Sunday, April 26, 2015

Sovereign Credit Report: Argentina

Argentina: Country and Economy

Argentina is the second largest economy in South America, with a GDP in late 2014 of $510bn (World Bank, 2014). The World Bank classifies Argentina as an upper middle income country. As of July 2014, its population was estimated at 43.0 million and growing annual at just under 1% (CIA, 2015). The country represents Latin America at the G20, jointly with Mexico and Brazil, providing it with a something of a leader status in Latin America.

However, despite its leadership position in the region, Argentina’s economy finds itself in some turmoil. In the first half of 2014, its exports fell by 10% in comparison to growth in exports of regional neighbours such as Mexico (4.2%), Chile (0.5%), Paraguay (12%), Uruguay (7.8%), Bolivia (6.8%) and Ecuador (4.1%) (Elizondo, 2014). 2014 was the third consecutive year in which Argentinian exports fell (see below).


This fall in exports has primarily been caused by a drop in price for agricultural commodities (cereals, fats, beef and related dairy products), which account for approximately 36% of Argentina’s exports as well as a fall in demand for automobiles and automobile accessories, which account for a further 12% (Trading Economics, 2015). Even the dramatic fall in oil prices in 2013-2014 affected Argentinian exports of crude oil, which comprise around 5% of total exports (even though Argentina is a net oil importer).

An Overdependence on Commodities?

Agriculture comprises over 30% of Argentine GDP, which may suggest an over-reliance on the sector and on the soy crop in particular. In addition, in February 2015, President Kirchner signed a wide-encompassing trade agreement with the Chinese government which may end up deepening the commodification of Argentina (Háskel, 2015). A danger exists that Argentina may increasingly be trading primary products in an effort in its trade with foreign countries rather than higher value-added products and services.

However, while such a high proportion of GDP invested in one sector – let alone agriculture – might be seen as unwise, soy exhibited some interesting tendencies over the past ten years, particularly so in the period after the global financial crisis. In 2006, ETFs for soy were trading at c. $600. By 2008, this had grown to $1,600 and although these ETFs were understandably affected by the global financial crisis, they recovered quickly after a steep drop off, to $1,200 in 2009 (still a 50% increase in 3 years at a time when most asset prices were greatly depressed). However, soy prices took another hit in 2014 – when markets were recovering –and now stand at approximately $970. Could it be that the soy is Argentina’s natural hedge to world markets?

Red and Blue: The Argentinian Peso

Falling exports combined with loose monetary policy and massive sovereign debt have together contributed in turn to the value of the peso dropping considerably in the past 10 years. As the graph below shows, in 2005, US$1 bought a little over 2.5 Argentine pesos. At the beginning of the 2015, the same amount bought 8.5 Argentina pesos and was continuing to grow in value against the Argentine currency.

The lack of faith in the Argentine peso is exhibited not only in the international currency exchange markets but also on the streets of Buenos Aires. Residents of the city – who have not been legally permitted to hold dollars since 2011 – can exchange dollars on the street at a parallel rate (“the blue rate”), reflecting punters expectations about inflation and where the Argentine peso is headed. This rate can be found daily on the national newspaper La Nación here. At a time when the dollar is officially trading at around 8.5 pesos, the blue rate is 13.5 pesos – a considerable premium.

Clearly, this has implications for inflation. The government statistics for inflation for 2014 show that the CPI (consumer price index) had risen 23.9% (Indec, 2015). However, a group of politicians and Unions opposed in the National Congress dispute the figures and have put together what they claim to be more realistic figures. Their figure for 2014 was 38.53% (Unión por todos, 2015) – over 50% higher than the inflation figures claimed by the government. Given that the government is forecasting a fall in the rate of inflation to around 24% in 2015, we can reasonably predict that the measure forecast by the National Congress will be in the vicinity of 36-40%.

Argentina and Debt

Argentina has quite a chequered history with debt. In 1991, in an effort to stem rampant inflation, the Argentine government introduced a 1:1 peg for the Argentine peso with the US dollar (Feldstein, 2002). For much of the 1990s, it was hailed as an example for emerging market economies on the strength of its success in bringing inflation under control. However, the peg ultimately became one of the factors in Argentina’s downfall as it overvalued the peso, Argentina was unable to retain competitiveness and debts began to rise. In 2002, it reneged on $95bn in debts (Porzecanski and Russo, 2014)

In July 2014, Argentina defaulted on its debt for the second time in thirteen years. This default was effectively a force majeure related to the country’s previous default in 2001; Argentina was blocked from making debt repayments when current President Cristina Kirchner refused to comply with the US Supreme Court verdict that Argentina was still liable for about $1.5 billion in settlements remaining from the 2001 default, after a small group of creditors from refused to accept a 70% write-down on debt totaling around $9 billion.
The incident sparked an international furor with Kirchner labeling the United States as “financial terrorists” in December 2014. 

This is just the latest in a series of run-ins that President Kirchner has had with external parties over Argentina economic matters. In 2012, she announced that the Argentine government was expropriating oil firm YPF from Spanish firm Repsol as hydrocarbons are for the “public good.” The seizure was untimely for a number of reasons, not least the fall in price of oil just two years later in 2014.

Politics

President Cristina Kirchner of the Justicialist Party (also referred to as “the Peronist Front for Victory”) has been in power since December 2007, when she became only the second female President of Argentina. She succeeded her husband, Néstor Kirchner, who had ruled between 2003 until late 2007. Mrs. Kirchner’s arrival coincided with the global financial crisis, which was the first big test of her leadership.  As one of the largest preventative steps against the financial crisis, Kirchner’s government nationalized $30 billion of private pensions in order to protect them in October 2008. (Barrionuevo, 2008). This was shortly followed by a nationalization of Aerolneas Argentinas SA in December of that year, on the basis that it was “a public good subject to expropriation.” (Faries, 2008).

Mrs. Kirchner is known in Latin America for keeping a close eye on opinion polls and has been remarkably popular in her two terms (if the polls are to be believed). However, she is only entitled to two terms and is closing in on the second. The next elections will be held in October 2015, when Kirchner will have to cede power under the terms of the constitution. It is expected that she will be succeeded by one of three candidates – Daniel Scioli, Sergio Massa or Mauricio Macri. All three candidates claim they would break with both of the Kirchner’s broader policies of social populism and protectionism. Mr. Daniel Scioli is governor of Buenos Aires and a member of Kirchner’s party. He claims his term in office would lead to a fall in crime and inflation. Mr. Sergio Massa is an ex-member of the same party, who broke away in 2013. He is considered the most charismatic of the candidates. The only non-Peronist on the list is Mr. Mauricio Macri, the current mayor of the city of Buenos Aires. He founded the Republican Proposal, which is centre-right and has a range of pro-market policies including less protectionism and increased international trade.

Corruption

Unfortunately, no report on Argentina is complete without mention of the presence of corruption in the country. Corruption has infiltrated many senior institutions in the country and as such, is highly relevant in a report on the country’s sovereign rating. In a fittingly titled paper, “Corruption as a drag on development,” author Rubén Berríos notes, “with the expansion of global markets and the push for economic liberalization, opportunities for corrupt practices have only increased.” (Berríos, 2010, p. 2)

President Cristina Kirchner’s Presidential term has been dogged by allegations of corruption and cronyism. The recent example of Alberto Nisman, an Argentine prosecutor murdered in Buenos Aires is the latest in a series of shady incidents to surround the President. Mr. Nisman had been due to testify in Congress the day after he was murdered against Mrs. Kircher. He alleged that Mrs. Kirchner had been involved in a cover-up with the Iranian Government.

Although the Nisman case isn’t immediately relevant to Argentina’s economy, some analysts have predicted that its ramifications have the potential to scare investors and push Argentina’s debt further down the political agenda. One commentator noted, “If investors were already worried about President Cristina Fernández’s populist tendencies, this will only make her more likely to indulge in a bit of old-fashioned tub-thumping. And there was never a better whipping boy than the holdouts.” (Mander, 2015).

Another allegation in previous years was that the government was falsifying consumer price data in an effort to understate the inflation rate (Politi, 2011). During one period, the Economist magazine stopped including Argentina in its Big Mac Index as it believed that prices in McDonald's in Argentina were being manipulated. In fact, the government is believed to have tinkered with inflationary measures since 2007 through its statistical agency, INDEC. It subsequently received a censure from the IMF about this, before rolling out a new consumer price index, the CPINu (Fishy Fingers, 2014)

The IMF made a statement on “the inaccurate provision of data” on December 15, 2014, stating that, “the Argentine authorities must implement actions previously specified for – end February 2015…the Fund will pursue discussions with the authorities and also welcomes the efforts made and initial advances achieved to improve the quality of Argentina’s official CPI and GDP data.” (IMF, 2014)

The Merval: The Buenos Aires Stock Exchange

The Buenos Aires stock exchange’s benchmark index is the Merval a basket-weighted index of a stock portfolio of 25 stocks based on participation in the stock exchange, number of transactions in the previous six months. It is revised every 3 months. The index has a base value set to June 30, 1986 (Bloomberg, 2015).

Despite ongoing difficulties in the Argentine economy associated with its debt obligations and political distractions, the Merval had performed well (if with a lot of volatility) from the beginning of 2013, when it was at 3,107 points to the third quarter of 2014, when it reached an historical peak of 12,535 at the end of September ( Yahoo! Finance)

However, this impressive growth is likely to have been caused at least in part by sluggish growth in the index in the years after the beginning of the global financial crisis and a subsequent re-evaluation (or even, over-evaluation). At the end of January 2015, the Merval had fallen to 8,490, a drop of around 33% in just 4 months (Yahoo! Finance).

World Bank Doing Business Report 2015

A complementary study to look at in conjunction with a sovereign risk report is the World Bank Doing Business Report (from the perspective that the former concerns more macro-level economics, while the former is concerned more with a micro level) which is published each year. The Doing Business Report, in its own words, “sheds light on how easy or difficult it is for a local entrepreneur to open and run a small to medium-size business when complying with relevant regulations.” (World Bank, 2015).

The report offers a comprehensive view of what Argentina does not perform very well on many of the measures, ultimately achieving 124th place of 189 countries surveyed in the report. This rating is based on qualitative and qualitative measures across a range of ten factors conducted in each of the countries surveyed: starting a business, dealing with construction permits, getting electricity, registering property, getting credit, protecting minority investors, paying taxes, trading across borders, enforcing contracts and resolving insolvency.

Arguably even more worrying for Argentina than being 124th on the list are two other observations: firstly, that it was in 124th place in 2014 (and thus has not made progress in any of the measures) and secondly, that of the factors still measured 5 years later, Argentina has not made progress in any since 2010. Particularly worrying the ease of paying taxes is ranked 170 of all 189 countries and it takes 92 days to get electricity installed in a small- to medium-sized business. If these same businesses are to generate the tax revenues that pay off some of Argentina’s national debt, they’re being asked to do it the hard way.

Argentina in Mercosur

Finally for this section, Argentina is a leading member of Mercosur, South America’s trading bloc. The bloc was established in 1991 and as of February 2015, its members include Argentina, Brazil, Uruguay, Paraguay and Venezuela. Its associate members, who do not have full voting rights include Chile, Bolivia, Colombia, Ecuador and Peru. Mercosur was established to promote the free movement of people, goods and services among its members (ironically containing two of the most protectionist countries in the world – Brazil and Argentina).

Despite noble aims at the outset, Mercosur is less about trade all the time. It has generally been politicized and possibly even anti-American (Klonsky, Hanson and Lee, 2012). It is indicative of the path that Argentina finds itself on that a trade bloc designed to lower trade barriers and encourage international trade has arguably led to the opposite. Most governments in South America are now populist and run a socialist agenda – Argentina’s mixing with these governments through Mercosur will not help its sovereign rating. 

Developing a Country Rating for Argentina

The credit ratings agency Standard and Poor’s (“S&P”) has developed a methodology for rating sovereign credit. According to this methodology, the five key factors behind this methodology are represented by the following table:

Table 1

Scoring of the Five Main Sovereign Ratings Factors

Key Rating Factor
Institutional effectiveness and political risks
Political score
Economic structure and growth prospects
Economic score
External liquidity and international investment
External score
Fiscal flexibility, fiscal performance, debt burden
Fiscal score
Monetary Flexibility
Monetary score

Each of the scores is given a rating of 1 to 6, where 1 is the highest achievable score and 6 is the lowest. Each score comes with a specific description of what the score might entail – sometimes qualitative (“unpredictable political decision”) and sometimes quantitative (an income range) Once the scores are collated, they are combined to provide a sovereign rating for Argentina and its peso.

Using this same methodology (a combination of forecasting, economic indicators and scoring models), I have synthesized a country rating for Argentina. Below, each of the factors are assessed in turn, using a combination of the qualitative and quantitative measures specified by the S&P methodology:

1. Political Score: 5

The political score “assesses how a government’s institutions and policy making affect a sovereign’s credit fundamentals by delivering sustainable public finances, promoting balanced economic growth and responding to economic or political shocks.”

Using the S&P criteria for scoring, I have allocated a score of 5 (where 1 is strongest and 6 is weakest) for this measure. The criteria for this score match the current political situation in Argentina quite accurately. 

At least one of the following should be present:

  • Policy choices which weaken the capacity and will to maintain sustainable public finances and timely debt service.
  • High risk of challenges to domestic political institutions.
  • Difficulty in predicting future policy responses due to a highly polarized political landscape.
  • In addition to at least one of the following:
  • Uncertain enforcement of contracts and respect for the rule of law.
  • Impaired transparency due to corruption, material data gaps or interference by political institutions in the free dissemination of information.

The characteristics ascribed appear to describe Argentina quite well and not just under Cristina Kirchner’s regime. Nationalization has almost been a defining characteristic of populist Argentine politics, since General Perón nationalized the railways in 1948 (Derrick, 2012).

The trend of nationalization continued with the Kirchner dynasty with nationalizations of the national postal service in 2003, the largest water utility, Aguas Argentinas in 2006, Aerolineas Argentinas in 2008 and YPF in 2012 (Faries, 2008). As such, it would be unwise to rule out such actions in the future, thus justifying the poor score.

2. Economic Score: 6

This score is primarily driven by income levels, growth prospects and economic diversity and volatility. These scores are all quantitative (with a small qualitative element) and are referenced against figures by recognized international economic bodies.

The biggest weight is based on GDP per capita. According to World Bank figures, the most recent measure of this indicator in Argentina was $14,715 (World Bank, 2014). Before other factors are figured in, this would give Argentina a score of 4. Positive adjustment factors (i.e., those that would move Argentina above a score of 4), are an undervalued currency and above-average economic growth.

An undervalued currency, for example, would suggest that prosperity is overstated. Above-average economic growth would suggest that income is likewise set to imminently move from its current GDP per head status, warranting a higher score in the process. Argentina has neither and consequently, its score cannot be adjusted upward.

Negative adjustment factors include an overvalued currency, over-dependence (over 20% of GDP) on one economic sector, below economic growth compared to its peers (all of which criteria Argentina possesses):
  • An over-valued currency as witnessed by live secondary markets in Argentina.
  • Over 30% of the GDP is based in one sector (Agriculture).
  • Lower growth than all South American countries excluding Venezuela.
There is one more measure which is a negative adjustment factor, which for now, Argentina does not possess: growth caused by excessive credit – this is somewhat surprising, given how highly Argentina scores on the ease of credit in the World Bank’s Doing Business Report 2015 (World Bank, 2015).

Given that Argentina can be shown to have failed in three of the measures used to negative adjustment, it is reasonable to adjust its economic score down by one. This takes its score in this section to the lowest possible score of 6.

3. External Score: 3

The external score reflects the country’s relationship with other countries in terms of its transactions. As S&P note, “it is the totality of these transactions that affects the exchange rates of a country’s currency.”

Here, three factors affect the final score:
  • The status of the currency in foreign transactions.
  • The country’s external liquidity.
  • The country’s external indebtedness.
As the S&P methodology points out, “the first step in the assessment of the degree to which a sovereign’s currency is used in international transactions.” One would expect Argentina to score poorly here given that a range of transactions within its own borders aren’t carried out using pesos.

The table below summarizes the measurement process.

On a scale of 1 to 6, strongest to weakest

Sovereigns with a reserve currency
Sovereigns with an actively traded currency
Other sovereigns: measures of a country's external liquidity
Gross external financing needs (CAR + usable reserves)
<50%
50-100%
100-150%
>150%
Narrow net external debt (assets)/ CAR (%)
Below (50)%
1
1
1
1
1
2
0-(50)%
1
1
1
1
2
3
0-50%
1
2
1
2
3
4
50-100%
2
2
2
3
4
5
100-150%
2
3
3
4
5
5
150-200%
3
4
4
5
5
6
Above 200%
3
4
5
6
6
6

Based on these criteria:

Argentina’s current external debt is US$145.3bn. (Trading Economics, 2015) Its CAR is US$611.76bn (Trading Economics, 2015) meaning that it has a narrow external debt/CAR of 23.7%. It has neither a reserve currency nor is it an actively traded currency, so we move to measure its gross external financing needs.

As of December 2014, Argentina has usable reserves of US$31.7bn, which is down from around US$50bn in three years. In 2015, this ratio is expected to be in the region of 40% (Bloomberg, 2014) for Argentina, meaning it has a score of 1.

In terms of adjustment factors for the score achieved, a sovereign displaying a significantly stronger net external position or one which is actively running current account surpluses could move the score up by one; Argentina’s peso possesses neither trait.

There are several negative factors, including consistent current account deficits and risks of lines of credit being cut off. We believe that Argentina possesses these two in particular, (especially with consistent current account deficits) bringing its score down to 3.

4. Fiscal Score: 3

The fiscal score reflects the sustainability of a sovereign’s deficits and debt burden. It is divided into two segments: “fiscal performance and flexibility” and “debt burden,” which are scored separately and an average of both is then given for the overall score.

i)  Fiscal Performance and Flexibility
The first indicator to measure is the change in debt to GDP as a percentage. Argentina’s debt to GDP ratio increased 2.3% between 2013 and 2014 (Trading Economics, 2015), giving it an initial score of 2 before potential adjustments, positive or negative, are considered.

There are 2 potential upward adjustment factors: governments with large liquid assets or the ability/tendency to raise revenues/cut expenditures in the short term. We believe this will also be difficult, particularly as the government is “Peronist” (i.e. populist).

In theory, Argentina does possess large liquid assets but given its tendency to nationalize assets (as outlined in section 1) even after they have been privatized before, intuition would suggest to us that these assets are less liquid than they might otherwise be.

In terms of negative adjustment factors to the score, it is believed that two in particular apply to Argentina:

The first is an inability to raise short-term taxes due to a large (and growing) internal informal economy. This is evidenced both by the illegal currency exchanges on the streets of Buenos Aires and the burgeoning market for products which aren’t available in Argentine stores (see section on mobile phones later in document).

The second adjust factor is shortfalls in infrastructure that may require long-term spending. Argentina’s transport infrastructure in particular is in bad condition and will need considerable reinvestment to reach international standards. This is just to take one example. Because of these, this score is adjusted downward to 3.

ii) Debt Burden
The debt burden measure reflects “the sustainability of the sovereign’s perspective debt level.” This factors in the debt level, the cost of maintaining the debt, debt structure and funding access. The chart below is used to obtain the score:

Assessing A Sovereign's Debt Burden Score




On a scale of 1 to 6, strongest to weakest




Cost of debt
General government interest expenditures as a % of general government revenues
<30%
30%-60%
60%-80%
80%-100%
>100%
Below 5%
1
2
3
4
5
5%-10%
2
3
4
5
6
10%-15%
3
4
5
6
6
Above 15%
4
5
6
6
6

As has already been mentioned, Argentina’s debt to GDP is around 24%, with a general interest cost of around 10%[1], meaning interest costs are around 2.5% of debt, or a figure of US$3.6bn.[2] The government expenditure budget for 2015 is approximately US$149bn, meaning that these interest costs constitute around 2.5%.

Moving across the table, we already know that Argentina’s Debt to GDP ratio is less than 30%, which means that, according to this table, Argentina’s score is 1. However, adjustment factors still need to be considered.

Among the negative adjustment factors, two in particular, apply to Argentina: the debt service profile is subject to significant variations and more than 40% of gross debt is denominated in foreign currency. Because of this, the score is adjusted to 2.

The average of both i) and ii) is 2.5, which, being conservative, should be rounded up to give Argentina a total score in this measure of 3.

5. Monetary Score: 4

The monetary score reflects the capability of the monetary authority to support sustainable economic growth and overcome economic or financial shocks, “thereby supporting sovereign creditworthiness.” The problem Argentina faces here is that “populist” often runs contrary to “sustainable.”

The score takes into account the following:
  • The sovereign’s ability to address domestic economic stresses through monetary supply.
  • The credibility of monetary policy (as measured by inflation).
  • The effectiveness of transmitting monetary policy decisions to the real economy.
The Argentine peso is not a traditionally free-floating currency. Its citizens are not allowed to hold euro or dollars and the currency is managed on the international currency markets by the government through monetary transactions. In addition, the foreign currency reserves that it uses for these transactions are running historically low – suggesting that this can only be sustained for three or four more years at the outer limits. On this basis, we award Argentina a score of 3 in its currency regime.

In terms of the central bank’s operational independence and objectives, Argentina receives a low score of 5, fitting as it does the criteria: “operational independence is limited by either lack of an effective transmission or perceived political interference.” The effectiveness of transmitting mechanisms via the financial system and capital markets is questionable given that there are two separate currencies operating in the market (the “official” and the “blue” rates).

However, the government recently issued long term debt expiring in 2033 (Russo, 2014). Likewise, domestic claims in local currency are estimated at between 60% and 80%, giving Argentina a score on this measure of 3.

In terms of negative adjustment factors, there are several which apply to a score between 1 and 5. These include:
  • The 5-year average CPI is negative (indicating deflation).
  • A significant share of deposits or loans are denominated in a foreign currency (“dolarization”).
  • The sovereign is part of a monetary union.
  • The sovereign has imposed exchange restrictions.
Two factors bring Argentina’s score down to 4. Firstly, it is running inflation in excess of 14% from 21% in 2014 (Devereux, 2014), while the government also engages in discriminatory monetary policy as previously outlined. Second, a significant share of deposits or loans are denominated in a foreign currency – albeit, not always within Argentina. Overall, the score for Argentina, therefore, is 4.

Accumulating the 5 scores for a credit rating

Using the scores gained by Argentina in the previous 5 sections, we can now turn to a table which translates these scores into a sovereign credit rating (see below). This table uses an average of the country’s political and economic profile and charts it against its flexibility and performance profile.

The political and economic profile is an average of the political score (5) and an economic score (6), giving an average of 5.5. The flexibility and performance profile is an average of the external (3), fiscal (3) and monetary (4) scores. The average here is 3.33.Therefore,
Argentina’s peso receives a rating of b+.

Table 2












Indicative rating levels from the combination of (1) political economic profile and (2) flexibility and performance profile
Political and economic profile
Flexibility and performance profile
Category
Superior
Extremely  strong
Very strong
Strong
Moderately  strong
Intermediate
Moderately   weak
Weak
Very weak
Extremely    weak
Poor
Category
Score
1
1.5
2
2.5
3
3.5
4
4.5
5
5.5
6
Extremely strong
1 to 1.7
aaa
aaa
aaa
aa+
aa
a+
a
a-
bbb+
N/A
N/A
Very strong
1.8 to 2.2
aaa
aaa
aa+
aa+
aa-
a+
a-
bbb+
bbb+
bb-
bb-
Strong
2.3 to 2.7
aaa
aa+
aa
aa-
a
a-
bbb+
bbb
bb+
bb
b+
Moderately strong
2.8 to 3.2
aa+
aa
aa-
a+
a-
bbb
bbb-
bb+
bb
bb-
b+
Intermediate
3.3 to 3.7
aa
aa-
a+
a
bbb+
bbb-
bb+
bb
bb-
b+
b
Moderately weak
3.8 to 4.2
aa-
a+
a
bbb+
bbb
bb+
bb
bb-
b+
b
b
Weak
4.3 to 4.7
a
a-
bbb+
bbb
bb+
bb
bb-
b+
b
b
b
Very weak
4.8 to 5.2
N/A
bbb
bbb-
bb+
bb
bb-
b+
b
b-
b-
b-
Extremely weak
5.3 to 6
N/A
bb+
bb
bb-
b+
b
b
b-
b-
ccc/cc
ccc/cc

Developing a Forecast for the Sovereign Rating

Predicting where Argentina’s rating is likely to go from here is no easy task. Elections in 2015 will likely have a bearing, as the opening section outlined. However, in the 2011 election, Cristina Kirchner received over 50% of the popular vote, with the second placed candidate receiving below 20%. On this basis, it’s likely to be a Kirchner-chosen successor.
In any event, none of the candidates are considered to have extremely different politics to Kirchner. If we take this to be the case, we can make a forecast for the rating model over the next four to five years, using the same methodologies described above to achieve the current b+- sovereign credit rating.

Using the existing S&P framework, I have attempted to forecast where changes are likely to happen if any. As with the original evaluation, this is a qualitative and quantitative exercise and as before, every effort has been made to retain objectivity and remain as close to the most likely outcome as is possible.

A regression analysis was considered but given the unpredictable nature of Argentina’s political and economic decision-making, a step-by-step analysis was preferred. The results are outlined on the page which follows together with a rationale provided for each of the scores:

Measure
Current Score
Most likely future divergence from current position
Notes
Future Score

Positive
Static
Negative
Political
4



On the Transparency International corruption Perceptions Index, Argentina has moved from 102 of 177 (2012) to 106 (2013) to 127 (2014). Predict a further slide and a fall to the lowest potential score of 6.
6






Economics
6



According to the USDA, worldwide usage of soya is to pick up in 2016, to Argentina’s advantage. Argentina's largest trading partner Brazil, will also recover. This score should remain 6 in order to be conservative.
6






External
3



Argentina's lost the right to trade currency after a July 2014 ruling and more debtholders are likely to return for their share if Argentina is made pay out to bondholders. One score decrease to 4.
4






Fiscal
3



The ongoing currency imbalance will have a material effect on Argentina's fiscal imbalance. Nevertheless, constant ongoing dialogue with the IMF should ensure that Argentina stays within manageable limits.
3






Monetary
4



The beginning of a new 4-year political term in 2015 comes at a bad time for Argentina. In the short-term, Kirchner can print money and the medium term, so can the incoming President. This score is marked down to 5 as a result.
5







As the table above shows, I estimate that 3 of the scores will deteriorate, while 2 will remain static. The reasons are provided in each case in the notes section and are conservative estimates of what will happen. These views are my own and are not to be taken in conjunction with any trading decisions. According to these opinions, Argentina will most likely move from b+ to b.

Argentine Import Industry: Mobile Phones

The example of mobile phones provides a useful subject for a focus imports in Argentina. Mobile phones are by now a ubiquitous product, most of which (from Argentina’s perspective) are made by foreign companies at a time when Argentina is attempting to harbour a mobile phone production industry of its own.

However, an article in 2011 (Keep Out, 2011) examined how mobile phones have become victims of Argentina’s protectionism since the latter part of the last decade. It noted how a multinational manufacturer by the name of Brightstar was importing kits of phones to its factory in Tierra del Fuego on the southern tip of Argentina.

300 workers assemble the imported parts, putting them into locally-produced packaging. The article claimed that the process costs 15 times more than in labour than it would in Asia (being up to $5,000 monthly). As a result, foreigners’ share of the domestic mobile phone market in 2012 fell to approximately 20%.

This had implications for the supply of those phones (which, for the record were Blackberries). For several months of the year, there were shortages all over Argentina as the manufacturers struggled to keep up with demand for the phones from domestic consumers. The whole supply chain had effectively been re-organized for populism.
Likewise, it was around this time that sales of smartphones began outstripping those of lower-cost symbian phones as well (Tricarito, 2013) – representing something of an opportunity in theory for the larger international brands seeking to establish a foothold in the Argentina market: 35 potential future consumers. But manufacturing in Argentina was key to avoid tariffs.

Manufacturing in Argentina was partly made possible by, among other measures, “non-automatic licensing” a stalling tactic that allows countries to delay imports for 2 months. However, this practise (present on over 600 categories of products) was eliminated in early 2013 in favour of higher import tariffs – 35% for mobile phones (STR Trade, 2013).

An import tariff of this magnitude clearly affects distorts the market. Partly as a result of having manufacturing operations in Argentina, Samsung has been able to achieve 36% of the smartphone market and 35% of the Symbian market (using official measures and not counting black market trade, it should be noted), thanks to lower competition created by Argentina’s import tariffs.

Apple is the runaway leader of the US smartphone market but has no presence in Argentina because of the import environment. By some estimates, the Apple iPhone 5s was priced higher in Argentina than anywhere else in the world when released in late 2013 (Ferdman, 2013), being sold online by individuals for as much as US$3,500.

In early 2015, there is still an active market for iPhones on Argentinian websites such as MercadoLibre and interestingly, another secondary market for iPhone accessories, ranging from power cables to protective holders. Visibly, another thing which Argentina’s import regime has created is a thriving secondary (black) market.

Potential Effects of a Credit Rating on Mobile Phone Imports

The mobile phone is by now almost a commodity product. Regardless of import tariffs or sovereign credit rating, Argentina will continue to require mobile telecommunications in the future as they’ve become an essential part of business. Nevertheless, a deteriorating credit rating can have an effect on this and other imported products.

A lower credit rating goes hand-in-hand with a currency which is being devalued. This in turn, creates obvious difficulties for imports such as mobile phones: foreign firms (even if they have manufacturing bases in Argentina) generally need to exchange Argentine pesos back to their domestic currency to return to their shareholders.

What this means for mobile phone manufacturers is difficult to say – almost certainly, it will become increasingly expensive for them to sell in Argentina (as their incomes in Argentine pesos are quickly eroded by inflation) and may even lead to some pulling out. That said, those that stay have the potential to benefit from increased market share and brand loyalty.
Mobile phones, of course, are only as useful as the networks they operate on. All of the Argentine mobile networks are foreign, which creates a similar problem to the one just mentioned. These companies require ongoing investment in infrastructure and will be paid in a currency which might not profitably translate back to their own.

The implications, therefore, of a currency downgrade, can be seen on quite a practical level. In a country with large mobile phone penetration (147% in 2014; budde.com, 2014) the importance of the industry for economic growth (both in terms of consumption and development) is high. This is just one of the industries on which Argentina’s credit rating will impact.

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[1] Using the Argentine 10-year bond as a proxy, which is trading at a yield of 9.5%: http://www.bloomberg.com/news/articles/2014-12-15/argentina-bond-sale-bust-proves-missed-chance-as-maturities-loom
[2] 2.5% of US$145.3bn.
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