For Argentinian investors, the final nail in the coffin arrived this week on the news of an S&P downgrade from B- (junk status) to CCC+ (super-junk).
A US court decision to force the government to honour its bond holdouts might be ignored by president Cristina Fernández de Kirchner, whose own re-election hopes in 2015 are fading. The legal wrangling could still see a selective default in a jurisdiction with problems that have been evident for some time.
Argentina’s ranking of 118th out of 186 countries on ECR’s global scoreboard has kept the sovereign within the lowest of ECR’s five tiered groups. Only Venezuela (131st) and Nicaragua (139th) are considered riskier in the region.
In spite of hope for improvement in its investment profile, on a total score of 33.1 out of a possible 100, Argentina’s risk metrics remain in disarray with its score in free-fall. Five of its six political risk indicators score less than three out of 10; the only exception, government stability, is a lowly 4.6.
Economic risk offers no hope either. Officially the economy grew during the first half of this year, by 5.1% year-on-year, but the statistics exaggerate the economy’s health by under-reporting inflation of some 25% as 10% at worst. High inflation is eroding disposable incomes and undermining export competitiveness, and all the while populist public spending is eroding the state’s finances.
No wonder then that scores for all five of Argentina’s economic risk indicators are lower compared with a year ago. The economic/GNP outlook has fallen the most (to 4.3) on concerns of an economic downturn next year; scores for monetary policy/currency stability (just 2.8) and government finances (3.5) are the lowest.
Structural indicators fare better. Argentina has comparatively favourable soft infrastructure and population dynamics, but it falls down on industrial relations.
Moreover, all 15 of Argentina’s risk indicators score less than Mexico’s, in most cases – repatriation risk for example, a gap of 4.7 – considerably so. Mexico’s rise in the rankings has delivered a record score differential of 27 points and widened the gap in the rankings with Argentina to 82 places.
Mexico is not without its problems. Economic risk factors all score more than six points each, but corruption (on 4.0) is evidently still a substantial problem.
There are also reservations about the government’s energy-sector reforms announced last month.
As Marijke Zewuster, head of emerging markets research at ABN Amro, and one of ECR’s experts, says: “[The reform] allows private companies to introduce profit sharing, but will clearly not end the monopoly position of [state-owned oil company] Pemex [and] getting these reforms approved will not be easy.
“Still, this represents the first important step for private-sector investment in the oil sector and that an agreement will eventually be reached. This is important, as a lack of investments, along with a decline in reserves, has led to a gradual decline in oil production over the last eight years.
“Mexico has huge shale gas and deep-water oil reserves, which could be tapped more easily once the reforms are approved.”
Mexico’s appeal is sending the sovereign skyward in the ECR survey. With less than five points separating it from tier-two status, the survey points to the sovereign perhaps converting its triple-B credit ratings to single-A status before too long.
Argentina’s comeback will take considerably longer.
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