RISK ASSESSMENT

ARGENTINA

RISK ASSESSMENT

A hard landing for the economy with fiscal and current account surpluses drying up
A worsening world economic and financial crisis in conjunction with accommodating economic policy pursued since the start of President Cristina Kirchner term in office is leading the economy to a hard landing. Besides, the president's handling of the farm dispute in 2008 triggered the most serious socio-political crisis since 2002 and undermined her popularity. In this context, the government has lost control of both houses of Congress in June 28 mid-term elections, brought forward from October 2009, and President Cristina Kirchner faces a 'lame duck' status for the remainder of her term, increasing concerns over governability. Further complicating matters, inflation has remained high without being masked by the price controls in force and the low credibility of the official index. The contraction of the economy, despite the fiscal stimulus policy adopted late 2008, in conjunction with the drop in world prices for farm products could put public sector accounts into the red. Covering the government's financing needs is thus likely to be difficult. In a much gloomier international framework, the weakening of farm exports will moreover likely contribute to the shrinkage of the current account surplus.
Increased liquidity crisis risk and a necessary normalisation of relations with foreign creditors
The risk of a liquidity crisis has been growing but will likely remain controllable in the near term with external financing needs currently manageable, largely covered by foreign direct investment, and with foreign exchange reserves still at comfortable levels, despite a resurgence of capital flight and doubts by operators as to the sustainability of Argentina's economic model, particularly since the announcement late October 2008 of the pension system nationalisation.
To regain access to international financial markets it will moreover be up to the government to normalise relations not only with its public creditors but also with the private creditors left out of the debt restructuring in 2005.
However, loans to Argentina totalling over 4.1bn$, approved mid June 09 by the World Bank), together with a discounted early repayment of coupons falling due in August 2009, have helped to somewhat reassure investors.
Deterioration of the financial health of private companies and the payment behaviour monitored by Coface
In this context, private company financial health has deteriorated, particularly in the automotive industry, construction, and distribution. The weakest sectors include agriculture and the dairy industry as a result of price controls and export problems, oil refining due to a lack of investment, and public services (water, electricity, gas, transport) because of regulated prices. The difficulties encountered in the textile, clothing, and leather industries are the traditional ones. Sectors like food, communications and certain services have fared somewhat better. Overall, the payment behaviour of private companies, monitored systematically by Coface, is expected to deteriorate.