Debt ratings agency S&P Global (formerly known as Standard & Poor's) on Wednesday downgraded Argentina's credit rating to just three notches above default as investors brace for a looming recession in an election year.
The country's long-term foreign currency sovereign debt rating was downgraded two notches, from "CCC+" to "CCC-", according to a statement issued on Wednesday. The decision follows the government's decree ordering state-owned companies to sell or swap dollar-denominated bonds for new peso-denominated instruments.
The government's measure, adopted by decree, is an attempt to halt a drop in the country's international reserves, in a context of currency shortages and exchange rate volatility.S&P also assigned a negative outlook, citing economic imbalances and political uncertainty surrounding the 2023 elections.
It is the second downgrade of the nation's credit rating in less than a week, after Fitch Ratings on Friday cut the country's long-term foreign currency debt rating to "C", one notch above default. The decision came as President Alberto Fernández visited his US counterpart Joe Biden at the White House.
"Divisions across the political spectrum limit the sovereign's ability to implement timely economic policy changes. Global capital markets are closed for Argentina," wrote S&P analysts led by Lisa Schineller. "The ongoing severe drought has exacerbated pressures in the already troubled foreign exchange market."
S&P could downgrade the ratings further in the next six to 12 months, depending on the nation's implementation of an International Monetary Fund programme, as well as the health of its banking system, the statement added.
The agency affirmed its long-term local currency rating of "CCC-".
As a transaction between government entities, "we do not consider it to be a default under our methodology ... but the proposed transaction suggests increased vulnerabilities for the repayment of foreign currency commercial debt," S&P said.
According to the Central Bank's latest balance sheet, the country's gross international reserves total US$37.594 billion, but the level of net reserves is much lower, according to analysts, if bank reserves and a swap with China are discounted.
In this context of currency shortages, the government justified the decrees by pointing out that they aim to "continue reducing probable monetary surpluses, stabilising the exchange market and strengthening the financing of the public coffers, thus clearing the way for the fulfilment of the 2023 financial programme."
Argentina has had currency controls since 2019 and agreed a new deal in January 2022 to refinance a debt of US$44.5 billion with the International Monetary Fund, a programme that obliges it to strengthen the Central Bank's reserves.