NEW YORK--(BUSINESS WIRE)--Mauricio Macri's victory in the November 22nd Presidential elections has not had an immediate impact on Argentina's creditworthiness. Once Argentina is able to resolve legal constrains preventing Argentina from servicing debt, the sovereign's rating will likely reflect the degree to which the new administration can ease financing constraints and strengthen the consistency and credibility of the policy framework, according to a new Fitch Ratings report.
Fitch believes that the Macri administration will likely negotiate with 'holdout' bondholders. However, the timing of a comprehensive and final resolution to this process remains uncertain given political hurdles and the urgency of other issues, such as reducing foreign exchange distortions and correcting fiscal imbalances.
Argentina's Long-Term Foreign Currency (LTFC) IDR has remained in Restricted Default (RD) since July 2014, and Fitch Ratings has indicated that the resumption of timely debt service on defaulted bonds would lead to the upgrade of the foreign currency IDR.
Fitch has moved 10 sovereigns out of the default category since 2003. Argentina is the only sovereign that has been lifted straight to 'B' from 'RD' (July 2010) due to higher per capita income and growth relative to peers, favorable public debt composition, consecutive years of current account surpluses and manageable financing requirements. Currently, Argentina faces weak international reserves buffer, high fiscal financing needs, growth underperformance and rising macroeconomic distortions.
The task of rebalancing Argentina's economy has become more difficult over the past year and is full of political challenges. FX and regulated price adjustments, if not accompanied by credible and broader policy measures, as well as adequate international reserves firepower, could result in greater BOP pressures, higher inflation and sharper economic slowdown. International reserves have declined by USD5bn since the beginning of 2015.
With no legislative majority and a narrow victory margin in the second round presidential election, the government faces the challenge of consolidating its popular support and creating a governing coalition to move ahead with politically sensitive measures.
A high fiscal deficit and significant financing needs await the new administration. Developing fresh financing sources and outlining a credible and politically feasible fiscal consolidation strategy will be important to boosting confidence and supporting a reduction in inflationary and FX pressures through reduced monetary financing.
Despite weaker flows to Emerging Markets (EMs), increased risk aversion and the 2014 default, investors have remained positive on Argentina due to the prospect of change after the elections. However, the risk of expectation reversal is present if policy adjustments disappoint.
The full report 'Argentina: Ready to Leave the Default Era? is available at 'www.fitchratings.com'.
Additional information is available at www.fitchratings.com.
Applicable Criteria and Related Research:
--Sovereign Rating Criteria (August 2014)
Argentina: Ready to Leave the Default Era?
Sovereign Rating Criteria (pub. 12 Aug 2014)