The credit-risk rating agency Moody's insisted this week that Argentina's main concern for the foreseeable future was its domestic debt in local pesos while the country keeps swerving through its financial mercuriality in an electoral year.
The risk we see has to do with macroeconomic impact. The Central Bank, by paying debt, creates those pesos. That creates more pesos in the market that it is forced to sterilize. What we are seeing is that the amount of Central Bank debt measured against the economy or monetary base has jumped, warned Moody's vice-president and senior analyst for Argentina Gabriel Torres.
The scenario for Argentina at the end of 2023 is one from which it is more or less possible to escape without everything exploding, he added.
By exploding he meant inflation reaching 150% and affecting the macroeconomy. Today we do not see that risk but it is not to be ruled out, Torres explained. The most immediate risk is in pesos, not in dollars, he also noted.
The large volume of central bank debt will intensify any exchange rate crisis, as creditors of peso debt choose to change the currency composition of their portfolios and push up the exchange rate, he explained.
As inflation is already close to 100%, a sudden exchange rate crisis could lead the central bank and the government to freeze or confiscate peso deposits and savings to limit pressures on the exchange rate, Torres underlined. Argentina has already implemented such policies to deal with periods of very high inflation, he went on.
Regarding its debt in dollars, Argentina will have no choice but to restructure it in 2024-2025 if it fails to improve market access, Torres also foresaw.
If the government changes hands in the 2023 elections, the opposition alone does not change the credit risk, Torres pointed out. I believe that the fundamental issue to improve ratings is that the markets believe that debt payment is more likely and allow refinancing.
Torres also found similarities between now and 2015. In the case of the previous transition, the improvement in the outlook for change -2015- started already in 2013. The probability of the opposition winning is higher than it was in 2013-2014 based on polls. However, the market is not reacting this way.
Regarding Argentina's recent agreement with international creditors such as the International Monetary Fund (IMF) and the Paris Club,
Moody's expert insisted they will not change Argentina's ability to borrow from abroad, which is non-existent. The biggest challenge for 2023 is to avoid the inflationary shock, I believe that Argentina will be able to reach next year without restructuring, Torres also noted.
Torres sees no risk of non-compliance with the IMF goals for 2023, but it is going to be a difficult year and they are expecting it to be managed without an explosion.