RIO DE JANEIRO, BRAZIL – The agency stated in a report that the risk of default remains latent despite the temporary support that additional external financing from the special drawing rights (SDR) to be granted to Argentina by the IMF and the resources that the country could obtain from the increase in international soybean prices, its main export product.
On March 23rd, IMF executive directors discussed a new allocation of SDRs to the organization’s members for 650 billion dollars to reinforce the countries’ monetary reserves and contribute to the economic recovery after the blow caused by the covid-19 pandemic.
If approved, which Moody’s considers “highly likely,” the SDR allocation will inject some $4.3 billion into Argentina’s limited currency reserves, which currently stand at around $39.645 billion.
But despite this additional financing and the rebound in soybean prices, for Moody’s, the risk of default on private external debt will remain high as long as an agreement with the IMF is not reached. There is no change in Argentina’s macroeconomic policy. The rating agency believes will not materialize this year, given the legislative elections scheduled for next October in the South American country.
Argentina must face two capital payments to the IMF for 1.91 billion dollars in September and December and payment of 2.24 billion to the Paris Club next May.
Moody’s points out in its report that the SDR allocation of 4.3 billion is sufficient to pay one of these two creditors and believes that the government of Alberto Fernández will probably choose to meet its obligations to the IMF, with which Argentina is negotiating an agreement to refinance debts for some 44 billion dollars.
Regarding these negotiations, the report indicates that, although the details released are limited, Argentina proposes to reach a program of extended facilities to pay off the debt in a ten-year term but starting to pay in 2026.
Also, Argentina would seek to achieve a primary fiscal surplus in three years, but without including a potential agreement binding fiscal targets or changes to domestic economic plans, a departure from what the agency has traditionally accepted in its programs.
Moody’s believes “it will take time to bridge the significant differences between the two parties”.
The report noted that the risk premium for Argentina, which successfully restructured some $100 billion of foreign and local law foreign currency bonds last year, has risen, reflecting the virtual lockout of international capital markets on Argentina, which is likely to persist until there is an agreement with the Fund and a “credible” change in “macro-fiscal policy that rebuilds investor confidence.”
“Without access to external financial support and with limited currency reserves, we expect the risk of default to gradually increase along with the amount of external debt repayments to private creditors next year,” the report concluded.