Argentina: Fitch upgrades rating to B

The rating agency Fitch upgraded Argentina’s from Restricted Default to B, after the country resumed its debt payments to restructured bondholder and amid an improvement in the sustainability and consistency of its policy, a reduction in external vulnerabilities and the easing of external and fiscal constraints.

It is the second upgrade in less than a week. On Friday, Standard & Poor’s upgraded Argentina from “Selected Default” to B- after the country completed the payment to restructured bondholders.

The outlook is stable amid a weak external liquidity position, macroeconomic underperformed and a deterioration of public finances.

Key Quotes:

“Fitch Ratings has upgraded Argentina's Long-Term Foreign Currency Issuer Default Rating (LT FC IDR) to 'B'/Stable Outlook from 'RD'. Fitch has also upgraded the Short-Term FC IDR to 'B' from 'RD'. The issue ratings on Argentina's senior unsecured foreign-currency bonds were affirmed at 'B'. Fitch has affirmed Argentina's Long-Term Local-Currency (LC) IDR at 'B'/Stable Outlook and Country Ceiling at 'B'.”

“The LT FC IDR upgrade to 'B' is driven by Argentina's resumption of debt payments to restructured bondholders, thus curing the default of July 2014. In addition, Argentina's ratings reflect the improved consistency and sustainability of Argentina's policy framework, reduced external vulnerability, and the easing of external and fiscal financing constraints.”

“The Stable Outlook balances these improvements against risks related to relatively weak external liquidity, continued macroeconomic underperformance compared with peers, and deterioration of public finances in recent years. Argentina's ratings also balance structural strengths such as GDP per capita and social indicators against a weak debt repayment record.”

“Fitch expects better coordination with fiscal policy and access to fresh sources of financing to allow authorities to phase out central bank financing, a key source of inflationary pressures.”

“Inflation, relatively large fiscal deficits and a slowing economy represent key policy challenges for the Macri administration. Inflation remains high (well above 30% in the first months of the year) according to private and local government estimates. While Fitch expects monetary and fiscal policy objectives to be conducive to disinflation, this process is likely to be gradual and inflation is likely to remain above 'B' rated sovereign levels.”

“Short-term growth prospects remain weak, as the economy could contract in 2016 reflecting the impact of higher utility tariffs, weaker exchange rate, and reduced policy stimulus. Growth could recover in 2017 through the easing of macroeconomic distortions, reduced government intervention, and greater access to external sources of financing.”