How the Election of Mauricio Macri May Impact Argentina's Credit Ratings
1. Credit FAQ:
How Will The Recent Presidential
Election Affect Standard & Poor's
Ratings On Argentina?
Primary Credit Analyst:
Daniela D Brandazza, Mexico City (52) 55-5081-4441; daniela.brandazza@standardandpoors.com
Secondary Contacts:
Julia L Smith, Buenos Aires (54) 114-891- 2186; julia.smith@standardandpoors.com
Joydeep Mukherji, New York (1) 212-438-7351; joydeep.mukherji@standardandpoors.com
Table Of Contents
Frequently Asked Questions
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2. Credit FAQ:
How Will The Recent Presidential Election Affect
Standard & Poor's Ratings On Argentina?
The opposition leader Mauricio Macri won the Argentine presidential elections on Nov. 22, 2015. Macri won in the
second round of the national elections, with just over 51% of the vote against his opponent Daniel Scioli. Voter turnout
was a high 81%. Below, Standard & Poor's addresses some frequently asked questions about the creditworthiness of
Argentina and its local and regional governments (LRGs) in light of this recent development.
Frequently Asked Questions
What are Standard & Poor's current ratings on the Republic of Argentina based on?
Standard & Poor's Ratings Services' unsolicited foreign currency sovereign credit ratings on the Republic of Argentina
are 'SD/SD' (selective default), and the unsolicited local currency sovereign credit ratings are 'CCC+/C'. The outlook
on the long-term local currency rating is negative. Our transfer and convertibility (T&C) assessment on the sovereign is
'CCC-', and our national scale rating is 'raB+' with a negative outlook.
Our selective default foreign currency ratings on Argentina stem from its nonpayment of part of its external debt. On
July 30, 2014, Argentina failed to make a $539 million interest payment on its discount bonds due in December 2033.
Since then, Argentina has not been able to service any of its external bonds under foreign law, which has limited the
sovereign's access to the international bond market.
Argentina previously defaulted on its debt in November 2001. Subsequently, after a debt exchange in 2005, we
assigned a new rating of 'B-' in June of that year.
When will Standard & Poor's change the 'SD' rating on the Republic of Argentina, and what rating will
the sovereign receive?
The recent election has no effect on our ratings. The foreign currency ratings will remain at 'SD' until Argentina cures
the default, through payment, exchange, or other settlement. If and when that happens, we will reassess the
sovereign's general credit standing, most likely raising the foreign currency rating to the 'CCC' or low 'B' categories.
We would reassess the economic conditions of the country while analyzing the details of any agreement with holdout
creditors in a broader political and economic context under a new government.
What economic issues will the new president face in his first few months in office?
When Macri assumes the presidency on Dec. 10, 2015, he will have to cope with very low foreign-exchange reserves
in the central bank. Gross reserves were only around US$26 billion as of Nov. 12, 2015, and could fall to around US$24
billion in December. However, we estimate that net reserves are likely to be negative in December, considering the
reserve requirements, a currency swap with the People's Bank of China, as well as unpaid imports and unpaid
corporation dividends.
The new administration will have to manage changes to Argentina's current set of foreign-exchange controls in order
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3. to avoid a possible disorganized devaluation of the currency that could have negative economic and political effects.
The success of the government's economic policies, as well as its credibility, will depend on the timing and the nature
of changes to foreign-exchange restrictions. It is clear that any structural solution to the issue of the depleting level of
international reserves and foreign exchange restrictions will have to be tied to the negotiations with the holdout
creditors.
The government also faces fiscal difficulties. We expect the general government deficit to exceed 4.5% of GDP in
2015. Also, the government is currently partially funding its fiscal deficit through lending from the central bank, which
in turn weakens monetary policy. The administration will face salary negotiations with employees at the federal and
provincial level at the beginning of 2016 in a context of high inflation, and it is likely to get requests for financial
support from provincial governments. This salary negotiation will be the initial challenge to test the new government's
deal-making skills against the highly organized unions and social movements, which strongly supported the departing
administration. The new administration will need to have very sophisticated negotiation skills in order to implement its
economic policy agenda.
We believe that Macri's government may move slower than some observers anticipate because of the complexity of
the economic issues, the political challenge of managing a Congress when the government lacks a majority, and the
administration's own desire to avoid unexpected volatility. Macri won the popular vote in only nine out of Argentina's
24 provinces but did well in the country's large urban centers. Macri may face difficulty balancing, on the one hand,
moving fast enough with reforms to satisfy his supporters and, on the other hand, avoiding alienating the nearly 49% of
the voters who did not support him.
Finally, the main macroeconomic challenge for the new administration will be how to decrease inflation to a single
digit. We also expect the government to take a gradualist approach in this regard. As long as inflation remains high, it
will continue to cause imbalances in the external sector of the economy, as well as cause the real exchange rate to
appreciate. Reducing inflation gradually will require a comprehensive political agreement--a significant challenge given
the political considerations--but remains essential for restoring macroeconomic sustainability.
Many market observers have questioned the reliability of official government data on inflation. Hence, steps to
strengthen the integrity of government institutions and provide more transparency on data would help restore public
confidence. The publication of more reliable economic data would help the administration better address the country's
economic imbalances.
Does the government have large debt servicing needs in the coming year?
We project Argentina's general government debt to be 43% of GDP at the end of 2015. Debt service in 2016 consists
mainly of local bonds (US$1 billion in BONAD 2016 and US$2.6 billion in two series of BONAR 2016). The debt
burden could spike in the coming years since around 65% of Argentina's debt is in foreign currency, according to
available data published by the Ministry of Economy. As a result, any significant devaluation can hurt the country's
debt service.
The country's largest provinces do not face any important external debt service next year. At the same time, both the
provinces and the private sector have been reducing their debt burden in recent years. However, the limited access to
external liquidity has been a problem for both public and private issuers.
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Credit FAQ: How Will The Recent Presidential Election Affect Standard & Poor's Ratings On Argentina?
4. Why is it important for Argentina to reach an agreement with holdout creditors?
Because Argentina has low foreign exchange reserves, as well as expected current account and fiscal deficits, access to
the capital markets is especially important. Reaching an agreement with holdout external creditors is the most
important step in restoring the sovereign's standing in the international capital markets. Absent an agreement, the
government will not be able to borrow from global capital markets, while subsovereign and private issuers will have
only limited access and at relatively high interest rates. Given the complexity of the issues, we are uncertain about the
timeframe for reaching an agreement with holdout creditors.
We estimate that gross external financing needs (including amortization requirements of debt currently in default) will
remain close to 100% of current account receipts (CARs) and usable reserves over 2015-2017, while external debt net
of public- and financial-sector external assets will average 63% of CARs in the same period.
How will the composition of the Argentine Congress affect the Macri Administration?
Macri's Propuesta Republicana, or PRO party, will govern the Province of Buenos Aires and the City of Buenos Aires,
which, together, account for 40% of Argentina's population. However, Macri will have to work with a Congress in
which the Frente Para la Victoria (FPV), Argentina's traditionally dominant Peronist party, holds an absolute majority
in the Senate and has the largest share of seats in the Chamber of Deputies, though not an absolute majority.
Chart 1
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Credit FAQ: How Will The Recent Presidential Election Affect Standard & Poor's Ratings On Argentina?
5. Chart 2
Macri will enjoy the support of 91 deputies from PRO and the radical party, Coalición Cívica, which are allied with
him, in the Chamber of Deputies.
Macri would need to quickly establish a good working relationship with the Congress since it will be dominated by the
FPV, which could block or dilute his initiatives. The Congress may, for example, delay approval of an agreement with
Argentina's holdout creditors, potentially extending the process of regularizing relationships with international
investors.
Have Argentine LRGs defaulted on their foreign currency debt while the sovereign has been in
default?
No. Contrary to what we have seen in the past, Argentine provinces and the City of Buenos Aires have been able to
repay their obligations in foreign currency since Argentina defaulted in 2014.
Do the provincial governments have any large debts coming due in 2016?
Not really. After the 2015 high debt repayments--mostly of the Province of Buenos Aires and the City of Buenos
Aires--many large external debt service payments aren't due until 2017. The City of Buenos Aires repaid a $475 million
bond in April 2015, and the Province of Buenos Aires repaid $675 million in October 2015 (after exchanging $375
million of the $1.05 billion bond in June for a longer-term bond). Both the City of Buenos Aires and the Province of
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Credit FAQ: How Will The Recent Presidential Election Affect Standard & Poor's Ratings On Argentina?
6. Cordoba have external bullet maturities in 2017, for a total of over $800 million, while the Province of Buenos Aires
doesn't face any large external debt maturities until 2018, on its $475 million bond.
Is Standard & Poor's assessment of the institutional framework of Argentine LRGs likely to change as
a result of the new administration?
No. We base our assessment of the LRGs' institutional framework on the analyses of three main factors: overall
predictability of the intergovernmental system, revenue and expenditure balance, and the transparency of the financial
information. We will assess the Argentine LRGs' institutional framework during 2016 as we did in 2015 to evaluate
these factors. In our view, the predictability measure is the most likely of the three to improve because the Macri
Administration could create an opportunity to have clearer plans for the provinces. A stronger institutional framework
assessment at the LRG level may eventually contribute to higher sovereign ratings.
Newly elected governors in Argentina have stated their intention to make modifications to some aspects of the LRGs'
institutional framework in order to balance the resources that the federal government manages versus the provincial
governments. For example, the elected governor of the Province of Buenos Aires, Maria Eugenia Vidal, announced
that one of the first steps she will take as the new governor will be to request that the national government return
coparticipation income to the province, which currently has an outdated mechanism of distribution. In our opinion, the
fact that Vidal and Macri come from the same party makes it more likely that the modifications to the institutional
structure will favor provinces such as Buenos Aires. However, such a modification will likely require the national
government to cede its own resources, given that it will be difficult to convince other provinces to accept smaller
coparticipation transfers and then vote unanimously for such a modification. Therefore, we still view such changes as
politically difficult during the next year.
Beyond the economy, what are other relevant issues on the public agenda in Argentina?
For the first time, security issues are taking the spotlight in the public debate in Argentina. Fighting organized crime
became a major part of the candidates' campaign promises, with some of them offering a stronger involvement of the
armed forces. As the experiences in other Latin American countries show, organized crime has a corrupting effect on
state institutions, particularly the justice system. The new government will have to strengthen institutions to preserve
their independence and functionality to meet public demands for more security.
We have determined, based solely on the developments described herein, that no rating actions are currently warranted. Only a rating
committee may determine a rating action and, as these developments were not viewed as material to the ratings, neither they nor this report
were reviewed by a rating committee.
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Credit FAQ: How Will The Recent Presidential Election Affect Standard & Poor's Ratings On Argentina?
