina--Key Statistics
2012 2013 2014 2015 2016 2017 2018 2019e 2020f 2021f
Economic indicators (%)
Nominal GDP (bil. LC) 2,637.91 3,348.31 4,579.09 5,954.51 8,228.16 10,644.78 14,566.56 21,916.55 31,937.90 42,349.65
Nominal GDP (bil. $) 581.43 613.32 567.05 644.90 557.20 642.68 518.48 438.33 456.26 529.37
GDP per capita (000s $) 13.9 14.5 13.3 15.0 12.8 14.5 11.6 9.7 10.0 11.5
Real GDP growth (1.0) 2.4 (2.5) 2.7 (2.1) 2.7 (2.5) (2.3) 0.5 2.0
Real GDP per capita growth (2.1) 1.3 (3.6) 1.6 (3.1) 1.0 (3.4) (3.2) (0.4) 1.1
Real investment growth (7.1) 2.3 (6.8) 3.5 (5.8) 12.2 (5.8) (12.0) 2.0 3.5
Investment/GDP 16.5 17.3 17.3 17.1 17.7 16.2 16.2 14.2 14.0 14.0
Savings/GDP 16.1 15.2 15.6 14.3 15.0 11.3 10.8 13.4 12.4 11.4
Exports/GDP 16.2 14.6 14.4 10.7 12.5 11.2 14.4 17.2 18.2 18.5
Real exports growth (4.1) (3.5) (7.0) (2.8) 5.3 1.7 (0.0) 17.0 6.0 4.0
Unemployment rate 6.9 6.4 6.9 6.7 8.4 8.4 9.2 10.0 10.0 9.5
External indicators (%)
Current account balance/GDP (0.4) (2.1) (1.6) (2.7) (2.7) (4.9) (5.4) (0.7) (1.5) (2.6)
Current account balance/CARs (2.2) (13.8) (10.5) (23.5) (19.6) (39.5) (32.9) (3.4) (7.9) (13.7)
CARs/GDP 17.0 15.5 15.4 11.6 13.8 12.4 16.4 21.4 19.5 18.7
Trade balance/GDP 2.6 0.8 1.0 (0.1) 0.8 (0.8) (0.2) 4.0 3.2 1.7
Net FDI/GDP 2.5 1.5 0.6 1.7 0.3 1.6 2.0 1.6 2.0 1.7
Net portfolio equity inflow/GDP (0.0) 0.0 0.1 0.1 0.4 0.4 (0.2) 0.0 0.0 0.0
Gross external financing needs/CARs plus usable reserves 102.4 110.1 117.3 133.8 136.1 149.9 133.8 109.9 120.5 123.6
Narrow net external debt/CARs 88.2 104.6 116.7 154.6 153.6 192.2 213.5 205.7 216.4 199.2
Narrow net external debt/CAPs 86.4 91.9 105.6 125.2 128.4 137.8 160.7 199.0 200.5 175.3
Net external liabilities/CARs (28.7) (37.7) (37.5) (51.0) (56.2) (20.9) (45.3) (21.6) (13.7) 1.4
Net external liabilities/CAPs (28.1) (33.1) (33.9) (41.3) (46.9) (15.0) (34.1) (20.9) (12.7) 1.2
Short-term external debt by remaining maturity/CARs 45.8 44.5 46.1 59.9 53.8 72.1 77.1 75.7 88.0 79.1
Usable reserves/CAPs (months) 5.2 4.6 3.6 3.6 2.8 3.5 5.1 7.3 7.0 5.9
Usable reserves (mil. $) 41,590 29,236 27,799 21,155 32,913 48,505 59,164 55,668 55,386 53,841
Fiscal indicators (general government; %)
Balance/GDP (2.5) (2.8) (4.2) (4.6) (6.9) (6.3) (5.7) (4.0) (3.7) (3.3)
Change in net debt/GDP 6.5 4.0 9.5 18.6 14.7 14.3 39.5 33.6 14.2 10.2
Primary balance/GDP (0.5) (1.4) (2.1) (2.6) (3.6) (3.6) (2.1) (0.5) 0.7 0.4
Revenue/GDP 32.7 34.2 35.3 35.3 34.3 33.0 30.8 30.8 31.2 31.7
Expenditures/GDP 35.2 37.1 39.5 39.9 41.2 39.3 36.5 34.8 34.9 35.0
Interest/revenues 6.2 4.3 6.0 5.9 9.7 8.2 11.8 11.4 14.1 11.6
Debt/GDP 39.3 36.3 37.7 47.6 50.7 54.8 85.6 90.0 76.0 67.5
Debt/revenues 120.2 105.9 106.9 135.0 147.9 166.3 278.0 292.3 243.4 213.1
Net debt/GDP 32.5 29.7 31.2 42.6 45.5 49.4 75.6 83.8 71.8 64.3
Liquid assets/GDP 6.7 6.6 6.5 5.0 5.2 5.4 9.9 6.1 4.2 3.2
Monetary indicators (%)
CPI growth 21.0 24.5 42.1 26.4 39.1 24.6 34.3 54.0 45.0 30.0
GDP deflator growth 22.3 23.9 40.3 26.6 41.1 26.0 40.4 54.0 45.0 30.0
Exchange rate, year-end (LC/$) 4.90 6.50 8.51 13.10 15.89 18.65 37.60 63.00 75.00 85.00
Banks' claims on resident non-gov't sector growth 30.9 31.0 20.2 36.7 31.4 51.3 33.1 12.6 45.7 37.6
Banks' claims on resident non-gov't sector/GDP 14.3 14.7 12.9 13.6 12.9 15.1 14.7 11.0 11.0 11.4
Foreign currency share of claims by banks on residents N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A
Foreign currency share of residents' bank deposits 8.4 7.5 8.0 11.8 20.6 23.8 31.4 52.7 52.7 52.7
Real effective exchange rate growth (14.4) (3.7) 5.3 (21.7) 13.5 (6.5) 34.7 N/A N/A N/A
Definitions: Savings is defined as investment plus the current account surplus (deficit). Investment is defined as expenditure on capital goods, including plant, equipment, and housing, plus the change in inventories. Banks are other depository corporations other than the central bank, whose liabilities are included in the national definition of broad money. Gross external financing needs are defined as current account payments plus short-term external debt at the end of the prior year plus nonresident deposits at the end of the prior year plus long-term external debt maturing within the year. Narrow net external debt is defined as the stock of foreign and local currency public- and private-sector borrowings from nonresidents minus official reserves minus public-sector liquid assets held by nonresidents minus financial-sector loans to, deposits with, or investments in nonresident entities. A negative number indicates net external lending. N/A--Not applicable. LC--Local currency. CARs--Current account receipts. FDI--Foreign direct investment. CAPs--Current account payments. e--Estimate. f--Forecast. The data and ratios above result from S&P Global Ratings' own calculations, drawing on national as well as international sources, reflecting S&P Global Ratings' independent view on the timeliness, coverage, accuracy, credibility, and usability of available information.

Ratings Score Snapshot

Table 2

Argentina Ratings Score Snapshot
Key rating factors Score Explanation
Institutional assessment 6 Policy choices likely weaken capability and willingness to maintain sustainable public finances and balanced economic growth, and thus, debt service. Future policy responses are difficult to predict because of a highly polarized political landscape.
Debt payment culture is weak.
Economic assessment 5 Based on GDP per capita ($) as per Selected Indicators in table 1.
Weighted average real GDP per capita trend growth over a 10-year period is at -0.8%, which is well below sovereigns in the same GDP category.
External assessment 6 Based on narrow net external debt and gross external financing needs as per Selected Indicators in table 1.
There is a risk of marked deterioration in the cost of or access to external financing.
Fiscal assessment: flexibility and performance 6 Based on the change in net general government debt (% of GDP) as per Selected Indicators in table 1.
Fiscal assessment: debt burden 5 Based on net general government debt (% of GDP) and general government interest expenditures (% of general government revenues) as per Selected Indicators in table 1.
Over 70% of gross government debt is denominated in foreign currency.
Monetary assessment 5 Argentina’s exchange rate regime is a managed float.
Persistently high inflation, as per Selected Indicators in table 1. The central bank has limited independence due to perceived political interference. Argentina has a small domestic capital market and a low level of credit to GDP.
Indicative rating b- As per table 1 of "Sovereign Rating Methodology."
Notches of supplemental adjustments and flexibility -3 We are currently using the 'CCC' criteria for Argentina.
Final rating
Foreign currency CCC-
Notches of uplift 0 Default risks do not apply differently to foreign- and local-currency debt.
Local currency CCC-
S&P Global Ratings' analysis of sovereign creditworthiness rests on its assessment and scoring of five key rating factors: (i) institutional assessment; (ii) economic assessment; (iii) external assessment; (iv) the average of fiscal flexibility and performance, and debt burden; and (v) monetary assessment. Each of the factors is assessed on a continuum spanning from 1 (strongest) to 6 (weakest). S&P Global Ratings' "Sovereign Rating Methodology," published on Dec. 18, 2017, details how we derive and combine the scores and then derive the sovereign foreign currency rating. In accordance with S&P Global Ratings' sovereign ratings methodology, a change in score does not in all cases lead to a change in the rating, nor is a change in the rating necessarily predicated on changes in one or more of the scores. In determining the final rating the committee can make use of the flexibility afforded by §15 and §§126-128 of the rating methodology.

Related Criteria

Related Research

In accordance with our relevant policies and procedures, the Rating Committee was composed of analysts that are qualified to vote in the committee, with sufficient experience to convey the appropriate level of knowledge and understanding of the methodology applicable (see 'Related Criteria And Research'). At the onset of the committee, the chair confirmed that the information provided to the Rating Committee by the primary analyst had been distributed in a timely manner and was sufficient for Committee members to make an informed decision.

After the primary analyst gave opening remarks and explained the recommendation, the Committee discussed key rating factors and critical issues in accordance with the relevant criteria. Qualitative and quantitative risk factors were considered and discussed, looking at track-record and forecasts.

The committee's assessment of the key rating factors is reflected in the Ratings Score Snapshot above.

The chair ensured every voting member was given the opportunity to articulate his/her opinion. The chair or designee reviewed the draft report to ensure consistency with the Committee decision. The views and the decision of the rating committee are summarized in the above rationale and outlook. The weighting of all rating factors is described in the methodology used in this rating action (see 'Related Criteria And Research').

Ratings List

Upgraded; Outlook Action
To From

Argentina

Sovereign Credit Rating CCC-/Negative/C SD/--/D
Ratings Affirmed

Argentina

Transfer & Convertibility Assessment B-

Argentina

Senior Unsecured CCC-

Certain terms used in this report, particularly certain adjectives used to express our view on rating relevant factors, have specific meanings ascribed to them in our criteria, and should therefore be read in conjunction with such criteria. Please see Ratings Criteria at www.standardandpoors.com for further information. Complete ratings information is available to subscribers of RatingsDirect at www.capitaliq.com. All ratings affected by this rating action can be found on S&P Global Ratings' public website at www.standardandpoors.com. Use the Ratings search box located in the left column.

Primary Credit Analyst:Lisa M Schineller, PhD, New York (1) 212-438-7352;
lisa.schineller@spglobal.com
Secondary Contacts:Joydeep Mukherji, New York (1) 212-438-7351;
joydeep.mukherji@spglobal.com
Sebastian Briozzo, Buenos Aires (54) 114-891-2185;
sebastian.briozzo@spglobal.com
Media Contact:Miriam Hespanhol, New York + 1 (212) 438 1406;
miriam.hespanhol@spglobal.com

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