--Long-term foreign and local currency Issuer Default Ratings (IDRs) at 'BB-';
--Senior unsecured foreign and local currency bonds at 'BB-';
--Country Ceiling at 'BB-';
--Short-term foreign currency IDR at 'B'.
The Rating Outlooks for the Long-term IDRs have been revised to Positive from Stable.
KEY RATING DRIVERS
The revision of the Outlooks on
In line with the 2009 constitution, the government advanced reforms to the legal frameworks for hydrocarbons, investment, mining and public enterprises in 2013 - 2014. If pragmatically implemented, these laws could reduce regulatory uncertainty, nationalization risks and encourage greater private participation in the economy with the state maintaining its predominant role.
The prospects of a new hydrocarbons regime could increase investment in exploration and smooth the declining production curve of maturing gas fields. The legislative assembly approved seven new exploration contracts in 2013 - 2014 and is considering eight more association agreements with foreign companies and subsidiaries of the state-owned YPFB. In the absence of new gas reserves developments,
The general government posted a fiscal surplus of 1.4% of GDP in 2013, following a positive outturn of 1.8% in 2012. Fitch forecasts that the budget surplus could shift to a deficit of 1% in 2014 - 2016. Public sector deposits, mostly held by YPFB and local governments, rose to 27% of GDP in 1H14, one of the largest cushions among peer commodity exporters.
General government debt fell to 31% of GDP in 2013 and could stay below the 36% median of the 'BB' category in 2014 - 2016. Contingent liabilities are the main driver of the recent uptick in the debt burden. Outstanding guarantees on central banks loans issued to public enterprises climbed to 2.5% of GDP in 1H14, nearly 17% of total domestic debt. The authorities have paid 1% of GDP in compensation to nine companies for nationalizations since 2006.
Commodity dependence is high relative to peers in the 'BB' category. Hydrocarbons generated 8% of GDP, 57% of tax collection, 54% of exports and 33% of domestic investment in 2013. However, natural gas production is partially hedged by long-term contracts that guarantee the purchase of minimum volumes at prices above international benchmarks.
Tighter monetary policy, administrative measures and price controls contained inflation at 6.5% by end-2013 and 7.3% by 1H14, although higher than the respective central bank's mid-point targets of 4.8% and 5.5%. Higher electoral spending and public investment are the main downside risks to the inflation outlook in 2014 - 2016.
Recently introduced mandatory credit quotas and interest rate controls are likely to adversely affect financial institutions' profitability and capitalization. The recent change in Fitch's Macro Prudential Indicator for
Low governance indicators, political risks and a poor business environment remain key credit constraints. Per capita income tripled since 2005 but is yet to overcome the gap with similarly rated sovereigns. Capacity constraints in local governments and public enterprises weigh on the execution of the government's ambitious public investment and industrialization agenda.
The Positive Outlook reflects the following risk factors that may, individually or collectively, result in an upgrade:
--Sustained growth momentum that would allow for improvements in GDP per capita with broad macroeconomic stability;
--Implementation of structural reforms that improve the business environment and increase our confidence in investment prospects and the medium-term sustainability of natural gas reserves;
--Strengthening of the budgetary and fiscal frameworks.
The Outlook is Positive. Consequently, Fitch's sensitivity analysis does not currently anticipate developments with a material likelihood, individually or collectively, of leading to a downgrade. However, future developments that may, individually or collectively, lead to a revision of the Outlook to Stable include:
--Hydrocarbons production shocks or a severe fall in export prices resulting in a material deterioration in external and fiscal solvency ratios;
--Failure to contain inflation pressures and policy changes that affect the stability of the financial system;
--Sustained fiscal slippage and materialization of contingent liabilities leading to adverse debt dynamics and the erosion of fiscal buffers.
The ratings and Outlooks are sensitive to a number of assumptions.
--The growth, fiscal and external forecasts assume that
--Public spending, political polarization and regional tensions could intensify in the run-up to the
--The risk of ad hoc nationalizations that do not severely impair economic activity and the sovereign's external and fiscal balance sheets are incorporated at the present rating level.
Additional information is available on www.fitchratings.com.
--'Sovereign Rating Criteria' (
--'Country Ceilings' (
Sovereign Rating Criteria - Effective from
Source: Fitch Ratings
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