Argentina
Press Release

Fitch Ratings: Risks to Argentine credits remain high

Bnamericas Published: Friday, April 05, 2019

PRESS RELEASE from Fitch Ratings

4 April 2019

Fitch Ratings-New York-04 April 2019: Risks to Argentine credits across all sectors persist in 2019 amid continued macroeconomic fragility, renewed FX volatility and an increasingly challenging fiscal outlook, says Fitch Ratings. Risk factors that were reflected in Fitch's decision to revise Argentina's Rating Outlook to Negative from Stable last November have not abated even though targets under the IMF Stand-By Arrangement (SBA) have been met so far.

These risks include macroeconomic volatility and uncertain recovery prospects, questions about debt sustainability, and policy and market uncertainties ahead of the October elections. Stabilization of some economic data on a seasonally adjusted sequential basis could indicate that the economy is bottoming out after a sharp slowdown. Problematically, though, multiple headwinds including sticky inflation, a recent sharp tightening of financial conditions and FX volatility underscore the challenges to a meaningful and sustained recovery.

The new monetary strategy, unveiled in October, has met its targets but has neither prevented currency volatility from returning nor reined in inflation yet. Fitch now expects year-end yoy inflation to be 38% after monthly figures rose close to 4% in February and annual inflation is running over 50%. In response, the central bank has tightened money supply targets and raised the interest rates of the "Leliq" notes it issues to control the money supply. Higher interest rates help to support the peso but weigh further on domestic demand. The central bank faces the difficult task of eventually lowering rates to more sustainable levels without stoking new FX pressures.

We believe that the risks to debt sustainability are high and the SBA's fiscal targets appear increasingly difficult to achieve. The primary deficit fell just below the 2.7% of GDP target in 2018 (2.6%) but this largely reflected transitory factors linked to the surge in inflation, which lifted revenues faster than spending. Revenues are underperforming, and primary spending will rise in real terms should inflation decline. Government debt-to-GDP was 86% at year-end 2018. The IMF projects this to fall rapidly beginning this year but this is dependent on achievement of fiscal targets, a rapid real appreciation of the peso and medium-term growth of 3.5%, all of which are highly uncertain.

The uncertainties weighing on Argentina's macroeconomic recovery are also driving credit risks across multiple sectors in the economy. Provinces benefit from a stronger fiscal starting point than the sovereign but are still vulnerable given narrower financing options, and some have turned to the sovereign for liquidity support. Like the sovereign, the jump in inflation last year is creating spending pressures in 2019, namely via compensation for past real wage losses, while revenue-raising options are limited.

Argentine corporates are under stress to a varying degree across sectors owing to weak revenues, tightening financing conditions, and regulatory and economic uncertainty. Despite these severe headwinds, one positive aspect is that companies within Fitch's global coverage portfolio are well-capitalized and face low refinancing risks for the near term. A majority of companies raised capital prior to the deterioration in market access, and near-term maturities are manageable. The energy sector remains a bright spot in the corporate outlook, although challenges remain to a rapid increase in unconventional gas production in the Vaca Muerta formation.

Banks have fared relatively well amid the market volatility. Strong balance sheets and risk management practices have helped banks to maintain broadly sound liquidity, solvency and profitability, and the austere new monetary programme has not impaired this. That said, credit growth has collapsed, asset quality has deteriorated and protracted economic weakness will pose more challenges.

Read the Fitch special report "What Investors Want to Know: How Are Argentine Credits Weathering

the Storm?"

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