Although Argentina is expected to fall into a recession through 2019, the country's financing agreement with the International Monetary Fund will limit external financing risks, Moody's said.

In a report, Moody's said it expects Argentina's economy to contract by 2.5% and 1.5% in 2018 and 2019, respectively, following multiple economic shocks, including a prolonged currency crisis and a historic drought, as well as the government's contractionary policy responses. Argentina's seesawing economy in recent years continues to adversely impact its sovereign credit profile, Moody's said.

The rating agency believes Argentina's inflation will hit above 40% by the end of the year, one of the highest among Moody's rated sovereigns. Meanwhile, the depreciation in the peso will weigh on the economy and will add up to the significant deterioration of the country's fiscal health, Moody's said.

Furthermore, the ongoing investigation on the so-called notebook corruption scandal will take a toll on domestic and foreign investment as investors steer away from construction projects involving companies named in the probe, Moody's said. The negative impact on the construction could also spoil into the economy, further reducing growth prospects.

However, Moody's sees Argentina maintaining its policy measures that aim to reduce fiscal and current account deficits, supporting the rating agency's stable outlook on the sovereign. "We expect compliance with the IMF program to materially reduce Argentina's need to tap international capital markets to cover its financing requirements, which would shield the government from external refinancing risk through at least 2019," Moody's added.

In particular, the stipulation in the IMF agreement requiring a new central bank charter will improve the regulator's institutional strength, Moody's said. "Over the medium term, changes to the central bank charter should materially improve monetary policy effectiveness and the central bank's ability to reduce inflation, which has risen significantly since the currency crisis began in April despite a strong response by the monetary authorities," the rating agency added.

Moody's also highlighted the improvement in Argentina's economic competitiveness, as reflected in its improved rank to 92 from 104 on the 2017-2018 Global Competitiveness Index. The increase in ranking was due to increased efficiency and high levels of innovation, Moody's said.

At $637 billion in 2017, Argentina's nominal GDP was the largest among Moody's B-rated sovereigns and 25x larger than the median of its rated peers. Nominal GDP will fall to $500 billion this year, which is still about 20x the median of Argentina's B-rated peers, Moody's noted.