Increased exchange rate pressures in Argentina suggest that it has a "meaningful risk of default," Fitch Ratings said, predicting that the country is more likely to be forced into debt restructuring.
Fitch's downgrade of the country's sovereign rating to CCC/C runs parallel to past rating trends of emerging markets with similar currency problems, according to James McCormack, a managing director at the rating agency.
Since 2000, 16 countries have seen their currencies fall by more than 30%, with the depreciation extending for more than 12 months, Fitch said. The rating agency eventually assigned default ratings in five of the countries.
Argentina's currency, the peso, was greatly devalued following the surprise result of the Aug. 11 primary election in the country, where Peronist candidate Alberto Fernández led incumbent President Mauricio Macri by 15.5 points.
"The recent depreciation in the Argentine peso suggests a real risk of default," McCormack said. "About 70% of the country's gross external debt is owed by the sovereign, and around 80% of government debt is denominated in foreign currency."
The peso's devaluation could also lead to worse economic problems, including a steeper decline in growth and faster inflation. Fitch now expects Argentina's economy to contract by 2.5% in 2019.
The currency crunch is one of the two reasons behind Argentina's downgrade into junk territory, McCormack earlier told El Cronista. The other reason is the possibility of a macroeconomic policy swing after the elections in October, he added.
Still, McCormack said Fitch sees an Argentine default as unlikely, as it still considers the debt to be sustainable. "If the level of indebtedness were worse and unpayable, our rating would be even lower. We pass from a possible to a probable restructuring scenario. ... But if the peso depreciates even more, the trajectory of the debt there would be unsustainable," the analyst added.
