Although the borrower is evidently making progress, investors must be prepared for setbacks given the enormous economic and political challenges still to overcome.
Brazil and Argentina head in the right direction, but the latter has a trickier path
Brazil and Argentina’s risk scores improved last year and have continued to edge higher in 2018, according to Euromoney’s crowd-sourcing country risk survey.
In Brazil’s case, this is despite the downgrading of its sovereign credit ratings from BB to BB- by Standard & Poor’s in January, and by Fitch a month later, which had been expected in view of the uncertainty surrounding the elections this October and failure to address the pensions deficit.
The latest preliminary survey results – to be released next week – show Brazil scoring 52.3 from a total of 100 risk points, and still ranking 60th out of 186 countries worldwide, compared with just 37.7 points for Argentina.
That makes Brazil a riskier option than Uruguay lying 44th in the global risk rankings, Peru (39th), Mexico (38th) and the region’s safest bet, Chile, in 15th position. It is still comfortably above Argentina, which has climbed to 93rd and remains a high risk given its history of default, despite bouncing back from 136th at its worst five years ago.
Brazil’s economy is now improving after having contracted since 2014.
“It has the most solid economy in the region and is the most attractive for the foreign investor,” says Bruno Vasconcelos, an economist at CEIC Data and survey participant.
Last year’s 1% expansion of real GDP was disappointing, but it followed two years of steep contraction, and forecasts provided by BBVA – one of numerous international banks taking part in Euromoney’s survey – show a 2.1% rise for 2018.
Others have suggested it might be higher with interest rates tracking inflation lower, and as Vasconcelos points out the country has shown its commitment by running a primary surplus – plus “the social security reform will probably pass in congress after the election, at the end of the year”.
Meanwhile, Argentina is facing similar political challenges, but has no elections until 2019 and is forecast to grow by 3.3% this year after last year’s 2.8% outturn.
President Mauricio Macri was strengthened by his party gaining at the mid-term elections in October and its capital-access score has naturally improved following the return to international markets in 2016 for the first time in 15 years.
However, the risk score differential between Argentina and Brazil has merely narrowed to what it was before the economic crisis in 2013-2014, from 28 to 14 points, meaning Brazil is still considered the safer bet:
That seems unsurprising considering Argentina’s history of repeated defaults, the challenges posed by its high inflation and fiscal problems highlighting structural issues, and its vulnerability to rising global interest rates.
Financing the deficit has spurred a rapid rise in foreign currency borrowing, and this trend along with real currency appreciation undermining exports, in concert with recovering domestic demand, is widening the current-account deficit, which doubled in value to $30 billion last year, to approximately 5% of GDP.
Alfonso Dingemans, a post-doctoral research fellow at the Universidad de Santiago de Chile, also notes the risks to government stability underlined by the low score for that and all other political risk indicators for Argentina in Euromoney’s survey.
“Macri’s coalition Cambiemos does not hold a majority,” he says.
“The political opposition led by the centre-left Peronist alliance Front for Victory (FPV) is strong and combative, and although Macri has managed to survive three years without a serious political crisis, the coming election year can change this relative calm.”
Macri has opted for a gradualist approach to reform than the type of shock treatment likely to cause instability, but requires another term and is pinning his hopes on an infrastructure boom.
This raises the question of whether the next government – especially if the FPV wins – will respect the path of economic reform towards fiscal equilibrium.
Most risk experts are still concerned by the economic picture, noting the persistently high inflation rate and fiscal deficit the government is grappling with, despite encouraging adjustments on both counts.
“The (re-)alignment of prices and tariffs of key services and commodities (public transport, gas), to reduce Argentina’s high fiscal deficit, has faced a social backlash,” says Dingemans.
Annual inflation has fallen from 40%, but at around 25% in February it stands out relative to Brazil’s, which is historically low at less than 3% since mid-2017.
“As the inflation problem is difficult to solve, it could politically harm the current administration and jeopardize its continuity after the 2019 elections,” states German Plessen, one of Euromoney’s survey contributors based in Buenos Aires, adding: “So, though Argentina is heading the right way, it is still far from being a stable economy.”
Investors are optimistic that reforms will progress and economic indicators will continue to improve.
Yet with the headline fiscal deficit rising to 6% of GDP in 2017, due to sharply rising debt interest payments, there is pressure to ensure the primary deficit targets are met and that Argentina avoids an economic downturn – which might become a bigger risk if Trump’s protectionist policies spark a global trade war.