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After tumultuous year, Argentina enters 2019 with near-record high country risk

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After tumultuous year, Argentina enters 2019 with near-record high country risk

While Argentina's inflationary and currency crisis has eased from a fever pitch earlier in the year, the country's risk metrics have begun to spike once more as political concerns come into play.

The country's 5-year CDS, which prices the cost of insurance against potential defaults, hit 809 basis points on Dec. 27, up 52% over the past three months and nearing a peak of 837 basis points reached in early September at the height of its currency crisis. So far this year, CDS spreads are up nearly 240%.

The latest rise comes despite Argentina's inflation rate and currency showing signs of stabilization. The country's central bank earlier in December stepped back from a 60% floor on its monetary policy interest rate noting that both current inflation and future 12-month expectations had started to slow. The Argentine peso, which plunged more than 51% against the U.S. dollar in the first 11 months of the year, has held relatively flat during much of December.

The resurgence in country risk, according to industry experts, is largely pegged to investors' growing concerns over longer-term uncertainty for Argentina, most notably a presidential election in the latter part of 2019 and funding issues the following year.

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Current President Mauricio Macri, whose election in 2015 marked a dramatic shift away from the populist governments that dominated Argentine politics for decades, is up for re-election in 2019; a preliminary vote is set for Aug. 11 and a run-off, if necessary, will be Nov. 24. With the country already in a technical recession that is expected to continue into the coming year, many question whether Macri and his economic reforms will be given another term. A recent poll by San Andres University showed that 62% of Argentina's population disapprove of Macri's administration, while 49% of those polled said they would never vote for his re-election.

"The economy is playing decidedly against the government, further weakening the political balance and fueling fears of a return to populism," fund manager SBS noted in a recent report.

As Claudio Zuchovicki, executive director at BYMA, explained, a potential shift in government has renewed bondholder concerns as to whether a future administration will have the political will to honor its debt obligations. "With an unclear outcome to the elections, [that] aspect is called into question, because regardless of what they might or might not do, there is talk of restructuring," Zuchovicki said.

Debt prices are already reflecting the risk: the yield on Argentine sovereign dollar-denominated debt maturing in 2019 stands at about 6.70%, while the yield on those maturing in 2020 — after the election — are far higher at about 11.70%.

The political uncertainty compounds ongoing fiscal issues facing the government in the years to come. While the country secured a $57.1 billion bailout from the IMF earlier in the year to help prop up its finances, the funds will only go so far, leaving the government still needing to source additional funds in future years. Official records show that the country's funding gap in 2019 will be covered by the IMF loan. But after the election, in 2020, some estimates suggest the country will need between $20 billion and $25 billion.

Where that funding will come from is still uncertain. "We see a series of austerity measures in the budget law that probably will not be met. There is risk of deviating from the fiscal goal of the next year," Juan Manuel Pazos, head strategist at wealth management firm Puente, said in an interview.

At the same time, recent efforts to raise additional revenue, including a revamped financial income tax, has come under fire. Zuchovicki criticized the government's latest tax policies as being "erratic" and "misguided," pointing both to the financial income tax, which came into effect retroactively, and "ambivalent" messaging regarding the annulment of a personal assets tax.

Failure to succeed on its cost and revenue targets could further erode Argentina's credit ratings. S&P Global Ratings already in November downgraded Argentina's debt rating to B from B+, pointing in part to an increased debt burden following setbacks in the government's implementation of its economic adjustment program. Fitch Ratings, meanwhile, lowered its credit outlook on the country and warned that it could push forward with a downgrade if the government fails to hit its tax revenue targets.

Further deterioration in its credit profile could make refinancing down the road an even more expensive proposition. Argentina's country risk index, a measure that reflects the cost of funding above U.S. 10-year treasurys, stood at 820 basis points, suggesting Argentina would face a roughly 11% interest rate should it look to tap markets again.

"The government has to lower the country risk if it wants to refinance (its debt) in 2020," Puente's Pazos said.

"If (Macri) is re-elected, this should not be a problem. But there are other scenarios where that is not so clear."

This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global. This S&P Global Market Intelligence news article may contain information about credit ratings issued by S&P Global Ratings, a separately managed division of S&P Global. Descriptions in this news article were not prepared by S&P Global Ratings.