S&P upgrades Argentina’s sovereign rating

S&P expects the government to pass several bills, including the 2018 budget, the fiscal responsibility law, and a tax reform.

Talk of the day

Standard & Poor’s raised Argentina Long-Term foreign currency rating to B+ (from B), and kept the stable outlook. The rating agency stated that, after the outcome of the congressional election, the government will have greater political capacity to continue pursuing its economic agenda leading to higher investment, growth and lower volatility. In particular S&P expects the Argentine government to pass several bills, including the 2018 budget, the fiscal responsibility law, and a tax reform. In addition, the administration will likely pursue other reforms that could improve labor costs and enhance local capital markets. Despite declining expected fiscal deficits, the net general government debt to GDP ratio will likely increase 10% to 54% by 2020, but will remain at a level deemed moderate by the agency. S&P expects inflation to continue falling from the current high level as the central bank gains more policy credibility and effectiveness in the monetary policy. While Argentina’s currently financial profile is still weak, a higher-than-expected fiscal consolidation could improve Argentina’s rating over the next two years.


The consolidated public sector posted a primary deficit of BRL 21.3 billion in September, better than our forecast (-24.8 billion) and market consensus (-23.4 billion). The consolidated primary deficit accumulated over 12 months remained at 2.4% of GDP. The central government’s result, as published by the National Treasury, was a deficit of BRL 22.7 billion in September (our estimate: -24.4 billion; Central Bank methodology: -22.2 billion), with the surprise reflecting lower transfers to states and municipalities and lower discretionary spending. Regional governments and state-owned companies also posted stronger-than- expected readings, with surpluses of BRL 0.8 billion and BRL 0.2 billion (while we anticipated deficits of 0.5 billion and 0.4 billion, respectively). After extraordinary revenues materialization and recurring revenues improvement, the government should be able to meet its target for the year of a primary deficit of BRL 162 billion (-2.4% of GDP) for the consolidated public sector.

Public debt dynamics remains unfavorable. The general government’s gross debt edged up to 73.9% of GDP in September from 73.7% in August, even though development bank BNDES returned BRL 33 billion (0.5% of GDP) to the National Treasury. Meanwhile, net debt expanded to 50.9% of GDP from 50.2%. If approved, the pension reform will be essential for public debt dynamics — by reversing the current upward trend in pension expenses and being a key step to comply with the constitutional spending cap — and could generate the necessary conditions for the structural decline in interest rates and a firmer rebound in economic activity. ** Full story here.

Inflation expectations for 2018 remained stable at 4.02%. According to Focus survey, inflation expectations has barely changed to 3.08% (+2bps) for 2017 and remained stable at 4.02% for 2018 and 4.25% for 2019. Year-end Selic expectations remained flat for the three years horizon, at 7.00% for 2017 and 2018, and 8.00% for 2019. GDP growth expectations did not change for 2017 (at 0.73%), and also remained flat for 2018 and 2019 (both at 2.50%). Finally, the BRL was virtually flat for 2017 at 3.19/USD (from 3.16/USD); for 2018 at 3.30/USD; and for 2019 at 3.34/USD (from 3.33/USD).

FGV’s economic uncertainty index declined 7.0% to 111 in October, the lowest level since February 2015.The survey is relevant for mapping part of the economic agents’ risk aversion that was not explained by traditional financial conditions indicators, given that the analysis of newspaper accounts for 70% of the aggregate index. A high figure is associated with greater uncertainty that is negatively related to economic activity.

The Copom minutes will be released at 8:00 AM (SP time). We will publish a research report on the central bank’s minutes still today. What’s more, the nationwide unemployment rate for September will come out today at 9:00 AM (SP time). We expect it to decrease 0.1 p.p. to 12.5% (unchanged at 12.6% according to our seasonal adjustment), while the Bloomberg consensus projects 12.4%.


The industrial production index expanded 1.0% year over year in September (5.2% in August), leading to growth of 3.2% in the third quarter of the year (up from -1.7% in 2Q17). The 3.6% year over year gain in mining production (9.2% in August), contributed with 1.6 p.p. to the headline gain in September. Meanwhile, manufacturing production dropped 1.4% year over year (market consensus: -1.5%; our call: -2.0%), overshadowed by the unfavorable calendar effect. Once adjusted for seasonal and calendar effects, manufacturing rose 1.5%, broadly stable from one month earlier. Manufacturing in the month was lifted by leather and metal related goods. In the quarter, manufacturing grew 0.9% in the third quarter of 2017, improving from the 0.9% decline in 2Q17 and the 0.4% drop in 1Q17. Mining (5.8% in 3Q17 vs. -1.7% previously) led industrial production improvement in the quarter (3.2% yoy vs. -1.7% in 2Q17). Meanwhile, utilities improved on its growth rate of 1.3% in 2Q17, with an increase of 2.0% in the third quarter.

We forecast growth of 1.7% this year (1.6% for 2016), with a recovery to 2.7% next year. Higher global growth (supporting copper prices), expansionary monetary policy and improving sentiment will drive an activity recovery going forward. The outcome of the general election and the debate over the reform agenda next year will likely have a significant influence on confidence and investment, and consequently on growth. ** Full story here.

Fuente: ITAU BBA

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