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Strategies & Market Trends : MDA - Market Direction Analysis -- Ignore unavailable to you. Want to Upgrade?

To: Stephen who wrote (20773)	7/22/1999 1:11:00 PM
From: Les H	Respond to of 99985

Also South American troubles back in picture... S&P AFFIRMS ARGENTINA'S FX RATINGS, BUT OUTLOOK NEGATIVE 10:55 EDT 07/22 NEW YORK (MktNews) - Standard & Poor's Thursday affirmed its double-'B' long-term senior unsecured rating on the Republic of Argentina's US$68.5 billion of foreign currency debt. Also, Standard & Poor's affirmed its triple-'B'-minus rating on the Republic's US$15.5 billion of long-term senior unsecured peso-denominated debt. The single-'B' foreign currency and 'A-3' local currency ratings on Argentina's US$3.5 billion of short-term dollar- and peso-denominated LETES are also affirmed. At the same time, Standard & Poor's affirmed its double-'B' long-term foreign currency and its triple-'B'-minus long-term local currency sovereign credit ratings on the Republic. The Republic's single-'B' foreign currency and 'A-3' local currency short-term sovereign ratings are also affirmed. The rating outlook is revised to 'negative' from 'stable.' The negative outlook reflects Standard & Poor's view that the next Administration--to take office in December--may face difficulties pushing through reforms needed to support Argentina's creditworthiness, as its fiscal and external positions weaken partly because of cyclical factors. The reversal of the business cycle in itself should help reduce the fiscal deficit, and the resumption of export growth would partly stabilize the external debt burden. Key reforms include strengthening public finances through a redesign of coparticipation (revenue sharing) between the federal and provincial governments, approval of the Fiscal Convertibility Law, improvements in tax administration (partly through the approval of a new tax code), and administrative reforms at the provincial level. Labor market reform and deregulation of key markets are also necessary. Lasting fiscal consolidation would reduce public sector borrowing needs abroad. Additionally, broadening the domestic banking system and capital markets would allow a progressive reduction in Argentina's external debt over the medium term. The negative outlook also anticipates continued market volatility in the run up to the October elections. The ratings are constrained by: --Argentina's heavy external debt and debt service burdens. At an estimated 229% and 67% of exports this year, respectively, net public external debt and debt service (excluding short-term debt) are among the heaviest of rated sovereigns and compare unfavorably with the corresponding medians for the double-'B' category, at 48% and 15%. If short-term debt is included, debt service rises to 165% of exports, compared with the double-'B' median of only 43%. However, the banking sector's short-term external debt (which accounts for two-thirds of total short-term external debt) is mostly interbank lines of credit and advances to Argentine subsidiaries of international banks, and has proven stable during previous times of stress. Public sector long-term amortization for next year is still heavy, similar to this year's. However, minimal short-term debt, at 1.5% of total external debt, and prudent liability management reduces its roll-over risk relative to that of peers. Nonfinancial private sector long-term amortization will further increase next year, and corporate sector dependence on external financing would only decrease in the medium term as the domestic banking system and capital markets keep deepening. --Persistent structural flaws in public finances. The federal government's tax burden is comparatively low, at 13.5% of GDP in 1998, in a country with the highest GDP per capita in the double-'B' category (US$7800 at year-end 1999) and comparatively high rates for value-added and corporate income taxes. Tax administration is hampered by an unsupportive judiciary system, which nurtures a culture of tax avoidance and evasion. This weakness is partly offset by the federal authorities' commitment to rein in discretionary public expenditures, as total expenditures excluding interest payments and transfers to the provinces has remained flat since 1997. However, controls on expenditures at the provincial level of government are loose at best. --Pending reforms designed to shore up competitiveness and public finances cited above. The ratings are supported by: --Strong political commitment to the basic tenets of the Convertibility Plan. As the Convertibility Plan has brought economic stability to Argentina in recent years, it enjoys widespread popular support. In turn, the next Administration is unlikely to reverse the current policy framework. However, it will be challenged to push through an ambitious reform program that addresses Argentina's remaining structural weaknesses. --Adequate systemic liquidity. Current sources of systemic liquidity (the Convertibility margin, liquidity requirements, and a contingent repurchase facility with international banks) cover 40% of total deposits, compared with a comparable ratio of only 5%-10% during the Tequila crisis. This available liquidity has made domestic bank deposits less sensitive to recurrent external shocks. In fact, total bank deposits have grown slightly since the Brazilian crisis, though some shift to U.S. dollar deposits has occurred. This in turn reduces the likelihood of forced abandonment of the parity of the Argentine peso with the U.S. dollar. --Sound banking system. The strengthening of the prudential framework and financial indicators of Argentina's banking system since 1995 has reduced the inherent systemic risk and has helped it become one of the strongest in the region, behind only Chile's. Key measures include improved prudential regulation and supervision, increased internationalization, continued consolidation, and decisive action by the authorities to resolve the problems of distressed banks while minimizing moral hazard, said Standard & Poor's.