TEXT-S&P revises Argentina outlook to negative

Mon Apr 23, 2012 10:59pm BST

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(The following statement was released by the rating agency) Overview

-- In our view, the recent government policies could increase risks to Argentina's macroeconomic framework, squeeze its external liquidity, and hinder medium-term growth prospects.

-- We revised the outlook on the Republic of Argentina to negative from stable.

-- We affirmed our 'B' unsolicited long-term foreign and local currency sovereign credit ratings, 'raAA' national scale rating, and 'B' transfer and convertibility assessment on Argentina. Rating Action On April 23, 2012, Standard & Poor's Ratings Services revised its outlook on the Republic of Argentina to negative from stable. In addition, we affirmed our 'B' unsolicited long- and short-term ratings and our 'raAA' national scale rating on Argentina. At the same time, we affirmed our 'B' transfer and convertibility assessment on Argentina. Rationale The negative outlook revision stems from policies enacted since the October 2011 presidential elections that we believe could over time increase the risk of a deterioration in the country's macroeconomic framework, put pressure on its external liquidity, and weaken Argentina's medium-term growth prospects. These include rising restrictions to international trade and recent steps to nationalize the hydrocarbon company Yacimientos Petroliferos Fiscales (YPF). We believe that these actions could exacerbate the existing weaknesses in Argentina's economy, including high inflation (which has appreciated the real exchange rate) and increasingly rigid government expenditure, and result in a worse investment climate. Current policies in the heavily-regulated energy sector have strongly expanded demand and reduced incentives for exploration and production, thereby weakening Argentina's external and fiscal accounts through higher energy imports and subsidies. Import restrictions have also raised several conflicts with key trading partners. These and other actions have contributed to the emergence of a parallel foreign exchange market. More recently, on April 16, 2012, the executive government announced and sent to Congress a bill for the immediate expropriation of 51% of YPF's shares, which until now the Spanish group Repsol-YPF S.A. (BBB-/Negative/A-3) controlled. The bill is expected to pass rapidly through Congress. While public versus private ownership of large hydrocarbon companies does not factor directly in Standard & Poor's sovereign methodology (see "Sovereign Government Rating Methodology and Assumptions" published June 30, 2011), we believe that this step, which was taken abruptly and unilaterally and with little negotiation with the controlling shareholder, underscores the weakening system of checks and balances in Argentina. Actions of this type continue to shorten the economic planning horizon in the country and contribute to Argentina's deteriorating economic and political links with the international community. As a result, we do not expect Argentina to progress on resolving its now long-standing impediments to regaining access to international markets, or curing the now 10-year old default to the bilateral creditors of the Paris Club. Although Argentina has $47.6 billion of international reserves as of April 13, 2012, equal to 5.5 months of current account payments, we see growing risks to the nation's external liquidity over the medium term. The combination of a weak global economy, growing uncertainty from both foreign and local market participants, and restricted access to foreign financing could over time raise the risk of a loss of external liquidity. High inflation contributed to a decrease in the real value of government debt (17% of which is denominated in nominal pesos and 21% linked to the official inflation rate). That, along with balanced budgets or small deficits, and rapid GDP growth, led to a decline in debt in terms of GDP. Argentina's gross general government debt fell to 43% of GDP at the end of 2011 from 60% in 2007. In addition, the central government relies on public sector entities (in particular the social security system, nationalized in 2008, and the Central Bank) to refinance maturing market debt, a policy that has moderated its rollover risk. This policy, however, is expected to face limits over time as these entities' own public missions are compromised by accumulating large levels of government debt instruments whose real value is not protected from inflation's effect. Although the government relies only moderately on private domestic markets to satisfy its borrowing requirement, we could interpret a future liability management operation as distressed under our methodology, and thus an event of default. Outlook The negative outlook indicates at least a one-in-three chance of a downgrade this year or next. A worsening external position, mostly likely from financial outflows (perhaps combined with weakening terms of trade) or additional policy actions that further diminish Argentina's growth prospects could lead to a downgrade. On the other hand, actions that restore investor confidence on medium-term prospects for the economy (on the monetary or structural front), and thus reduce uncertainty over its external liquidity position, could lead us to revise the outlook back to stable. Related Criteria And Research

-- Republic of Argentina, Sept. 16, 2011

-- Sovereign Government Rating Methodology And Assumptions, June 30, 2011

-- Criteria For Determining Transfer And Convertibility Assessments, May 18, 2009 Ratings List Ratings Affirmed; Outlook Action

To From Argentina (Republic of) (Unsolicited Ratings) Sovereign Credit Rating B/Negative/B B/Stable/B National scale rating raAA/Negative raAA/Stable Rating Affirmed Argentina (Republic of) (Unsolicited Ratings) Transfer & Convertibility Assessment B This unsolicited rating(s) was initiated by Standard & Poor's. It may be based solely on publicly available information and may or may not involve the participation of the issuer. Standard & Poor's has used information from sources believed to be reliable based on standards established in our Credit Ratings Information and Data Policy but does not guarantee the accuracy, adequacy, or completeness of any information used. Complete ratings information is available to subscribers of RatingsDirect on the Global Credit Portal at www.globalcreditportal.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. Use the Ratings search box located in the left column. (New York Ratings Team)

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