DBRS Upgrades Argentina’s Short-Term Ratings from SD to R-5, Ratings Under Review-Negative

DBRS, Inc (DBRS) upgraded the Republic of Argentina’s Short-Term Foreign and Local Currency – Issuer Ratings from SD to R-5. At the same time, the Short-Term Ratings have been placed Under Review with Negative Implications (URN). The Long-Term Foreign and Local Currency – Issuer Ratings, at CC, also remain Under Review with Negative Implications (URN).

KEY RATING CONSIDERATIONS

DBRS downgraded Argentina to SD following the August 28 announcement that payments would be deferred on short-term debt obligations, some of which came due on August 30. Argentina is now making payments in accordance with the revised payment schedule, prompting an upgrade of the short-term issuer ratings to R-5.

As noted in DBRS’s August 30 press release, Argentine authorities have announced their intention to launch a “voluntary” debt swap to extend maturities on additional longer-term securities maturing within the next ten years. This expected change in duration combined with the implicit threat of nonpayment, if creditors do not participate in the exchange, is also likely to meet DBRS’s definition of default, but the terms and timing of the exchange are not yet clear. Consequently, the Long-Term Issuer Ratings remain at CC and are Under Review with Negative Implications.

The repayment of the newly rescheduled short-term debt obligations also remains in doubt, as these payments have been pushed back only 3-6 months and will now come due shortly after the inauguration of a new administration. The recent imposition of capital controls combined with the reprofiling of short-term debt alleviate the immediate demands on reserves, but DBRS expects volatile conditions to persist through the election period and subsequent transition. In this context, Argentina may struggle to rollover or repay its short-term obligations as they come due early in 2020. In the absence of continued engagement from the IMF and a well-designed macroeconomic adjustment program, DBRS sees risks of additional difficulties in servicing Argentina’s debt.

For additional details see DBRS’s prior press release, published on August 30.

RATING DRIVERS

Argentina’s ratings are likely to be downgraded to Selective Default (SD) if Argentina compels creditors to extend maturities or risk non-payment. Otherwise, downward pressure on the ratings could emerge if (1) fiscal or monetary policy discipline weakens considerably in the lead up to or following any change in administration; or (2) the incoming government proves unwilling to make policy commitments similar to those agreed under the current IMF program, generating continued market pressures and limiting the availability of non-inflationary financing heading into 2020 and 2021.

A stabilization of the ratings will likely hinge on the administration’s commitment to (1) preserve fiscal policy discipline; and (2) maintain the main pillars of the existing macroeconomic program, for example through passage of the law on central bank independence.

RATING COMMITTEE SUMMARY

The DBRS Sovereign Scorecard generates a result in the B (high) – B (low) range. Additional considerations factoring into the Rating Committee decision included the announced reprofiling of Argentina’s debt obligations and near-term external liquidity position. The main points discussed during the Rating Committee include the extension of short-term debt maturities, the status of payments on the debt, the likelihood that an exchange of medium- and long-term debt will meet DBRS’s default definition, and additional risks to Argentina’s repayment capacity in coming months.

KEY INDICATORS

Fiscal Balance (% GDP): -5.0 (2018); -2.7 (2019F); -1.5 (2020F)
Gross Debt (% GDP): 86.0 (2018); 75.9 (2019F); 69.0 (2020F)
Nominal GDP (USD billions): 538.1 (2018); 477.7 (2019F); 515.4 (2020F)
GDP per capita (USD thousands): 11.7 (2018); 10.6 (2019F); 11.3 (2020F)
Real GDP growth (%): -2.5 (2018); -1.2 (2019F); 2.2 (2020F)
Consumer Price Inflation (%, avg): 34.3 (2018); 43.7 (2019F); 23.2 (2020F)
Domestic Credit (% GDP): 14.6 (2018)
Current Account (% GDP): -5.1 (2018); -2.0 (2019F); -2.5 (2020F)
International Investment Position (% GDP): 12.5 (2018)
Gross External Debt (% GDP): 41.7 (2018)
Foreign Exchange Reserves (% short-term external debt + current account deficit): 1.0 (2018); 1.3 (Jun-2019)
Governance Indicator (percentile rank): 57.1 (2017)
Human Development Index: 0.83 (2017)

Notes:

All figures are in USD unless otherwise noted. Public finance statistics reported on a general government basis unless specified. Forecasts drawn from IMF. Governance indicator represents an average percentile rank (0-100) from Rule of Law, Voice and Accountability and Government Effectiveness indicators (all World Bank). Human Development Index (UNDP) ranges from 0-1, with 1 representing a very high level of human development.

The principal applicable methodology is Rating Sovereign Governments, which can be found on the DBRS website www.dbrs.com at http://www.dbrs.com/about/methodologies. The principal applicable rating policies are Commercial Paper and Short-Term Debt, and Short-Term and Long-Term Rating Relationships, which can be found on our website at http://www.dbrs.com/ratingPolicies/list/name/rating+scales.

The primary sources of information used for this rating include INDEC, BCRA, Ministry of Finance, IMF, World Bank, UN, and Haver Analytics. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

This rating was not initiated at the request of the rated entity.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS did not have access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

Lead Analyst: Thomas R. Torgerson, Co-Head of Sovereign Ratings
Rating Committee Chair: Roger Lister, Chief Credit Officer, Global FIG and Sovereign Ratings
Initial Rating Date: September 6, 2007

For more information on this credit or on this industry, visit www.dbrs.com.

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