NEW YORK--(BUSINESS WIRE)--Argentina's failure to cure its missed coupon payments on Oct. 30 constitutes a default under Fitch Ratings' criteria and has led to a downgrade of the affected securities to 'D'. The government's inability to reach a resolution will continue to affect already difficult economic conditions and prospects in Argentina, according to a new Fitch report published today.
'Economic conditions have deteriorated significantly in 2014, with GDP expected to post a -1.9% contraction this year, after a 3% expansion in 2013,' said Santiago Mosquera, Director in Fitch's Latin America Sovereign Group. 'We anticipate the economy will contract even further, by -2.6% in 2015, if Argentina fails to clear the default before presidential elections are held in October next year. This should lead to additional pressures on inflation, exchange rate and reserves.'
Deficit monetization due to a lack of financing options has fueled annual inflation in 2014 (41.1% according to private estimates by 9M14). The election cycle and a potential decision to mitigate negative side effects from the default could lead to an additional widening in the fiscal deficit and its monetization in the context of constrained financing, further undermining inflation and exchange rate dynamics.
Argentina's external position is expected to continue to weaken in light of lower soy prices, contained sales of soy exports, strong demand for FX by local economic agents, limited capital inflows and a demanding external debt servicing calendar. International reserves could dip below USD18bn next year, when the central government faces over USD12bn in FC debt service.
As a cure of the default under the current administration is far from assured, both the business community and the opposition are looking beyond the 2015 presidential elections. The next administration could potentially implement a more pragmatic economic program and attempt to resolve the sovereign default to improve financing flexibility. With a recovery in capital flows and cross-border financing under this scenario, GDP growth could be restored in 2016. However, growth would not pick up until 2017, as the unwinding of distortions created over the past few years will likely prove to be challenging.
The full report 'Argentina's Default Implications: Weaker Economy, Higher Inflation, Exchange Rate and Reserve Pressures' is available at 'www.fitchratings.com'.
Additional information is available at www.fitchratings.com.
Applicable Criteria and Related Research:
--'Sovereign Rating Criteria' (August 2014).
Applicable Criteria and Related Research: Argentina's Default Implications
Sovereign Rating Criteria