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Argentina gets nailed with multiple credit downgrades a week after suffering the 2nd-largest stock drop in global history

Carmen Reinicke , Business Insider US
 Aug 20, 2019, 12:39 PM
Argentina sheep
(Getty)
  • Fitch Ratings and S&P Global Ratings downgraded Argentina's sovereign credit rating following the country's August 11 primary election and subsequent market fallout.
  • The ratings have declined as it looks less certain that Argentina will be able to repay its debts.
  • Weak economic conditions have made the path ahead difficult for current President Macri and his successor, according to Citi.
  • For more stories, go to Business Insider SA.

A number of credit-rating agencies are getting increasingly worried about Argentina's ability to repay its sovereign debt.

The concern comes following the country's primary election August 11 when current president Mauricio Macri lost to left-of-center opposition Alberto Fernandez and his running mate, former president Cristina Kirchner.

On Friday, both S&P Ratings and Fitch Ratings downgraded the country's sovereign debt ratings. Fitch downgraded Argentina to CCC from B. Meanwhile, S&P Global Ratings downgraded the country's rating to B- from B, and also gave it a negative outlook.

The ratings are the latest proof of growing uncertainty around Argentina's future. Markets tanked when the election results were first announced, which the S&P Merval Index dropping 48% in one day - the second-largest single-day drop ever for a global stock market.

The Argentine peso also fell more than 15% against the US dollar amid the turmoil. In the days following the election, markets stayed rocky. The S&P Merval has recovered slightly, but is still down more than 30% from its pre-election level, while the peso's value has slid further against the dollar.

Fitch said in its ratings release that the downgrade "reflects elevated policy uncertainty following the Aug. 11 primary elections." In addition, the agency said severe tightening of financial restrictions and deterioration in the macro environment would eventually prompt Argentina to default on debt, or restructure it.

If Fernandez is to win, Fitch wrote that "increases risks of a break from the policy strategy of the current administration of Mauricio Macri guided by a program with the IMF."

That's an issue because the loan Macri secured with the International Monetary Fund was viewed by investors as getting the country back on track, and for ratings was a positive indicator that the country would be able to repay its debts. If Macri loses in October, those chances will diminish.

Fernandez has yet to outline a clear plan for Argentina's fiscal future, but he has advocated for a weaker peso and light capital controls, analysts at Citi wrote in a note Monday.

There is also the fear for investors that Fernandez will try to renegotiate the agreement Macri secured with the IMF. Even though Fernandez said that he does not plan to default, the analysts wrote that "defaults are typically not pre-planned but happen out of necessity."

Weakening economic conditions have not helped, and on Saturday, Economy Minister Nicolas Dujovne stepped down. Dujovne had led bailout negotiations between Argentina and the IMF. In his resignation letter to Macri, he said that Argentina needs "significant renewal in the economic area," Bloomberg reported.

Macri and his successor have few alternatives to prevent deterioration other than selling the country's reserves, Fernando Jorge Diaz, an economist at Citi, wrote on Monday note. Inflation, which is already over 50% in the country, is likely to accelerate and will require monetary stabilisation going forward, Diaz said.

The government needs to cover coupon payments and cover its short term debts, and because voluntary debt markets are closed for the country, it means that it will have to lean on its reserves, approximately $19 billion (R292 billion) US dollars, Diaz wrote.

The pressures will increase in 2020, when IMF disbursements run out, according to Fitch. That's when the country will need to turn to market sources for financing its fiscal deficit and debt maturities.

Elsewhere, foreign bond repayments will increase beginning in 2021, Fitch said. If local and external borrowing conditions do not improve, "both roll-over and fresh financing could be difficult," according to the agency.

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