Dagong Global Credit Rating Co., Ltd.
May 9, 2018
Dagong Global Credit Rating Co., Ltd. (hereafter referred to as “Dagong”) has decided today to maintain the local currency sovereign credit rating of Argentina at B- and its foreign currency sovereign credit rating at CCC, each with a stable outlook. Thanks to continued structural reform and ongoing fiscal consolidation, the Argentine economy resumes growth with a significant deficit reduction. Government debt has stabilized at a high level while local and foreign currency solvency remains sturdy at a low level.
The key reasons for maintaining the sovereign credit ratings of Argentina are laid out below:
First, Argentina’s repayment environment is increasingly stable and a tightening monetary policy offers growing support for the economy. The governing coalition led by incumbent president Macri won a massive victory in the mid-term election of 2017, which provides solid political support for deeper structural reform. Meanwhile, to curb high inflation, the Argentine government has adopted a tightening monetary policy, which provides a limited degree to which the financial system can support the economy.
Second, in the short term, the Argentine economy will make a visible recovery with some improvements in economic imbalances, so the country likewise has some growth potential in the medium and long term. In 2017, though Argentina’s inflationary rate was as high as 25.7%, it remained under control. With real wage rises, higher infrastructure investment, and increasing demand from major trade partners, Argentina has achieved a growth rate of 2.9%. In the short term, real wage increases and greater infrastructure investment, as well as a reduced corporate tax burden, can stimulate the Argentine economy to resume growth. However, uncertainty over the external environment will hamper export growth, and it is expected that in 2018 and 2019, Argentine growth will hit 2.9% and 2.8%. In the medium and long term, with ongoing structural reform and abundant natural resources, there are opportunities to redress economic imbalances and reduce the high costs of production factors. Therefore, it is forecasted that in the following five years, Argentina’s growth will average 3.1%.
Third, Argentina’s primary fiscal deficit is decreasing dramatically, ensuring the stability of repayment resources. In the near term, tax reform will limit the growth of tax revenues, yet reductions in subsidies, government staff cuts, and pension reform can reduce fiscal spending dramatically. Hence, it is projected that in 2018, the Argentine general government’s fiscal deficit will drop by 1.1 percentage points to 3.4% and the ratio of government financing needs to fiscal revenues will decline to 30.2%.
Fourth, the government debt burden rises ever slightly with growing financing costs and significant external vulnerabilities, thus government solvency remains at a low level. In the short term, a narrowing fiscal deficit will cause debt to grow at a slower rate. It is forecasted that in 2018 and 2019, the ratio of Argentine general government debt to fiscal revenues will be 162.4% and 162.6%, respectively. In the medium and long term, given lower dilution by inflation, government debt will increase. Since foreign currency-denominated debt and debt at a floating exchange rate both account for a large proportion of total debt, it is government solvency ― under the context of local currency depreciation and growing financing costs ― which will come under pressure. Although the government has issued foreign debt to compensate for foreign exchange reserves, nevertheless in 2017, the forex reserves’ coverage on government total foreign debt and foreign financing needs was 21.8% and 128.3%, respectively. Woefully inadequate forex reserves and pressure from currency devaluation continue to render Argentina’s external vulnerabilities significant, undermining the sustainability of foreign-currency solvency.
In the short term, as Argentina’s economic imbalances improve progressively and the government continues its fiscal consolidation, Argentina’s debt will stabilize at a high level with solvency in local and foreign currency remaining stable. Therefore, Dagong assigns a stable local and foreign currency sovereign credit rating outlook for Argentina in the upcoming one or two years.