Moody's Cuts Argentina's Rating to 'Caa1'; Cites Official Reserves, Policy Environment
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Moody's Investors Service has today downgraded Argentina's government bond rating to Caa1 from B3, and changed the outlook to stable from negative. Concurrently, Moody's has downgraded its rating on Argentina's foreign legislation debt to (P)Caa2 from (P)Caa1.
RATINGS RATIONALE
RATIONALE FOR DOWNGRADE
Moody's decision to downgrade Argentina's government bond rating was driven by the following factors:
1. A significant fall in official reserves, which have dropped to $27.5 billion from a high of $52.7 billion in 2011, thereby increasing the risk that Argentina may not meet its foreign-currency debt service obligations, and
2. An inconsistent policy environment that increases the likelihood that official reserves will remain under pressure this year and next.
FIRST DRIVER -- FALL IN OFFICIAL RESERVES
A combination of persistent capital flight and declining trade surpluses have put pressure on official international reserves which fell to $27.5 billion from a high of $52.7 billion in 2011. While reserves have stabilized in the last month, there are continued high risks of further drops, a key credit risk since Argentina lacks international market access and utilizes central bank reserves to meet its foreign currency debt obligations.
Argentina is one of the few Latin American countries with a capital account deficit due to persistent capital outflows and a lack of access to international debt markets. The trade surplus, which helped prop up dollar inflows for years, fell 27% in 2013 compared to 2012 levels. Lack of confidence in government economic policies, including one of the region's highest inflation rates, will make it difficult to prevent continued capital flight.
Argentina's government relies on the use of official reserves to meet its foreign currency obligations. Moody's estimates that the government faces dollar debt payments of over $20 billion between 2014 and 2015. However, Argentina does not have external funding options that would reduce its reliance on official reserves to pay debt.
SECOND DRIVER -- AN INCONSISTENT POLICY ENVIRONMENT WILL MAKE IT DIFFICULT TO REVERSE RESERVE LOSSES
The fall in reserves and the lack of market access both reflect unsustainable economic policy decisions that have led to very high inflation, currency depreciation, capital flight and economic stagnation. Inflation, which was averaging 25% annually in recent years, will likely spike higher in 2014, partly due to January's 17% currency devaluation, which was itself the result of the need to stem dollar outflows. Moody's expects the Argentinean government to face further pressure on official reserves and the currency.
Despite talk of lowering some energy subsidies, the government has not reduced ongoing fiscal imbalances. Moody's therefore expects that the monetization of the fiscal deficit will continue feeding inflation. The central bank's policy of higher interest rates and faster currency depreciation will have a negative impact on economic growth. Political challenges will also reduce the government's room to maneuver as unions resist official efforts to keep wage increases below expected inflation. The Paris Club recently invited Argentina to hold negotiations to settle outstanding debt but this is unlikely to materially improve reserve levels. A final agreement with the Paris Club could lead to new bilateral lending but it will take months for any agreement to be finalized and we expect any new bilateral funding to remain limited in the next two years.
RATIONALE FOR STABLE OUTLOOK
The stable outlook on the Caa1 rating reflects Moody's view that no further rating changes are likely in the near future. The stable outlook is premised on a balance between no further significant drops in official reserves and continued government difficulties in addressing macroeconomic imbalances.
WHAT COULD MOVE THE RATINGS UP/DOWN
Moody's would consider moving the government bond rating outlook to positive upon evidence that Argentina's funding options have improved and that economic policies have become more consistent and predictable.
Argentina's foreign legislation bonds could potentially be upgraded back to the level of the issuer rating if the final court ruling does not affect Argentina's payments on its restructured debt.
A downgrade of the issuer rating could result if policy decisions end up having a negative impact on the main economic and debt metrics. Additionally, a persistent decline in international reserves and a rise in the country's debt ratios could also result in a lower rating. A further downgrade of Argentina's foreign legislation debt could result if Argentina's reaction to a final court ruling involves missed payments to restructured debt bondholders.
COUNTRY CEILINGS
As a result of this rating action, Moody's has adjusted the long-term local currency bond and deposit ceilings to B1 from Ba3. The long-term foreign-currency deposit ceiling was changed to Caa2 from Caa1. The long-term foreign-currency bond ceiling changed to Caa1 from B3. All foreign currency short-term ceilings remain at Not Prime. Country ceilings reflect a range of undiversifiable risks to which issuers in any jurisdiction are exposed, including economic, legal and political risks. These ceilings act as a cap on ratings that can be assigned to the foreign- and local-currency obligations of entities domiciled in the country.
Downgrades:
..Issuer: Argentina
.... Country Ceiling Bank Deposit Rating, Downgraded to Caa2 from Caa1
.... Country Ceiling Rating, Downgraded to Caa1 from B3
..Issuer: Argentina, Government of
.... Issuer Rating, Downgraded to Caa1 from B3
....Senior Unsecured Shelf, Downgraded to (P)Caa2 from (P)Caa1
....Senior Unsecured Shelf, Downgraded to (P)Caa1 from (P)B3
Outlook Actions:
..Issuer: Argentina
....Outlook, Changed To No Outlook From Negative
..Issuer: Argentina, Government of
....Outlook, Changed To Stable From Negative
Affirmations:
..Issuer: Argentina
.... Country Ceiling Bank Deposit Rating, Affirmed NP
.... Country Ceiling Rating, Affirmed NP
..Issuer: Argentina, Government of
....Senior Unsecured Medium-Term Note Program, Affirmed (P)Ca
....Senior Unsecured Medium-Term Note Program, Affirmed (P)NP
....Senior Unsecured Regular Bond/Debenture , Affirmed Ca
....Senior Unsecured Shelf, Affirmed (P)Ca
GDP per capita (PPP basis, US$): 17,917 (2012 Actual) (also known as Per Capita Income)&Real GDP growth (% change): 3% (2013 Actual) (also known as GDP Growth)&Inflation Rate (CPI, % change Dec/Dec): 11.5% (2013 Actual) &Gen. Gov. Financial Balance/GDP: -2.4% (2013 Actual) (also known as Fiscal Balance)&Current Account Balance/GDP: -0.7% (2013 Actual) (also known as External Balance)&External debt/GDP: 28.5 (2013 Actual) &Level of economic development: Low level of economic resilience &Default history: At least one default event (on bonds and/or loans) has been recorded since 1983. &
On 07 March 2014, a rating committee was called to discuss the rating of the Argentina, Government of. The main points raised during the discussion were: The issuer's economic fundamentals, including its economic strength, have materially decreased. The systemic risk in which the issuer operates has materially increased. The issuer has become increasingly susceptible to event risks. An analysis of this issuer, relative to its peers, indicates that a repositioning of its rating would be appropriate. Other views raised included: The issuer's institutional strength/ framework, have not materially changed. The issuer's governance and/or management, have not materially changed. The issuer's fiscal or financial strength, including its debt profile, has not materially changed.
The principal methodology used in this rating was Sovereign Bond Ratings published in September, 2013. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.
The weighting of all rating factors is described in the methodology used in this rating action, if applicable.
RATINGS RATIONALE
RATIONALE FOR DOWNGRADE
Moody's decision to downgrade Argentina's government bond rating was driven by the following factors:
1. A significant fall in official reserves, which have dropped to $27.5 billion from a high of $52.7 billion in 2011, thereby increasing the risk that Argentina may not meet its foreign-currency debt service obligations, and
2. An inconsistent policy environment that increases the likelihood that official reserves will remain under pressure this year and next.
FIRST DRIVER -- FALL IN OFFICIAL RESERVES
A combination of persistent capital flight and declining trade surpluses have put pressure on official international reserves which fell to $27.5 billion from a high of $52.7 billion in 2011. While reserves have stabilized in the last month, there are continued high risks of further drops, a key credit risk since Argentina lacks international market access and utilizes central bank reserves to meet its foreign currency debt obligations.
Argentina is one of the few Latin American countries with a capital account deficit due to persistent capital outflows and a lack of access to international debt markets. The trade surplus, which helped prop up dollar inflows for years, fell 27% in 2013 compared to 2012 levels. Lack of confidence in government economic policies, including one of the region's highest inflation rates, will make it difficult to prevent continued capital flight.
Argentina's government relies on the use of official reserves to meet its foreign currency obligations. Moody's estimates that the government faces dollar debt payments of over $20 billion between 2014 and 2015. However, Argentina does not have external funding options that would reduce its reliance on official reserves to pay debt.
SECOND DRIVER -- AN INCONSISTENT POLICY ENVIRONMENT WILL MAKE IT DIFFICULT TO REVERSE RESERVE LOSSES
The fall in reserves and the lack of market access both reflect unsustainable economic policy decisions that have led to very high inflation, currency depreciation, capital flight and economic stagnation. Inflation, which was averaging 25% annually in recent years, will likely spike higher in 2014, partly due to January's 17% currency devaluation, which was itself the result of the need to stem dollar outflows. Moody's expects the Argentinean government to face further pressure on official reserves and the currency.
Despite talk of lowering some energy subsidies, the government has not reduced ongoing fiscal imbalances. Moody's therefore expects that the monetization of the fiscal deficit will continue feeding inflation. The central bank's policy of higher interest rates and faster currency depreciation will have a negative impact on economic growth. Political challenges will also reduce the government's room to maneuver as unions resist official efforts to keep wage increases below expected inflation. The Paris Club recently invited Argentina to hold negotiations to settle outstanding debt but this is unlikely to materially improve reserve levels. A final agreement with the Paris Club could lead to new bilateral lending but it will take months for any agreement to be finalized and we expect any new bilateral funding to remain limited in the next two years.
RATIONALE FOR STABLE OUTLOOK
The stable outlook on the Caa1 rating reflects Moody's view that no further rating changes are likely in the near future. The stable outlook is premised on a balance between no further significant drops in official reserves and continued government difficulties in addressing macroeconomic imbalances.
WHAT COULD MOVE THE RATINGS UP/DOWN
Moody's would consider moving the government bond rating outlook to positive upon evidence that Argentina's funding options have improved and that economic policies have become more consistent and predictable.
Argentina's foreign legislation bonds could potentially be upgraded back to the level of the issuer rating if the final court ruling does not affect Argentina's payments on its restructured debt.
A downgrade of the issuer rating could result if policy decisions end up having a negative impact on the main economic and debt metrics. Additionally, a persistent decline in international reserves and a rise in the country's debt ratios could also result in a lower rating. A further downgrade of Argentina's foreign legislation debt could result if Argentina's reaction to a final court ruling involves missed payments to restructured debt bondholders.
COUNTRY CEILINGS
As a result of this rating action, Moody's has adjusted the long-term local currency bond and deposit ceilings to B1 from Ba3. The long-term foreign-currency deposit ceiling was changed to Caa2 from Caa1. The long-term foreign-currency bond ceiling changed to Caa1 from B3. All foreign currency short-term ceilings remain at Not Prime. Country ceilings reflect a range of undiversifiable risks to which issuers in any jurisdiction are exposed, including economic, legal and political risks. These ceilings act as a cap on ratings that can be assigned to the foreign- and local-currency obligations of entities domiciled in the country.
Downgrades:
..Issuer: Argentina
.... Country Ceiling Bank Deposit Rating, Downgraded to Caa2 from Caa1
.... Country Ceiling Rating, Downgraded to Caa1 from B3
..Issuer: Argentina, Government of
.... Issuer Rating, Downgraded to Caa1 from B3
....Senior Unsecured Shelf, Downgraded to (P)Caa2 from (P)Caa1
....Senior Unsecured Shelf, Downgraded to (P)Caa1 from (P)B3
Outlook Actions:
..Issuer: Argentina
....Outlook, Changed To No Outlook From Negative
..Issuer: Argentina, Government of
....Outlook, Changed To Stable From Negative
Affirmations:
..Issuer: Argentina
.... Country Ceiling Bank Deposit Rating, Affirmed NP
.... Country Ceiling Rating, Affirmed NP
..Issuer: Argentina, Government of
....Senior Unsecured Medium-Term Note Program, Affirmed (P)Ca
....Senior Unsecured Medium-Term Note Program, Affirmed (P)NP
....Senior Unsecured Regular Bond/Debenture , Affirmed Ca
....Senior Unsecured Shelf, Affirmed (P)Ca
GDP per capita (PPP basis, US$): 17,917 (2012 Actual) (also known as Per Capita Income)&Real GDP growth (% change): 3% (2013 Actual) (also known as GDP Growth)&Inflation Rate (CPI, % change Dec/Dec): 11.5% (2013 Actual) &Gen. Gov. Financial Balance/GDP: -2.4% (2013 Actual) (also known as Fiscal Balance)&Current Account Balance/GDP: -0.7% (2013 Actual) (also known as External Balance)&External debt/GDP: 28.5 (2013 Actual) &Level of economic development: Low level of economic resilience &Default history: At least one default event (on bonds and/or loans) has been recorded since 1983. &
On 07 March 2014, a rating committee was called to discuss the rating of the Argentina, Government of. The main points raised during the discussion were: The issuer's economic fundamentals, including its economic strength, have materially decreased. The systemic risk in which the issuer operates has materially increased. The issuer has become increasingly susceptible to event risks. An analysis of this issuer, relative to its peers, indicates that a repositioning of its rating would be appropriate. Other views raised included: The issuer's institutional strength/ framework, have not materially changed. The issuer's governance and/or management, have not materially changed. The issuer's fiscal or financial strength, including its debt profile, has not materially changed.
The principal methodology used in this rating was Sovereign Bond Ratings published in September, 2013. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.
The weighting of all rating factors is described in the methodology used in this rating action, if applicable.
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