RIO DE JANEIRO, BRAZIL – Moody’s agency sovereign risk rating indicated that Argentina is at risk of defaulting again on its sovereign debt and having a significant exchange rate jump.
Moody’s chief sovereign risk analyst for Argentina, Gabriel Torres, said in a virtual press conference that inflation will rise in 2022 and that the agreement with the International Monetary Fund (IMF) is a “necessary but not sufficient” measure to recover credibility.
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After an annual event of the rating agency in Argentina, Torres, who is vice president of Moody’s, said that the key is for the country to maintain consistent policies in the medium term to reduce the fiscal deficit. Moody’s has a C rating for Argentina, one of the bottom rungs among sovereign ratings and very close to default (D).
High country risk: “The market takes it for granted that Argentina will have to restructure its debt, and we agree; our rating is consistent with a default. No country in the world pays its debt, they all refinance it, if Argentina does not change its spread, it will default.”
Inflation: “Argentina is at 50 or 52 percent, and that is with several frozen prices: electricity, energy, the official dollar; it is the history of the crises. We seek to limit inflation but with an exchange rate anchor until a moment comes when it cannot be sustained, there will be an abrupt devaluation, and it will lead to an inflationary jump.”
On the agreement with the IMF: “It will fulfill two functions: to fix the payments with the IMF because if it defaults, that will mean that other organizations such as the World Bank will not lend to it. And the other thing is that it forces Argentina to say what it will do in the coming years with the multi-year plan. An agreement will give it a chance, of course, if it is fulfilled.”
The signals that are needed: “From the credit perspective, the government must give priority to paying the debt, and that requires access to the markets, and that is not there. But there is another element: confidence, because the fiscal numbers improved and the Central Bank’s assistance to the Treasury decreased, but since there is no confidence that the government will continue with this deficit reduction, it does not translate into better expectations.”
Reasons for the lack of confidence: “Argentina repeats its crises over and over again; it only tries to solve them by anchoring its exchange rate, but there comes a time when reserves drop, it devalues, explodes and everything goes back to the beginning. If it were easy, it would have been solved by now. So there needs to be continuity in certain policies beyond a single government. For example, the Central Bank’s priority should be to lower inflation. Already Today in the rest of Latin America, there is an agreement in all political parties, on the right and the left, that inflation cannot exceed 10 percent.”
Devaluation: “It is difficult for there not to be an exchange rate jump; the different dollars, parallel and official, are at 200 and 100 pesos, respectively, so if you free the exchange rate, the official exchange rate may reach 150 pesos. Governments that find themselves in this situation try to do it gradually, but that is impossible without policies that generate confidence.”
Fiscal deficit target 2022: “The target of 3.3% of GDP is a political decision. It would not be serious if it were to reach 3.5% if it maintains a plan”. This assumes that the Covid situation continues to improve, but without that problem, Argentina’s problem is not so much the number but credibility.
Return to the markets: “Today, we do not see it as a scenario. Argentina has a country risk of 1900 basis points, and Honduras, a country with extreme poverty and a new leftist president, has 400 points. Argentina would have to reach 400 or 500 points to come back, and that requires an abrupt change in how it implements its public policies.”
Recovery: “Definitely the better expectation helps; our last forecast was 7.5%, and more income will help. But problems are not solved with one- or two-year growth, although it can help in the short term to reduce the fiscal deficit.”
BCRA reserves: “There are the total and net reserves, which are around 5 billion dollars. This figure reflects -an especially trend- that the exchange rate cannot be sustained in the medium term. This has already been seen in the past: when reserves reach a certain level, the Central Bank has no choice but to devalue.”
Lack of savings in pesos: “The real rates are negative and therefore the country, unlike others in the region, cannot finance itself domestically. Added to this is the history of the corralito, the nationalization of the AFJP and other events.”
Effect of a lack of agreement with the IMF: “If an agreement is not reached, we have to see what it means; if it is postponed or it means that the IMF will not be paid, a scenario that in general does not exist in the world. It would close all types of funding and would make Argentina’s situation much worse.”
Vaca Muerta oil deposit: “A strong development requires confidence because Vaca Muerta requires a greater effort than in other countries due to the fracking technique; besides, there is a change in the world, and there are greater pressures not to extract so much oil due to climate change.”