Agency warns of high inflation, says gov’t must work to prevent high wage increases
Credit rating agency Standard & Poor’s gave a clear seal of approval for President Mauricio Macri’s first economic measures by raising the country’s long-term and short-term sovereign credit ratings in pesos by one notch — the first time that one of the top credit-rating agencies boosted Argentina’s rating since Macri took office in December.
The move meant that the country’s local-currency debt moved up to “B-/B” from “CCC+/C.”
Despite the improvement, S&P warned annual inflation could spike to 35 percent this year and pointed out that whether Macri is “success” in stabilizing the economy will depend on whether the government can “contain” the upcoming wage negotiations
“The rapid and successful recent liberalization of the exchange-rate market supports the improvement in our transfer and convertibility assessment. While this is only the beginning of a long process, we believe the sovereign is now unlikely to interfere with access to and transfer of foreign exchange,” the credit rating agency said.
S&P kept unchanged its selective default on the country’s foreign-currency debt due to the ongoing conflict with the holdout creditors that is preventing the country from servicing much of its bonds paid abroad.
Argentina will remain stagnant this year, the credit-rating agency said, blaming the decline in part to Brazil’s recession and devaluation, lower agricultural prices and uncertainties on China’s prospects. The outlook is more positive in 2017, when the country will grow by two percent.
The outlook still remains uncertain and the country could “surprise” if the country receives a greater degree of confidence from investors. If the economic agenda can’t be implemented due to political polarization though, the country’s prospects could worsen.
“Over the long term, one of Argentina’s main challenges is to avoid its historical pattern of very volatile economic performance, with periods of rapid growth followed by crises and low growth,” S&P said.
The country’s fiscal deficit “may decrease modestly” this year, after ending 2015 with a 7.5 percent increase of the gross domestic product, Standard and Poor said.
Despite the administration’s efforts to decrease the deficit, the government debt would gradually increase to 51 percent of GDP at year-end 2016 from 50 percent in 2015 and 41 percent in 2014.
Finance Minister Alfonso Prat-Gay said last month that the country’s deficit was now at 7.1 percent after ending 2015 with a 5.8 percent deficit. The government’s goal is to lower it one percentage point this year.
While debt increases, inflation will also spike in part due to the sharp devaluation in December devaluation and the government’s decision to do away with subsidies for electricity, among other factors.
The increase in the inflation rate will turn the upcoming wage negotiations into Macri’s most important political test, S&P said, claiming the government will have to “contain” salary demands from unions if it hopes to “stabilize” the economy.
“The stable outlook on the local currency rating balances the improvement of economic policies with the political challenges facing the new administration. We expect the government to implement policies that gradually contain inflationary pressures and reduce its fiscal deficit, slowly strengthening the macroeconomic pillars of the economy,” the credit rating agency said.
Considering the government is negotiating with the “vulture” funds, Standard & Poor’s left the door open to improve the selective default on the country’s foreign currency ratings. If Argentina solves its default through “payment, exchange or other settlement,” the agency has vowed to reassess the country’s rating and most likely raise it to CCC or B categories.
The final decision will depend on “the government’s ability to implement its economic reforms and on any possible lingering legal threats that could impair its ability to service future debt,” S&P said.
The credit rating agency didn’t make a forecast over the result of the negotiations but said regaining access to international markets would be very important for the country to correct its “main macroeconomic imbalances.” A larger inflow of external funding would boost the liquidity of the national and provincial administrations and help to stabilize the economy,” S&P said.
“We expect that greater access to commercial and multilateral borrowing will be reflected in likely growing current account deficits in the next two years. As a result, Argentina’s narrow net external debt will likely reach 109 percent of current account receipts by the end of 2016, compared with 107 percent last year,” Standard and Poor said.
S&P’s rating improvement comes after credit rating agency Moody’s raised Argentina’s outlook from “neutral” to “positive” after the elections, meaning that a rating upgrade could be in the cards soon.
Moody’s report said Macri “consistently and increasingly” made clear that his policies would represent a much more market-friendly government, while he pointed out that the rating upgrade would depend mainly on reaching an agreement with the “vulture” funds.
“A prompt resolution of the holdout saga is a key Macri pledge in this regard, and is required for the government to borrow abroad, which it will probably need to do in order to meet upcoming debt service obligations,” noted the report.
Date: February 5, 2016