Fitch: Rate Hike Adds to Argentinian Local Debt Risks
29 MAY 2018 10:35 AM ET
Fitch Ratings-New York-29 May 2018: Recent currency exchange volatility and the central bank's rate hike to 40% could affect Argentina's local and regional governments (LRGs) by temporarily increasing market refinancing risk and shifting their financing sources and tools. This pressure would be added to an already weak and volatile macroeconomic environment that includes high inflation and currency depreciation.
The rise in volatility and rates arrives during a period of growth in LRG debt beginning when LRGs regained market access in 2016. However, in most cases, leverage ratios are still low. During 2017 debt issuances in local markets increased to 44.0% from 12.7% in 2016 of total bond issuances, excluding short-term treasury bills operations.
Although leverage ratios are still generally low, when compared to international peers, most Argentinian LRG debt is unhedged to currency exposure and refinancing risk. One mitigant to this pressure is most LRGs that regained market access have successfully shifted debt maturities toward longer tenures. Between 2016 and 2017, average local debt maturities extended from two years to four years and external debt went from five years to eight years. During 2017, some, including Buenos Aires Province and the City of Buenos Aires, refinanced a substantial portion of their debt from foreign currency to local currency.
Uncertainty remains around 2018 financing trends, which could temporarily shift toward more external bond issuances with fixed-rate coupons, as costs in the local market rise. However, this trend may be slowed as LRGs may attempt to avoid higher unhedged currency exposure costs, especially if currency depreciation persists. Provinces with revenue linked to the U.S. dollar, such as hydrocarbon royalties, could be at an advantage for external funding. Those with lower foreign currency exposure could also be at an advantage.
These pressures will add to LRG's high infrastructure and financing needs, which have risen on cost increases. Some short-term liquidity tools, such as the issuance of short-term treasury bills, could be temporarily replaced by other financing and liquidity sources, including cash deposits and sovereign assistance/funding. Budgetary savings could be less likely, as most provincial governments have structural and fiscal deficits. Another possible liquidity source could come from the fiscal pact signed between the nation and provinces in December 2017.
Finally, the 2017 fiscal consensus and new federal fiscal responsibility law, to which most jurisdictions have adhered, could help underpin budgetary stability via expenditure controls through the current uncertainty. However, if market volatility evolves into an economic downturn, LRGs would be affected by lower local and federal revenue.
