On Aug. 8, 2024, S&P Global Ratings affirmed its 'CCC/C' foreign and local currency sovereign credit ratings on Argentina and kept the outlook stable. Below are answers to questions that we have been receiving recently regarding our sovereign ratings on Argentina.

Frequently Asked Questions

Why did S&P Global Ratings affirm its ratings on Argentina and keep the stable outlook despite recent economic progress?

Argentina has progressed in tackling immense economic problems, but it still suffers from many vulnerabilities. Inflation has fallen toward a 4% monthly rate from nearly 26% in December 2023; however, it remains high. The central bank's foreign exchange reserves have risen in the first half of 2024, but from a severe negative position and remain low. The bank has stopped financing the government and transferred its own debt liabilities to the Treasury, stopping growth in the monetary base. The government has made a large fiscal adjustment and is on track to achieve a primary budget surplus in 2024. Congress approved laws that, among other things, reform income taxes and labor markets, give incentives for large investments (through tax breaks and easier access to foreign exchange markets, etc.), and delegate powers to the president to pursue reforms such as privatizations. Moreover, the government has created a new Ministry of Deregulation and State Transformation to promote reforms to deregulate the economy and strengthen the long-term economic performance.

Despite such progress, the ratings reflect Argentina's external vulnerabilities, weak public finances, lack of access to global capital markets, persistent inflation, and lack of monetary flexibility. A 'CCC' rating indicates that the obligor might not meet its financial commitments in the event of adverse business, financial, or economic conditions.

What could change the ratings?

We could raise the ratings during the next 12 months if reduced macroeconomic imbalances set the stage for sustainable fiscal outcomes, contain inflation, and boost economic recovery. Under such a scenario, the government would enjoy better access to capital market funding.

Conversely, we could lower the ratings if negative developments undermine Argentina's already limited access to financing. Failure to carefully advance difficult exchange-rate, fiscal, monetary, and other reforms could result in instability and default.

Will S&P Global Ratings raise the ratings if the government maintains its fiscal surplus?

The central government ran a primary fiscal surplus (which excludes interest payments) of 1.1% of GDP in the first half of 2024 and an overall surplus of 0.4% of GDP. The administration demonstrated a strong commitment to fiscal prudence by adjusting its stance in a very rapid manner despite the lack of robust political backing.

However, as important as fiscal adjustment might be for Argentina (where the lack of fiscal sustainability has been at the core of its poor creditworthiness), a fiscal surplus may be necessary but not always sufficient to stabilize the economy. We typically look at the annual increase in the general government debt as a share of GDP, as opposed to the fiscal deficit, to assess fiscal vulnerability.

The government's debt burden has historically increased annually much more than the size of its fiscal deficit (chart 1). The rapidly rising debt burden reflects the fact that persistently high inflation has forced the government to rely on debt denominated in--or linked to--foreign currency (which accounts for nearly 70% of total government debt) and on domestic currency debt that is indexed to inflation (around 29% of total debt). Hence, we expect that the annual increase in the general government debt burden could still be substantial in the next couple of years, despite improved fiscal balances and progress in improving the composition of sovereign debt.

Chart 1

Poor fiscal and monetary policy has blocked development of domestic capital markets, leading the government and private-sector borrowers to issue foreign-currency debt. Hence, any program to stabilize the government's debt burden depends upon a more effective monetary policy and less volatile exchange rate, in addition to fiscal adjustment.

What are the key policy challenges facing the Milei administration?

The challenges are numerous, including:

• Pursuing a sustainable fiscal consolidation program;
• Increasing the central bank's holdings of foreign exchange;
• Unifying the exchange rate;
• Removing foreign-exchange controls;
• Further reducing inflation;
• Implementing structural reforms to address economic weaknesses; and
• Regaining access to external capital markets.

Failure to advance timely reforms would delay the economic recovery, potentially weakening political support for the administration and limiting Milei's ability to work with Congress where his party has a minor presence. Milei's ability to maintain high approval ratings will be particularly important in convincing Congress to support his program.

Tight fiscal policy and strict control of money supply can anchor a stabilization program for a while but not forever. The government retains pervasive controls on trade and foreign exchange, and there are parallel exchange rates. It sharply devalued the official exchange rate in late 2023 and is currently devaluing the exchange rate by a pre-announced 2% every month.

However, the monthly inflation rate is now 4%, creating an appreciation of the real exchange rate. Continued appreciation of the domestic currency could undermine investor confidence, damage the real economy, and weaken inflows of dollars, making it harder for the central bank to accumulate foreign-exchange reserves. Conversely, a potential further depreciation of the currency could boost inflation. The government plans to remove exchange controls and move toward a unified exchange rate.

Can a new IMF program trigger a sovereign upgrade?

Fresh money from a new program could be very helpful but is not likely to be enough by itself to trigger an upgrade.

What is the path to higher sovereign ratings over the long term?

In the near term, we could raise the ratings if the government stabilizes the economy and regains access to international capital markets, thereby improving its liquidity position to meet growing debt servicing needs toward the end of 2025. Beyond that, further upgrades would depend on an improved external position, stronger public finances, sustained economic recovery, and a more effective monetary policy. Building a more resilient economy with higher productivity and more private investment depends on greater macroeconomic stability and more certainty about future policies.

Historically, we have never rated Argentina higher than 'BB', reflecting its track record of inconsistent macroeconomic policies. A long history of drastic changes in the direction of economic policies following presidential elections underscores one of Argentina's key credit vulnerabilities. A recent emerging political consensus on policies to develop the country's oil and gas sector could herald early steps to move away from historical policy volatility. Similar political consensus on elements of macroeconomic policies, especially fiscal policy, could serve as the basis for sustained long-term growth and higher ratings in the future.

What is the economic and institutional legacy inherited by the Milei administration?

The country's economic problems have deep roots. Argentina was the seventh-wealthiest country in the world in per capita income in 1918, but fell sharply in international rankings during the 20th century. Its average GDP growth was only 1.8% in the 20th century, compared with 3.2% for Latin America as a whole. According to World Bank calculations, Argentina suffered recessions during one-third of the 1950-2022 period, higher than any other country.

Volatility and the lack of policy predictability have led to economic instability and have shortened the time horizon of investors, which, in turn, have constrained private investment and blocked the development of domestic financial markets. This has also impaired the sovereign's debt payment capacity and debt payment culture.

Increased spending by all levels of government in the past two decades has led to high and distortionary taxes, hampering private investment and encouraging tax evasion. Prolonged economic problems have contributed to worsening poverty and rising income inequality in recent years.

Around half the workforce is in the informal sector, high for a country at this level of development. Alarmingly, the share of the workforce in low-productivity sectors has increased in recent years. A substantial rise in public-sector employment, to 3.3 million people in 2022 from 2.2 million in 2003, has not led to better public services or more public investment. (Argentina has a larger share of its workforce in the public sector than Uruguay, Chile, Brazil, and Mexico.)

Commodities have dominated Argentina's exports for many years. Failure to address fiscal weaknesses, strengthen monetary policy, and enhance productivity has left the country vulnerable to crises and debt defaults when commodity prices fell. Prolonged fiscal deficits led governments to borrow from the central bank, contributing to inflation, the peso's depreciation, and economic instability.

Chart 2

Do you see an upside in GDP growth prospects?

There is much uncertainty about the GDP growth rate in the next couple of years. Argentina remains ahead of most similarly rated sovereigns in its human capital, giving it greater potential to recover quickly if the economy is successfully stabilized and reformed through pro-growth policies.

One potential engine of growth is the energy sector, which has been receiving substantial private investment recently. Production in the Vaca Muerta non-conventional oil and gas field has risen sharply in recent years. It holds the world's second-largest reserve of gas and the fourth-largest reserve of petroleum.

Development of the mining sector could also boost growth. Argentina is the world's fourth-largest lithium producer and has the second-largest lithium reserves in the world. It also has ample gold, copper, and silver reserves. The country's large agroindustry remains an important source of exports. Argentina's educated workforce could support a more buoyant export sector, including in biotechnology.

However, poor policies, such as price controls, a rigid labor code, and regulatory barriers to entry and competition, have constrained growth. Argentine residents and private firms hold net external assets (excluding foreign direct investments) equivalent to 50%-60% of GDP, a legacy of past instability and capital flight. Reforms that raise domestic investor confidence could convince residents to repatriate their funds, resulting in capital inflows that boost long-term economic growth.

Related Research

• Argentina 'CCC/C' Global Scale And 'raB+' National Scale Ratings Affirmed; Outlook Remains Stable, Aug. 8, 2024