Aug 1 (The following was released by the
Overview -- Local governments in Argentina are experiencing
slower economic growth, high inflation, and difficulties
financing their 2012 budget deficits.
-- We are downgrading the province of Buenos Aires to 'raA'
from 'raAA-', the province of Cordoba to 'raAA-' from 'raAA',
the province of Mendoza to 'raA+' from 'raAA', and the province
of Neuquen to 'raA+' from 'raAA', and affirming the 'raAA'
national scale rating on the city of Buenos Aires.
-- We are also lowering the short-term national scale
rating on Neuquen to 'raA-1' from 'raA-1+' and affirming the
'raA-1+' short-term national scale ratings on the city of Buenos
Aires and the province of Cordoba.
-- The negative outlook on all entities reflects our belief
that provincial finances could continue to deteriorate in the
next 12-18 months.
On July 31, 2012, Standard & Poor's Ratings Services lowered
its national scale ratings on the province of Buenos Aires to
'raA' from 'raAA-', Cordoba (Province of) to 'raAA-' from
'raAA', Mendoza (Province of) to 'raA+' from 'raAA', and Neuquen
(Province of) to 'raA+' from 'raAA'. In addition, we affirmed
the 'raAA' national scale rating on the city of Buenos Aires.
At the same time, we lowered the short-term national scale
rating on Neuquen to 'raA-1' from 'raA-1+' and affirmed the
short-term national scale rating on the city of Buenos Aires at
'raA-1+'. The outlooks on all entities remain negative.
The rating actions reflect the impact of current economic
slowdown and high inflation on the provinces' fiscal balances.
The provinces' revenues-both their own source revenues and
coparticipation transfers--are shrinking. At the same time, high
inflation is pressuring the public-sector costs especially amid
demands for higher wages which account for more than 50% of the
As a result, we expect increasing fiscal deficits for most
of the provinces in 2012. The central government's discretionary
transfers to support the provinces' individual capital programs
or its transfers to compensate unfavorable coparticipation
distribution have been important funding sources in the past
several years. For 2012, we are expecting these transfers to
sharply decline, given the central government's own fiscal
Besides the provinces' regular needs to finance their
budgets, the uncertainty over these transfers exacerbates the
funding gap for most of the provinces and increases pressure to
cut their capital expenditures and/or to increasingly rely on
short-term bonds to finance operating expenditure. Given that
access to international capital markets is mostly closed to
Argentine local governments, the provinces are more likely to be
dependent on domestic markets, multilateral agencies (such as
The World Bank), and domestic financial institutions.
Still, following the passage of the fiscal Responsibility
Law in 2004, provinces need an authorization from the central
government to issue debt, which constitutes an additional
uncertainty factor to our analysis. Provinces have increasingly
relied on short-term debt to cover their funding needs, which we
believe constitutes an additional risk factor, given the
rollover risk of this type of debt as provinces are dependant on
local market conditions. We believe that short-term issuances
are to be used to cover temporary shortfalls but not to be used
as a permanent funding source for operating needs. We believe
that the central government's fiscal support for the provinces
is important through discretionary transfers, direct financing
of projects, and its power to authorize any new debt.
However, we believe that each province faces different
fiscal challenges, which leads us to differentiate their credit
quality in the national scale rating spectrum. The downgrade of
the province of Buenos Aires, which contributes 36% of
Argentina's GDP, reflects its increasing fiscal deficits and
uncertainty over the central government transfers to cover
The densely populated suburban areas of Buenos Aires have a
significant number of poor residents who pose a constant
pressure on the province's spending on social programs. In
addition, we expect the province to increase its debt service
due to short-term issuance and/or borrowings from local
financial institutions to finance its large budget deficit.
The province's debt surpasses that of its national
peers--total debt represents about 70% of its operating
revenues. As of March 2012, its total debt reached ARP61.1
billion: 54.3% of this debt is denominated in pesos and
corresponds to debt with the central government, 0.5% is indexed
to inflation, and 45.2% is in foreign currency.
Despite the province's relatively smooth maturity profile
for its capital market debt in 2013, the increasing short-term
financing needs weaken its financial performance. For fiscal
2012, we estimate that the province is likely to maintain a
fiscal deficit of around 10% of operating revenues.
With diminishing access to capital markets and a growing
tension in the relationship between the province of Buenos Aires
and the central government, the province's ability to fulfill
its financing needs are is becoming difficult in the next 12-18
months. The downgrade of the province of Cordoba reflects the
increasing funding needs due to more uncertain central
government transfers to cover the province's pension system
deficit. We are expecting the province to end the year with a
balanced fiscal budget or a small deficit. Given Cordoba's
diversified economic structure, its revenues from its sources
will increase at least 25% in 2012, although at a slower rate
than in previous years.
At the same time, the provincial government has already took
measures to contain its operating expenses and cut capital
expenditures. Also, as a result of the recent issuance of $105
million in the local capital market, we believe the province has
already obtained most of the funds to cover its 2012 operating
needs. The main credit risk for the province is the funding of
its pension system.
Unlike other provinces in the 1990s, the province of
Cordoba did not transfer its pension system to the central
government, but agreed to finance the deficit jointly with it.
However, in 2011, the central government didn't transfer
ARP1.040 billion to cover the pension system deficit.
The province has already initiated legal actions against the
central government for its refusal to transfer these funds,
along with more than ARP500 million for public works that the
central government committed to transfer as well. Overall,
Cordoba is claiming that the central government owes it about
ARP2.2 billion. The resolution of this claim is uncertain.
Although the province expects to cover the pension system
deficit with its own revenues in 2012, in the future, this could
be more difficult to achieve.
The downgrade of the province of Mendoza reflects the
deterioration of its fiscal balance which we believe will deepen
in 2012. Mendoza had a small fiscal deficit in 2011 which we
expect to increase to about 2% of operating revenues in 2012. We
expect the province's funding needs to be about ARP1 billion in
2012, which will force it to look for alternative sources of
funding, which will generate a significant challenge. In
addition, the province needs the central government
authorization to increase its debt.
The province of Neuquen's revenues are equally distributed
among its own revenue sources, coparticipation transfers, and
royalties. The growth of these revenues slowed in the first half
of the year compared to 2011, and prospects for the second half
are not better. At the same time, the province is constrained in
cutting capital expenditures, as most of the public works
projects already have earmarked funds. Overall, we are expecting
a fiscal deficit of 7%-8% of total revenues in 2012. The
province already issued about ARP400 million in short-term debt
in the local market and asked for an additional authorization
from the central government to issue short- and medium-term
notes for ARP855 million. It's is still uncertain whether the
province will be able to issue in the local market the necessary
debt to close 2012 fiscal gap or to access alternative funding
We are affirming the national scale rating on the city of
Buenos Aires because we believe the city is better positioned to
withstand a slowdown and high inflation than other local
governments given its high fiscal flexibility both in terms of
revenues and expenses and its low debt burden. The city covers
90% of its revenues from its own sources. We expect an operating
surplus of about 15% of revenues in 2012 and fiscal deficit
would depend on the city's ability to execute capital
expenditures which have significantly increased in the past
several years. Its capital expenditures accounted for more than
15% of total expenses for the past three years and are expected
to remain at those levels in 2012.
Also, at the beginning of the year the city issued $415
million in debt, which will help to cover most of its 2012
funding needs. We believe the city will be able to deal with the
potential responsibilities which are currently in discussion
with the central government (for example, the subway
maintenance) in a manner consistent with its current rating
level. Outlook The negative outlooks on the provinces of
Cordoba, Mendoza, Neuquen, and Buenos Aires, and the city of
Buenos Aires parallel the outlook on the sovereign. The negative
outlook on Argentina indicates at least a reasonably high chance
of a downgrade this year or next.
A worsening external position, most likely from financial
outflows (possibly 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 in medium-term
prospects for the economy (monetary or structural), and thus
reduce uncertainty over its external liquidity position, could
lead us to revise the outlook back to stable. The negative
outlooks on these entities reflect our belief that provincial
fiscal deficits could continue to widen in a context of
deteriorating economic conditions in Argentina.