NEW YORK--(BUSINESS WIRE)--Argentine President-elect Mauricio Macri's incoming government will likely attempt to improve the consistency and credibility of Argentina's policy framework, Fitch Ratings says. Easing FX financing constraints is a key factor in preventing destabilizing macroeconomic pressures and providing the new government with maneuvering room for future initiatives.
Fitch rates Argentina 'RD' and the election's outcome will not have an immediate impact on the nation's ratings. The most important credit issue for the new administration is to achieve a final resolution to the legal battle with holdout creditors that would allow Argentina to resume service on its restructured debt and potentially allow it to increase external sources of financing.
Argentines went to the polls yesterday for an unprecedented presidential election run-off. The initial official results point to the victory of Mauricio Macri from the Cambiemos Coalition with 51.4% of the votes. This electoral outcome effectively marks the end of the "Kirchner model" that has directed the economy of Argentina for the past 12 years.
The new president will face several external risks. The slowdown in China, weaker commodity prices and the expected continuation of the recession in Brazil are likely to weigh on the recovery in Argentine exports. Other Latin American currencies declines, (particularly the Brazilian Real depreciation), and relative stability in the peso have made Argentinian goods much more expensive in real terms. At the same time, external financing conditions have tightened in emerging markets.
Fitch expects the new government to undertake policy changes meant to increase the consistency and credibility of Argentina's policy framework. The incoming administration will face economic challenges that include balance of payments pressures, external and fiscal financing constraints, and rising macroeconomic distortions such as high inflation and widening spreads between the official and parallel exchange rate.
Pressures on international reserves have intensified in recent months due to the rigid FX policy of the outgoing Fernandez de Kirchner administration and increased uncertainty related to the electoral cycle. Even including a swap agreement with China, international reserves are down 20% since early October. Improved access to fresh sources of FX financing, strengthening of external buffers, and greater exchange rate flexibility are key to easing balance of payments pressure and mitigating external vulnerabilities.
Argentina's government debt is similar to its rated peers. Public-sector entities hold 61% of that debt, reducing short-term refinancing risk. However, higher fiscal financing needs (as a result of the widening of the government's deficit) have not been accompanied by an increase in financing sources. The sovereign receives some multilateral funding, but has been cut off from direct access to international capital markets for a decade, relying on intra-public sector financing. Adding to funding sources in the near term will be important given the limited space in the domestic market and the negative impact of central bank financing on monetary stability.
Additional information is available on www.fitchratings.com.
The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article, which may include hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.