Standard and Poor’s Rating Services has raised its long-term sovereign credit rating on Argentina to B from B-. Standard and Poor’s also raised its short-term sovereign credit rating on the republic to B from C, and its national scale rating to raAA- from raA. The outlook on the long-term sovereign and national scale ratings remains stable.
“The upgrade reflects Argentina’s improved external and fiscal flexibility,” says Standard & Poor’s credit analyst Joydeep Mukherji. “Recent years of impressive economic growth and fiscal surpluses, combined with a reduction in the sovereign’s debt burden in 2005 after debt rescheduling, have strengthened Argentina’s financial profile. The threat of economic disruption caused by the acrimonious process of debt rescheduling, creditors who did not participate in the offer, and a tense relationship with the International Monetary Fund has also abated.”
Mukherji explains that the stable outlook is based upon the expectation of favourable economic performances in both 2006 and 2007, with continued good GDP growth and fiscal and current account surpluses.
Improved economic management is key to stabilising the country’s historically volatile growth path. Success in containing the recent rise in inflation would help reduce political pressure to raise public sector salaries, allowing the government to maintain the recent gain in fiscal flexibility as economic growth declines to moderate levels.
“That, combined with steps to resolve regulatory disputes that have constrained investment in key infrastructure sectors, would raise the likelihood of a more sustained and stable growth trajectory over the medium term, strengthening the country’s credit standing,” notes Mukherji.
“Conversely, continued discretionary government intervention in key economic sectors, such as recent steps to reduce prices on specific items, could undermine private investment over the medium term, lowering GDP growth prospects and potentially weakening the sovereign’s credit rating.”