On Feb. 6, 2025, S&P Global Ratings upgraded eight Argentine local and regional governments (LRGs) above the sovereign 'CCC' foreign and local currency ratings. The ratings on these entities range between 'CCC+' and 'B-', which are at or close to their individual stand-alone credit profiles, continuing to indicate significant vulnerability in creditworthiness. However, the ratings differentiation reflects our view that the Argentine LRGs could withstand--and remain current on their financial obligations under--a sovereign default scenario.
Chart 1
What's Happening
We now rate eight LRGs above the sovereign, which capture strengths and capacity to muddle through the central government's shock therapy. The sovereign's fiscal adjustment-–cascaded down to LRGs last year--was achieved by spending cuts in real terms that were deeper than the pronounced revenue reduction. As of September 2024, the LRGs' total revenues fell 13% in real terms on average (compared with the drop of 4% for the central government). Transfers to the LRGs represented 5.5% of the central government's primary spending in 2023, and fell to nearly 1.8% in 2024, and automatic transfers declined by 21% in real terms, because of the economic downturn, while the discretionary transfers tumbled 66%. The LRGs responded by cutting total spending by 21% (compared with the 30% drop at the sovereign level), while capital expenditure (capex) was slashed by half. This was a more severe fiscal adjustment by LRGs than the one in 2020 (operating spending was down by 12% on average and capex by 29%). Notwithstanding these challenges, even the most fiscally weak LRGs accumulated some liquidity over the course of the year.
Why It Matters
The Argentine LRGs have tended to be less active in the domestic market for financing. Their foreign and local currency debt profiles are smoother after the 2020 restructurings, while their financing needs for the next 12 months seem manageable. Our base-case scenario doesn't expect distressed exchange by the LRGs. Despite the pronounced fiscal pressure transferred to the LRGs in 2024, they showed capacity to trim their budgets, generating positive fiscal results and maintaining cash reserves. Unlike the LRGs, the sovereign foreign currency 'CCC' and local currency 'SD' ratings reflect risks of distressed debt exchanges on its domestically issued commercial debt. Despite some improvement in the sovereign's domestic currency debt profile, roll-over needs are high with US$90 billion due 2025.
Argentine LRGs in 2024 prioritized debt servicing, but how they will manage pent-up spending pressures will be key in 2025. We expect average inflation to tumble to 45% in 2025 from 220% in 2024. The ability to manage public-sector employee salary negotiations will be a key determinant of fiscal outcomes this year. Also, pension management for those provinces that have their own pension systems will be crucial in maintaining balanced fiscal accounts, given that revenue gains slow as inflation declines.
What Comes Next
While investor confidence has improved, the capacity to tap debt markets is still limited for most LRGs. A wider access to domestic and global debt markets could help LRGs resume spending on public works, especially amid an election year. While this could mean higher after-capex deficits financed with borrowing, it won't necessarily weaken the LRG ratings. The conditions of new issuances as well as the characteristics of the financed projects would be important factors to consider. In 2025, we expect only a few LRGs to tap international debt markets, such as the city of Buenos Aires and province of Neuquen. Bank loans will be an important funding source for LRGs less active in the domestic debt market.
The LRGs relatively smooth debt profile, following the restructuring back in 2020 gives them more fiscal space. Low outstanding debt in the domestic market, coupled with our view of fewer restrictions on non-sovereign borrowers accessing foreign exchange for debt service, underpins our expectation that the risks of a missed debt payment have diminished for these eight LRGs. The track record of prioritizing debt service in 2024 suggests that the LRGs saw greater reputational costs of default than the potential benefit from debt relief. That said, vulnerabilities remain significant, consistent with the 'CCC+' and 'B-' ratings.
Related Research
- Five Argentine Subnational Governments Upgraded To 'B-', Three Others To 'CCC+' On Lower Transfer & Convertibility Risks, Feb. 6, 2025
- Argentina 'CCC/C' Ratings Affirmed, Outlook Remains Stable; Transfer And Convertibility Assessment Revised Up To 'B-', Feb. 5, 2025
This report does not constitute a rating action.
| Primary Credit Analyst: | Alina Czerniawski, Buenos Aires +54 1148912194; alina.czerniawski@spglobal.com |
| Secondary Contacts: | Carolina Caballero, Sao Paulo (55) 11-3039-9748; carolina.caballero@spglobal.com |
| Lisa M Schineller, PhD, New York + 1 (212) 438 7352; lisa.schineller@spglobal.com |
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