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Research Update: Argentina Downgraded To 'SD' On Short-Term Debt Maturity Extension; Long-Term Issue Ratings Lowered To 'CC' From 'CCC-'

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Research Update: Argentina Downgraded To 'SD' On Short-Term Debt Maturity Extension; Long-Term Issue Ratings Lowered To 'CC' From 'CCC-'

Overview

  • The administration of President Alberto Fernandez announced on Dec. 19, 2019, a unilateral extension (until August 2020) of U.S. dollar-denominated short-term paper (Letes) held by private-sector market participants.
  • This constitutes default under our criteria, and we are lowering the foreign currency long-term sovereign credit rating on Argentina to 'SD' from 'CCC-' and the short-term rating to 'D' from 'C'.
  • We are also lowering the local currency long-term sovereign credit rating to 'CC' from 'CCC-', given the heightened prospects for restructuring all long-term debt soon. We also affirmed the local currency short-term sovereign credit rating at 'C'.
  • Uncertainty about the government's broader strategy and its intention to make timely payment on peso-denominated debt due in the coming weeks will inform when we could raise the sovereign credit rating from 'SD'.

Rating Action

On Dec. 20, 2019, S&P Global Ratings lowered its foreign currency sovereign credit ratings on Argentina to 'SD/D' from a long-term rating of 'CCC-' and a short-term rating of 'C' (our criteria does not distinguish between short or long-term when there is a default). We lowered the local currency long-term sovereign credit rating to 'CC' from 'CCC-' and affirmed the local currency short-term sovereign credit rating at 'C'. The outlook on the local currency long-term sovereign credit rating is negative. We also took the following rating actions:

  • We lowered our long-term issue ratings to 'CC' from 'CCC-';
  • We affirmed our transfer and convertibility assessment on Argentina at 'B-'; and
  • We lowered our national scale rating on Argentina to 'SD' from 'raCCC-'.

Rationale

Amid ongoing financial distress in the Argentine economy and as the new administration of President Alberto Fernandez formulates and outlines its economic strategy, the government unilaterally extended the maturity of all short-term dollar-denominated paper on Dec. 19. Under our distressed exchange criteria, and in particular for entities rated in the 'CCC' category, the extension of the maturities of the short-term debt with no compensation constitutes a default. Since the new terms became effective immediately, the default on these short-term instruments has effectively been cured. However, uncertainty remains about the government's broader debt management strategy, and in particular that for peso-denominated obligations that come due over the next few weeks. Clarity on this strategy and any potential restructuring of these obligations will help determine when we could raise the sovereign credit rating from 'SD'.

The downgrade of the local currency long-term sovereign credit rating and the long-term issue ratings on Argentina to 'CC' from 'CCC-' reflects heightened vulnerability of a distressed debt exchange as the Fernandez Administration has signaled its plans to advance a restructuring, the terms of which are unknown, of its long-term debt with the private sector. This action is in line with our 'CCC' rating criteria and distressed exchange criteria; it could entail an extension of maturities, which will not be compensated by the issuer, or a reduction in the face value of debt. Alternatively, there are risks associated with failure to advance with a timely debt renegotiation, raising the possibility of missing principal or interest payments amid ongoing stressed market dynamics.

We affirmed our transfer and convertibility assessment at 'B-'. The transfer and convertibility assessment remains higher than the sovereign rating because the government continues to signal its intention that the tightened capital controls will not apply to principal and interest payments. However, we may lower our transfer and convertibility assessment if, in our view, capital controls are likely to become more severe.

The heightened vulnerabilities of Argentina's credit profile stem from the deterioration of its financial environment, the absence of confidence in the financial markets in policy initiatives, and the challenges of the Treasury in rolling over short-term debt with the private sector.

Debt dynamics remain stressed amid a depreciated exchange rate, high inflation, and a deep economic recession.

These factors have stressed capacity to pay, leading to a second maturity extension of short-term debt in less than four months; the prior administration reprofiled short-term debt on Aug. 29, 2019. We continue to expect a restructuring of the sovereign's long-term debt in the coming months as the Fernandez Administration outlines its economic and debt management plan.

Key Statistics

Table 1

Argentina--Selected Indicators
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
Economic indicators (%)
Nominal GDP (bil. LC) 2,638 3,348 4,579 5,955 8,228 10,645 14,606 21,820 32,416 42,769
Nominal GDP (bil. $) 581 613 567 645 557 643 525 450 432 486
GDP per capita (000s $) 13.9 14.5 13.3 15.0 12.8 14.5 11.7 10.0 9.5 10.6
Real GDP growth (1.0) 2.4 (2.5) 2.7 (2.1) 2.7 (2.5) (3.0) (1.0) 1.5
Real GDP per capita growth (2.1) 1.3 (3.6) 1.6 (3.1) 1.0 (3.4) (3.9) (1.9) 0.6
Real investment growth (7.1) 2.3 (6.8) 3.5 842.2 12.2 (5.7) (18.0) (10.0) 2.0
Investment/GDP 16.5 17.3 17.3 17.1 17.7 16.2 15.9 13.2 11.7 11.6
Savings/GDP 16.1 15.2 15.6 14.3 15.0 11.3 10.7 13.1 12.2 10.0
Exports/GDP 16.2 14.6 14.4 10.7 12.5 11.2 14.3 16.0 16.6 17.0
Real exports growth (4.1) (3.5) (7.0) (2.8) 5.3 1.7 (0.7) 8.5 3.0 4.0
Unemployment rate 6.9 6.4 6.9 6.7 8.4 8.4 9.2 10.4 10.5 10.7
External indicators (%)
Current account balance/GDP (0.4) (2.1) (1.6) (2.7) (2.7) (4.9) (5.2) (0.1) 0.4 (1.7)
Current account balance/CARs (2.2) (13.8) (10.5) (23.5) (19.6) (39.5) (32.1) (0.5) 2.1 (7.7)
CARs/GDP 17.0 15.5 15.4 11.6 13.8 12.4 16.3 20.5 21.2 21.8
Trade balance/GDP 2.6 0.8 1.0 (0.1) 0.8 (0.8) (0.2) 4.3 5.0 2.5
Net FDI/GDP 2.5 1.5 0.6 1.7 0.3 1.6 1.9 1.3 2.1 1.9
Net portfolio equity inflow/GDP (0.0) 0.0 0.1 0.1 0.4 0.4 (2.4) 0.0 0.0 0.0
Gross external financing needs/CARs plus usable reserves 102.4 110.1 117.3 133.8 136.1 149.9 133.3 107.9 127.7 131.6
Narrow net external debt/CARs 88.2 104.6 116.7 154.6 153.6 192.2 180.3 182.6 183.3 166.7
Narrow net external debt/CAPs 86.4 91.9 105.6 125.2 128.4 137.8 136.5 181.6 187.1 154.8
Net external liabilities/CARs (28.7) (37.7) (37.5) (51.0) (56.2) (20.9) (77.1) (49.7) (41.2) (18.4)
Net external liabilities/CAPs (28.1) (33.1) (33.9) (41.3) (46.9) (15.0) (58.4) (49.4) (42.0) (17.1)
Short-term external debt by remaining maturity/CARs 45.8 44.5 46.1 59.9 53.8 72.1 76.7 76.5 88.5 76.5
Usable reserves/CAPs (months) 5.2 4.6 3.6 3.6 2.8 3.5 5.1 7.7 5.6 4.5
Usable reserves (mil. $) 41,590 29,236 27,799 21,155 32,913 48,505 59,164 42,091 42,428 40,374
Fiscal indicators (general government; %)
Balance/GDP (2.5) (2.8) (4.2) (4.6) (6.9) (6.3) (5.7) (4.7) (4.8) (4.4)
Change in net debt/GDP 6.5 4.0 9.5 18.6 14.7 14.3 39.5 36.6 21.1 8.5
Primary balance/GDP (0.5) (1.4) (2.1) (2.6) (3.6) (3.6) (2.1) (1.2) (0.1) (0.4)
Revenue/GDP 32.7 34.2 35.3 35.3 34.3 33.0 30.7 30.5 30.5 31.0
Expenditures/GDP 35.2 37.1 39.5 39.9 41.2 39.3 36.4 35.2 35.3 35.4
Interest/revenues 6.2 4.3 6.0 5.9 9.7 8.2 11.8 11.6 15.4 13.0
Debt/GDP 39.3 36.3 37.7 47.6 50.7 54.8 85.5 93.3 83.9 72.1
Debt/revenues 120.2 105.9 106.9 135.0 147.9 166.3 278.4 306.1 275.2 232.9
Net debt/GDP 32.5 29.7 31.2 42.6 45.5 49.4 75.5 87.2 79.8 69.0
Liquid assets/GDP 6.7 6.6 6.5 5.0 5.2 5.4 9.9 6.2 4.1 3.1
Monetary indicators (%)
CPI growth 21.0 24.5 42.1 26.4 39.1 24.6 34.3 54.0 50.0 30.0
GDP deflator growth 22.3 23.9 40.3 26.6 41.1 26.0 40.7 54.0 50.0 30.0
Exchange rate, year-end (LC/$) 4.90 6.50 8.51 13.10 15.89 18.65 37.60 65.00 85.00 90.00
Banks' claims on resident non-gov't sector growth 30.9 31.0 20.2 36.7 31.4 51.3 33.1 12.4 48.5 36.9
Banks' claims on resident non-gov't sector/GDP 14.3 14.7 12.9 13.6 12.9 15.1 14.7 11.0 11.0 11.4
Foreign currency share of residents' bank deposits 8.4 7.5 8.0 11.8 20.6 23.8 31.4 54.4 54.4 54.4
Real effective exchange rate growth (14.4) (3.7) 5.3 (21.7) 13.5 (6.5) 34.7 N/A N/A N/A
Definitions: Savings is defined as investment plus the current account surplus (deficit). Investment is defined as expenditure on capital goods, including plant, equipment, and housing, plus the change in inventories. Banks are other depository corporations other than the central bank, whose liabilities are included in the national definition of broad money. Gross external financing needs are defined as current account payments plus short-term external debt at the end of the prior year plus nonresident deposits at the end of the prior year plus long-term external debt maturing within the year. Narrow net external debt is defined as the stock of foreign and local currency public- and private- sector borrowings from nonresidents minus official reserves minus public-sector liquid assets held by nonresidents minus financial-sector loans to, deposits with, or investments in nonresident entities. A negative number indicates net external lending. N/A--Not applicable. LC--Local currency. CARs--Current account receipts. FDI--Foreign direct investment. CAPs--Current account payments. e--Estimate. f--Forecast. The data and ratios above result from S&P Global Ratings' own calculations, drawing on national as well as international sources, reflecting S&P Global Ratings' independent view on the timeliness, coverage, accuracy, credibility, and usability of available information.

Ratings Score Snapshot

Table 2

Argentina--Ratings Score Snapshot
Key rating factors Score Explanation
Institutional assessment 6 Policy choices likely weaken capability and willingness to maintain sustainable public finances and balanced economic growth, and thus, debt service. Future policy responses are difficult to predict because of a highly polarized political landscape.
Debt payment culture is weak.
Economic assessment 5 Based on GDP per capita ($) as per Selected Indicators in Table 1.
Weighted average real GDP per capita trend growth over a 10-year period is -0.8%, which is well below sovereigns in the same GDP category.
External assessment 6 Based on narrow net external debt and gross external financing needs as per Selected Indicators in Table 1.
There is a risk of marked deterioration in the cost of or access to external financing.
Fiscal assessment: flexibility and performance 6 Based on the change in net general government debt (% of GDP) as per Selected Indicators in Table 1.
Fiscal assessment: debt burden 5 Based on net general government debt (% of GDP) and general government interest expenditures (% of general government revenues) as per Selected Indicators in Table 1.
Over 70% of gross government debt is denominated in foreign currency.
Monetary assessment 5 There is heavy intervention in the foreign exchange rate market.
Persistently high inflation, as per Selected Indicators in Table 1. The central bank has limited independence due to perceived political interference. Argentina has a small domestic capital market and a low level of credit to GDP.
Indicative rating b- As per Table 1 of "Sovereign Rating Methodology."
Notches of supplemental adjustments and flexibility -5 Argentina is currently in selective default.
Final rating
Foreign currency SD
Notches of uplift 0 Default risks do not apply differently to foreign- and local-currency debt
Local currency SD
S&P Global Ratings' analysis of sovereign creditworthiness rests on its assessment and scoring of five key rating factors: (i) institutional assessment; (ii) economic assessment; (iii) external assessment; (iv) the average of fiscal flexibility and performance, and debt burden; and (v) monetary assessment. Each of the factors is assessed on a continuum spanning from 1 (strongest) to 6 (weakest). S&P Global Ratings' "Sovereign Rating Methodology," published on Dec. 18, 2017, details how we derive and combine the scores and then derive the sovereign foreign currency rating. In accordance with S&P Global Ratings' sovereign ratings methodology, a change in score does not in all cases lead to a change in the rating, nor is a change in the rating necessarily predicated on changes in one or more of the scores. In determining the final rating the committee can make use of the flexibility afforded by §15 and §§126-128 of the rating methodology.

Related Criteria

  • Methodology For National And Regional Scale Credit Ratings, June 25, 2018
  • Sovereign Rating Methodology, Dec. 18, 2017
  • Methodology For Linking Long-Term And Short-Term Ratings, April 7, 2017
  • Post-Default Ratings Methodology: When Does S&P Global Ratings Raise A Rating From 'D' Or 'SD'?, March 23, 2015
  • Methodology: Timeliness Of Payments: Grace Periods, Guarantees, And Use Of 'D' And 'SD' Ratings, Oct. 24, 2013
  • Criteria For Assigning 'CCC+', 'CCC', 'CCC-', And 'CC' Ratings, Oct. 1 2012
  • General Criteria: Use Of CreditWatch And Outlooks, Sept. 14, 2009
  • General Criteria: Methodology: Criteria For Determining Transfer And Convertibility Assessments, May 18, 2009
  • General Criteria: Rating Implications Of Exchange Offers And Similar Restructurings, Update, May 12, 2009

Related Research

  • Banking Industry Country Risk Assessment Update: December 2019, Dec. 17, 2019
  • Can Argentine Provinces Withstand A Potential Sovereign Default In 2020?, Dec. 9, 2019
  • Sovereign Ratings History, Dec. 4, 2019
  • Credit Conditions Latin America: Political Challenges Will Prevail In 2020, Dec. 3, 2019
  • Argentina Sovereign Ratings Raised To 'CCC-/C' From 'SD' Following Cured Default On Short-Term Notes; Outlook Negative, Aug. 30, 2019
  • Argentina Downgraded To 'SD' On Maturity Extension Of Short-Term Debt; Long-Term Issue Ratings Lowered To 'CCC-', Aug. 29, 2019
  • Argentina Long-Term Sovereign Ratings Lowered To 'B-' As Market Turbulence Weakens Creditworthiness; Outlook Negative, Aug. 16, 2019
  • Banking Industry Country Risk Assessment: Argentina, July 30, 2019
  • Sovereign Risk Indicators, https://www.spratings.com/sri/

In accordance with our relevant policies and procedures, the Rating Committee was composed of analysts that are qualified to vote in the committee, with sufficient experience to convey the appropriate level of knowledge and understanding of the methodology applicable (see 'Related Criteria And Research'). At the onset of the committee, the chair confirmed that the information provided to the Rating Committee by the primary analyst had been distributed in a timely manner and was sufficient for Committee members to make an informed decision.

After the primary analyst gave opening remarks and explained the recommendation, the Committee discussed key rating factors and critical issues in accordance with the relevant criteria. Qualitative and quantitative risk factors were considered and discussed, looking at track-record and forecasts.

The committee's assessment of the key rating factors is reflected in the Ratings Score Snapshot above.

The chair ensured every voting member was given the opportunity to articulate his/her opinion. The chair or designee reviewed the draft report to ensure consistency with the Committee decision. The views and the decision of the rating committee are summarized in the above rationale and outlook. The weighting of all rating factors is described in the methodology used in this rating action (see 'Related Criteria And Research').

Ratings List

Downgraded
To From

Argentina

Sovereign Credit Rating
Foreign Currency SD/D CCC-/Negative/C
National scale SD raCCC-
Downgraded; Ratings Affirmed
To From

Argentina

Sovereign Credit Rating
Local Currency CC/Negative/C CCC-/Negative/C
Downgraded
To From

Argentina

Senior Unsecured CC CCC-
Ratings Affirmed

Argentina

Transfer & Convertibility Assessment B-

Certain terms used in this report, particularly certain adjectives used to express our view on rating relevant factors, have specific meanings ascribed to them in our criteria, and should therefore be read in conjunction with such criteria. Please see Ratings Criteria at www.standardandpoors.com for further information. Complete ratings information is available to subscribers of RatingsDirect at www.capitaliq.com. All ratings affected by this rating action can be found on S&P Global Ratings' public website at www.standardandpoors.com. Use the Ratings search box located in the left column.

Primary Credit Analyst:Lisa M Schineller, PhD, New York (1) 212-438-7352;
lisa.schineller@spglobal.com
Secondary Contact:Joydeep Mukherji, New York (1) 212-438-7351;
joydeep.mukherji@spglobal.com
Additional Contacts:Miriam Hespanhol, New York + 1 (212) 438 1406;
miriam.hespanhol@spglobal.com
John J Piecuch, New York (1) 212-438-1579;
john.piecuch@spglobal.com

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