Fitch: IMF SBA still supports Argentina but risks mount

Wednesday, September 12, 2018

Press release from Fitch

11 September, 2018

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Fitch Ratings-Chicago-11 September 2018: Talks between the Argentine government and the IMF to strengthen the USD50 billion stand-by arrangement (SBA) reflect proactive efforts to mitigate near-term financing risks and lower borrowing needs, Fitch Ratings says. These efforts are helping to support Argentina's credit profile. However, a looming economic recession and political challenges to planned budget cuts pose risks to Argentina's fiscal outlook and financing program that will be critical for Fitch's sovereign credit assessment.

Argentina's macroeconomic outlook has worsened since May, when Fitch revised the Outlook to Stable from Positive, while maintaining the rating at 'B'. Tight financing conditions involving record-high policy interest rates, declining confidence, eroding real wages and faster fiscal retrenchment will weigh heavily on growth. We project real GDP will contract 2.5% in 2018 and remain flat in 2019. Inflation is expected to exceed 40% in 2018, widely surpassing the SBA target of 27%.

Furthermore, investor sentiment toward Argentine debt has deteriorated since June, when the SBA was initiated. This suggests the SBA has not yet succeeded in stabilizing markets and catalyzing private funding as intended.

Despite these negative developments, new fiscal measures and efforts to mobilize greater official-sector financing were positive steps that may help reduce the twin deficits more quickly than previously expected and reduce reliance on market funding.

The government now aims to achieve a primary fiscal balance by 2019 from a 3.8% GDP deficit in 2017, instead of the original 1.3% SBA deficit target. The government is also seeking an accelerated disbursement schedule with the IMF to shore up financing for 2019. According to Fitch's calculations, if it is successful in these efforts and in rolling over most of its short-term Treasury Bills (Letes), it will have covered its financing needs for 2019 at USD25 billion in amortizations and USD14 billion in interest payments.

Nevertheless, the new fiscal targets face both revenue- and spending-side risks. Cuts in investments, subsidies and transfers to provincial governments will be especially difficult during the 2019 election year, and negotiations around the 2019 budget will be a key gauge of progress.

On the revenue side, recently-enacted export tax hikes have the benefit of not requiring legislation and targeting sectors that have benefitted from Argentine peso depreciation, but there could be downside risk to other tax collections amid the incipient recession. The government projects tax collections will remain resilient to the economic contraction, which has been the case so far according to data through August, but it could be hard-pressed to find offsetting measures, should these begin to underperform.

Additional risks include rollover of Letes, which if below 100% could add to financing needs. Furthermore, Argentina's net sovereign borrowing widely exceeded the reported deficit in recent years. This could reflect additional 'below-the-line' financing needs that may need to be addressed.

While Fitch believes sovereign debt risks primarily relate to liquidity, risks around debt sustainability could rise if the adverse effects of contracting real GDP, peso depreciation and rising interest rates are exacerbated by fiscal slippage. This could complicate the recovery of market access.

We project central government debt will jump to 88.0% of GDP in 2018 from 56.5% in 2017 assuming the exchange rate ends the year close to current levels, bringing it well above the IMF's 70.0% risk threshold and the level previously projected in the SBA's 'adverse scenario'. While a large share of debt is held by the central bank - a mitigating factor given negligible interest costs and rollover risk - the net debt ratio, projected at 64% in 2018, is still high relative to 'B' category peers.