Fitch Affirms Argentina at 'B'; Outlook Stable
Fitch Ratings-New York-13 October 2016: Fitch Ratings has affirmed Argentina's sovereign ratings as follows:
--Long-term Foreign and Local Currency Issuer Default Ratings (IDRs) at 'B', Outlook Stable;
--Senior unsecured Foreign Currency bonds at 'B';
--Country Ceiling at 'B';
--Short-Term Foreign and Local Currency IDRs at 'B'.
KEY RATING DRIVERS
Argentina's ratings balance the improved consistency and sustainability of its policy framework, reduced external vulnerability, and the easing of external and fiscal financing constraints against relatively weak external liquidity, continued macroeconomic underperformance compared with peers, and deterioration of public finances. Argentina's ratings also balance structural strengths such as GDP per capita and social indicators against a weak debt repayment record.
The central bank has focused its policy actions on addressing rising inflation in the first half of 2016 and containing inflation expectations. It has also announced moves toward an inflation targeting framework. Moreover, the introduction of a budget with realistic guidelines could improve the predictability of fiscal policy. Finally, the government is making progress in rebuilding the credibility and reliability of official statistics. The resumption of the IMF Article IV reviews supports greater transparency.
International reserves have increased to USD32.5 billion in early October, up 30% from end-2015 levels. The increased flexibility of the Argentine peso should contribute towards improving the capacity of the economy to absorb external shocks and relieve pressure on international reserves. In addition, balance of payments pressures are likely to remain in check due to moderate current account deficits, access to external financing, and the discontinuation of using reserves for sovereign debt payments. Nevertheless, Argentina's external liquidity ratio, forecast by Fitch at 54% in 2017, remains low in relation to 'B' rated peers, especially given the country's high commodity dependence and recent episodes of balance of payments pressures.
A delayed recovery, inflation and large fiscal deficits represent key policy challenges for the Macri administration. Fitch expects the economy to contract by 1.7% in 2016 and recover to 3.2% growth in 2017 driven by the reactivation of public investment, lower inflation and a better growth outlook for Brazil. Inflation remains high (close to 40%) according to private and local government estimates but has shown month-on-month deceleration, and inflation expectations have declined significantly.
In an effort to strengthen monetary policy credibility and predictability, the central bank has made official its intention to adopt an inflation targeting regime, setting an inflation band of 12-17% for 2017 and the objective of reducing inflation to 5% in 2019. Fitch believes that the disinflation process will be more moderate due to challenges such as backward-looking salary adjustments. Moreover, sustaining a large fiscal imbalance for a longer period could weigh on the build-up of monetary policy credibility despite the phasing-out of central bank financing.
Fitch estimates the general government deficit could increase to 5.6% of GDP, up from 4.8% in 2015 and above the 4.1% 'B' category median reflecting tax reductions, weaker than anticipated economic performance, the payment of arrears worth 0.7% of GDP and setbacks to the subsidy reduction strategy. The government is on track to meet its 2016 federal primary deficit (excluding central bank and social security transfers) target of 4.8%, but it revised up its 2017 target to 4.2% from 3.3% of GDP. This revision reflects real spending increases due to social and pension outlays, and the reactivation of public investment.
Gross general government debt (consolidating federal and provincial debt with federal debt held by the social security administration, ANSES) could remain elevated at 50.4% of GDP in 2016, slightly below the 'B' median. The government reported that only 19.4% of GDP was held by the private sector in Q116. Fitch forecast the general government deficit to equal 5.8% of GDP in 2017 and total amortizations 6.3% of GDP (1.2% of GDP expected to be rolled-over by the central bank). In contrast to the previous administration, the current authorities do not intend to tap into international reserves for debt service while at the same time reducing the participation of intra-public sector financing. Significant financing requirements, though, create vulnerability to global conditions and investor confidence
In spite of having a minority position in Congress, the Macri administration has been able to muster the necessary support to approve key pieces of legislation such as the law to settle with holdout creditors and tax amnesty. Legislative elections are scheduled to take place in 2017. The Macri administration maintains strong approval ratings, but the ruling Cambiemos electoral performance will depend on the magnitude and perception of economic rebound and the progress of the opposition Peronist party reorganization.
SOVEREIGN RATING MODEL (SRM) and QUALITATIVE OVERLAY (QO)
Fitch's proprietary SRM assigns Argentina a score equivalent to a rating of 'B' on the Long-Term Foreign Currency IDR scale.
Fitch's sovereign rating committee did not adjust the output from the SRM to arrive at the final Long-Term Foreign Currency IDR.
Fitch's SRM is the agency's proprietary multiple regression rating model that employs 18 variables based on three year centred averages, including one year of forecasts, to produce a score equivalent to a Long-Term Foreign Currency IDR. Fitch's QO is a forward-looking qualitative framework designed to allow for adjustment to the SRM output to assign the final rating, reflecting factors within the agency's criteria that are not fully quantifiable and/or not fully reflected in the SRM.
The main risk factors that, individually or collectively, could trigger a positive rating action are:
--Faster-than-anticipated fiscal consolidation and deepening of market funding sources;
--Consolidation of strengthened policy framework leading to improvement in macroeconomic performance in relation to peers;
--Strengthening of external buffers.
The main factors that could lead to a negative rating action are:
--Re-emergence of financing pressures, failure to consolidate fiscal accounts or to improve funding sources such as maintaining access to capital markets;
--Erosion of international reserves.
--Fitch assumes that China will avoid a hard landing, growing by 6.5% and 6.3% in 2016 and 2017, respectively. In contrast, Fitch expects Brazil to contract by 3.3% in 2016 and grow by 1.2% in 2017.
--Fitch assumes that remaining legal risks from holdout creditors will not prevent Argentina from servicing external debt or accessing external capital markets.
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
Media Relations: Elizabeth Fogerty, New York, Tel: +1 (212) 908 0526, Email: firstname.lastname@example.org.
Additional information is available on www.fitchratings.com
Country Ceilings (pub. 16 Aug 2016)
Sovereign Rating Criteria (pub. 18 Jul 2016)
Dodd-Frank Rating Information Disclosure Form
Copyright © 2016 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of Fitch’s factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third- party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of Fitch’s ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed.
The information in this report is provided “as is” without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. Fitch is not engaged in the offer or sale of any security. All Fitch reports have shared authorship. Individuals identified in a Fitch report were involved in, but are not solely responsible for, the opinions stated therein. The individuals are named for contact purposes only. A report providing a Fitch rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. Ratings may be changed or withdrawn at any time for any reason in the sole discretion of Fitch. Fitch does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of payments made in respect to any security. Fitch receives fees from issuers, insurers, guarantors, other obligors, and underwriters for rating securities. Such fees generally vary from US$1,000 to US$750,000 (or the applicable currency equivalent) per issue. In certain cases, Fitch will rate all or a number of issues issued by a particular issuer, or insured or guaranteed by a particular insurer or guarantor, for a single annual fee. Such fees are expected to vary from US$10,000 to US$1,500,000 (or the applicable currency equivalent). The assignment, publication, or dissemination of a rating by Fitch shall not constitute a consent by Fitch to use its name as an expert in connection with any registration statement filed under the United States securities laws, the Financial Services and Markets Act of 2000 of the United Kingdom, or the securities laws of any particular jurisdiction. Due to the relative efficiency of electronic publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers.
For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia Pty Ltd holds an Australian financial services license (AFS license no. 337123) which authorizes it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001
13 Oct 16
ANALYSTS: Arispe, Erich ; Shetty, Shelly
MARKET SECTORS: Sovereigns
FULL REPORTRATING HISTORY
Fitch Affirms Argentina at 'B'; Outlook Stable
13 Oct 16
Global Sovereigns Portfolio Rating Changes
25 Jul 16
Fitch Applies Criteria Changes to Global Sovereign Ratings
22 Jul 16
Global Sovereign Ratings Review - Rating Action Report
22 Jul 16
Fitch Upgrades Argentina's Foreign Currency IDR to 'B'; Outlook Stable
10 May 16
RELATED SECTOR RESEARCH
Latin American Sovereign Overview 4Q16
12 Oct 16
Global Economic Outlook Datasheet - July 2016
29 Jul 16
Global Sovereigns Portfolio Rating Changes
25 Jul 16
2016 Mid-Year Sovereign Review and Outlook
07 Jul 16
Macro-Prudential Risk Monitor – May 2016
05 May 16
VIEW MORERESEARCH ENDORSEMENT POLICY - Fitch's approach to ratings endorsement so that ratings produced outside the EU may be used by regulated entities within the EU for regulatory purposes, pursuant to the terms of the EU Regulation with respect to credit rating agencies, can be found on the EU Regulatory Disclosures page. The endorsement status of all International ratings is provided within the entity summary page for each rated entity and in the transaction detail pages for all structured finance transactions on the Fitch website. These disclosures are updated on a daily basis.
The Why? Forum
Code of Ethics and Conduct
Understanding Credit Ratings