• Argentina is seriously impacted by the May 2018 confidence crisis, which resulted in capital outflows and a sharp depreciation of the peso
  • The recent turmoil led to a virtual standstill of the economy while inflation is expected to swell this year to about 27%, a high level
  • External debt and external debt service were boosted to persistently high levels, especially vis-à-vis current account receipts 
  • Public finances are in an unhealthy shape and despite expected strong fiscal consolidation, public debt is likely to remain at an elevated level in the coming years
  • Foreign exchange reserves are expected to stay at an adequate level but liquidity is pressurised due to the increased and high level of short-term external debt
  • On the positive side, the peso depreciation is likely to have a positive impact on the current account deficit, which is expected to narrow

The medium- and long-term political risk classification of Argentina was upgraded in October 2016 to category 5/7 based on the orthodox policies of President Macri and the country’s renewed access to financial markets. However, less than two years after this upgrade there has been a vast deterioration of the macroeconomic fundamentals. Firstly, this renewed access to the financial markets combined with a gradual approach to fiscal consolidation and ultra-low global interest rates, have led to quickly rising external debt. Secondly, current account receipts of the relatively undiversified country (food accounts for around half of its export revenues) only slowly increase and inflation has remained high.

On top of that, a confidence crisis in May 2018 further hit the economy. Indeed, anxiety among investors resulted in capital outflows and a run on the Argentine peso, which lost around 40% of its value vis-à-vis the USD between August 2017 and August 2018. Only when President Macri embarked on a domestically highly unpopular USD 50 bn IMF stand-by agreement for 3 years, pressure on the currency waned and tentative signs of a return of the market confidence appeared. That being said, the country remains vulnerable to volatility in the financial markets (e.g. following the Turkish lira’s tumble).

On the upside, the peso depreciation is likely to have a positive impact on the current account balance. In 2017 the current account deficit vis-à-vis GDP surged to a significant level of 5% of GDP but the strong peso depreciation is forecasted to lead to strong import compression and more competitive export sectors this year. Hence, the current account deficit is projected to narrow to 3.8% of GDP in 2018.

Nevertheless, Argentina’s macroeconomic fundaments have clearly deteriorated. The recent turmoil led to a virtual standstill of the economy while inflation is expected to swell this year to about 27%, a high level. Moreover, in the coming two years, inflation is likely to remain in double-digit numbers while GDP growth is expected to be rather weak. Additionally, (short-term) external debt and debt service levels have significantly increased to dangerous levels. Indeed, as a large share of external debt is foreign currency debt while the GDP denominated in USD fell, total external debt is expected to increase from 27% of GDP at the end of 2015 to 51% of GDP in 2018, a relatively elevated level. Even more worrisome is the debt ratio vis-à-vis current account receipts. As current account receipts hardly increased in the past years, external debt vis-à-vis current account revenues spectacularly soared to almost 350% in 2018, a very high level. What is more, external debt (especially vis-à-vis current account receipts) and debt service are forecasted to remain very high in the coming years.

Also public finances deteriorated. As around 70% of the general government debt is denominated in foreign currency, debt surged to an estimated 65% of GDP in 2018 owing to the currency depreciation. In the next years, the general government debt is expected to decline thanks to fiscal consolidation, but remain at a relatively elevated level.

For these reasons, Credendo decided to downgrade the country classification for the MLT political risk, which represents the country’s solvency, from category 5/7 to category 6/7.      

Analyst: Jolyn Debuysscher – j.debuysscher@credendo.com