Argentina’s credit rating upgraded by Moody’s to Caa3, outlook positive

Investing.com — Moody’s (NYSE:) Ratings has upgraded the long-term foreign currency and local currency issuer ratings of the Government of Argentina from Ca to Caa3. The outlook for the country has also been changed from stable to positive.

This upgrade is a reflection of the government’s successful policy shift which has facilitated fiscal and monetary adjustments, helping to stabilize the economy and external finances. This has reduced the likelihood of a credit event. However, considerable risks remain concerning the country’s ability to cover upcoming external debt payments. These risks could stem from the removal of capital and exchange controls or from negative shocks leading to a credit event with substantial losses for bondholders.

The positive outlook indicates potential for further rating improvements as Argentina continues its macroeconomic adjustment. A smooth transition to a more open capital account would be consistent with higher ratings.

At the same time, Moody’s has withdrawn Argentina’s short-term foreign currency and local currency issuer ratings, both previously at Not-Prime (NP), its foreign currency and local currency senior unsecured ratings, previously at Ca, and its foreign currency senior unsecured shelf program, previously at (P)Ca, for business reasons. The country’s local and foreign currency ceilings remain at B3 and Caa1 respectively.

The ratings upgrade was supported by Argentina’s improved credit fundamentals over the past year, due to effective policy adjustments that stabilized the macroeconomic environment. President Javier Milei’s administration, which took office on December 10, 2023, implemented decisive fiscal adjustments and measures to halt monetary financing, which have been effective in addressing economic imbalances.

These measures led to a drastic improvement in the fiscal accounts, driven by widespread spending cuts, resulting in a substantial reduction in the government debt burden. The government debt is projected to continue to decline, moving towards 50% of GDP by 2026.

The fiscal adjustment allowed the central bank to adopt a restrictive monetary policy stance, which helped to reduce inflation from very high levels. After peaking at 25.5% in December 2023, monthly inflation fell to single digits in March 2024 and has consistently slowed, projected to be around 40% in 2025.

Argentina’s external liquidity has increased due to a tax amnesty that brought nearly $20 billion in assets held abroad, and measures to attract additional foreign currency inflows, allowing the authorities to gradually build up international reserves.

However, as Argentina moves to the next phase of the macroeconomic adjustment period, involving the removal of capital and exchange controls, new challenges could emerge that could compromise the progress made to date.

The positive outlook is based on the government’s continued progress on its macroeconomic stabilization program. The possibility of Argentina entering into a new program with the International Monetary Fund (IMF) would further support the country’s external liquidity position. This would help anchor domestic and foreign investors’ sentiment, allowing the sovereign to regain external market access and diversify funding sources.

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