Dagong Downgrades Argentina's Sovereign Credit Ratings with Negative Outlook
Dagong Global Credit Rating Co., Ltd.
January 30, 2014
Dagong Global Credit Rating Co., Ltd. (hereinafter referred to as “Dagong”) decides to downgrade the local and foreign currency sovereign credit ratings of the Republic of Argentina (hereinafter referred to as “Argentina”) from B- and CCC to CCC and CC, respectively, each with a negative outlook. The long-term accumulation of structural imbalance has revealed the lack of macroeconomic sustainability, and the risk of a hard-landing has increased substantially. There will be little room for policy adjustment in the future, its international reserves has dropped precipitously, and the pressure of peso devaluation is increasing. The federal government’s local and foreign currency solvency has declined significantly.
The main reasons for lowering the sovereign credit ratings of Argentina are as follows:
1. The risk of an economic hard-landing in the short term has increased significantly, and the deterioration of structural imbalances is gradually eroding the national wealth creation capacity. The long-term accumulation of inflation risk and low economic efficiency highlighted the macroeconomic imbalance after the global financial crisis. The economic growth stimulated by fiscal expansion and excess currency becomes unsustainable. There is little room for policy adjustment, and the risk of economic hard-landing has increased significantly. The real economic growth rate is projected to drop to 2.8% and 2.3% in 2014 and 2015 respectively, and the inflation pressure remains elevated. The promotion of the Industrialization Strategy by tariff barriers, import restrictions and administrative control is unlikely to achieve the policy objective of macroeconomic rebalance, and will gradually erode long-term economic growth potential. Therefore, the long-term economic growth will enter a sluggish phase, and social tensions will be intensified accordingly.
2. The foreign exchange generating capacity has been severely weakened. The shortage of international reserves and substantial currency devaluation pressure have increased Argentina’s external debt solvency risk drastically. As of September 2013, Argentina’s external debt ratio was only 27.6%. However, strict import restrictions and foreign exchange control measures did not reverse the trend of falling current account income and deterioration of capital outflows due to the declining foreign exchange generating capacity. The current account deficit is expected to remain at 0.8% of GDP, and capital outflows will continue in 2014. Consequently, the Argentine peso devalued by 32.6% in 2013, and international reserves dropped to 6.3% of GDP, only covering 90.3% of short-term external debt and 46.4% of general government external debt. There is a severe shortage of international reserves and currency devaluation pressure remains high. Argentina’s external debt repayment risk rose rapidly.
3. The fiscal status deteriorated, funding difficulty exacerbates, and the government’s local and foreign currency solvency risks are significant. Given the government’s overly optimistic short-term economic expectation and difficulty in controlling fiscal expenditure growth, the general government fiscal deficit ratio is expected to maintain at the high level of 4.3% and 4.0% respectively in 2014 and 2015, and the general government debt burden ratio will rise slightly to 48.9% and 49.4%. Due to the high inflation and dramatically declining international reserves, the heavy reliance on the financing support from the central bank and international reverse to meet the government’s financing requirement has been unsustainable. The leftover problem of debt default and the deteriorated relationships with international organizations also block Argentina’s channels to seek financing support from international capital market and international multilateral institutions. Therefore, the funding difficultly will exacerbate the risk of government debt repayment in both local and foreign currency, and the federal government’s solvency is very fragile.
In the near term, whether the government will be able to obtain stable domestic and external financing to alleviate the pressure from insufficient international reserves and currency devaluation is highly uncertain. In addition, the government’s ability to manage the economy to achieve a soft-landing is inadequate. The federal government solvency will continue to be under pressure. Therefore, Dagong assigns the negative rating outlook for the local and foreign currency sovereign credit ratings of Argentina in the next 1 to 2 years.