SAO PAULO -- The initiatives that Argentina's (Caa1 positive) President Mauricio Macri announced this week to reduce the country's economic distortions, should boost the economy in the long run. However, some sectors will face near-term challenges, says Moody's Investors Service.
Most notably, the government lifted capital controls and allowed the Argentinian peso to float freely. Initially, this has prompted a sharp depreciation of the currency, but in the longer-run it should attract increased overseas investment and help stabilize the country's foreign exchange reserves.
"The pace of the measures shows that the new administration wants to quickly move to a more market-friendly framework," said Gabriel Torres, a Vice President and Senior Credit analysts at Moody's. "The announcements are broadly credit positive for the sovereign and for some companies, but the adjustment period will likely be challenging."
The weaker peso will lead to faster inflation over the coming months, putting negative pressure on corporate margins and further eroding consumer demand, particularly for consumer durables goods such as electronics and automobiles. Importers will see a sharp rise in the cost of imported inputs, forcing them to raise prices for their end products, also reducing demand, according to the report, "Cross Sector -- Argentina; Rapid Pace of Policy Change is Credit Positive, But Raises Short-Term Challenges."
Select utility companies, such as Metrogas S.A. (Caa1 negative) and Empresa Distribuidora de Electricidad Salta (Caa1 positive), face strains because they have significant dollar-denominated debt, while relying exclusively on local currency revenues.
Sub-sovereigns should get some relief resulting from improved coordination with the federal government, as the new administration has indicated it will improve dialogue and policy coordination with provincial governments. However, in the near-term, those with foreign currency debt will see increased leverage ratios and declining liquidity as a result of the weaker peso.
A plan to eliminate export taxes on beef and other products, combined with the weaker currency, should boost agricultural exporters. The change will be credit positive for agricultural goods producers such as Asociacion de Cooperativas Argentinas Coop. (B3 stable) and Quickfood S.A. (Caa1 stable), a subsidiary of Brazilian food conglomerate BRF S.A. (Baa2 review for downgrade).