Credendo Group continues to see high risks in Argentina. Countrywide commercial risk is classified in category C (on a scale from A to C) and as for political risk (classified on a scale from 1 to 7), the short-term classification is in category 5 and the medium- and long-term classification is in category 6.
The short-term classification boils down to an assessment of liquidity risk. In that sense, it is noteworthy that Argentina’s classification has remained stable despite the renewed international sovereign bond default as of July 2014. That is explained by the fact that strict controls have continued to prevent massive capital flight (thus underpinning the liquidity position) and because the sovereign already before the latest default lacked access to international financial markets. What is more, Argentine international reserves have received a boost thanks to increased soy exports and a large currency swap deal that was agreed with China.
That being said, Credendo Group remains pessimistic about both commercial and political risk. One reason for that is the dire state of the Argentine economy. GDP fell by 2.1% in 2014 and is expected to contract by 1% in 2015, while inflation – according to private sector estimates – rose above 40% in 2014. Besides raising countrywide commercial risk, such stagflation will also add to social discontent and possibly spark protests. Furthermore, despite lower oil prices making for a cheaper import bill (and bringing down expected inflation to ‘only’ 30% in 2015), fiscal and external imbalances stand to worsen in the short-term due to increased public spending in the run-up to the October 2015 general election, an adverse evolution of soy prices, subdued external demand from Brazil and – most importantly – the falling due of substantial external debt servicing obligations.
Finally, note that while the latest sovereign debt default has had few immediate consequences, it does weigh on longer term macroeconomic prospects. Indeed, by eroding recent efforts to improve relations with international investors (see the agreements reached with Paris Club creditors over arrears, with Repsol over compensation payments for the expropriation of its majority share in YPF, with International Centre for Settlement of Investment Disputes litigants over claims and with the IMF over improving the quality of official statistics), the default has pushed back the much-needed diversification of financing sources. For the time being, the government will thus continue to monetize fiscal deficits (hence fuelling inflation) and resort to ad hoc interventionist policies (expanding price and exchange controls rather than scaling them down), as Argentina struggles its way to the general election in October.
In terms of resolving the latest default (which implies finally settling the discussion with holdout creditors that did not take part in the 2005 and 2010 debt restructuring that followed the massive sovereign debt default in 2002) and undertaking structural reforms to address the fundamental macroeconomic imbalances, all eyes are set on the outcome of the October election. Some optimism prevails, as all three main candidates are seen as more pragmatic and business-friendly than incumbent President Kirchner. The hope is that the new administration will manage to restore investor confidence, thus unlocking Argentina’s vast potential in energy, mining and agribusiness. A low level of external debt and a relatively sound banking system could underpin such a positive evolution. A quick turnaround of economic policies will not be easy however, as the anti-business policy framework has become increasingly entrenched in recent years.