Moody’s credit ratings agency upgraded Argentina’s long-term foreign and local currency debt issuer’s score from Ca to Caa3, changing its outlook from “stable” to “positive.” In a Friday report, Moody’s celebrated the government’s macroeconomic stabilization but warned of “significant risks” to the country’s ability to cover its external debt payments.

Despite the improvement, Argentina remains in a fragile position as its new score is Moody’s third-to-last debt rating and indicates poor quality and very high credit risk. 

Moody Vice President and Senior Credit Officer Jaime Reusche told the Herald that the agency remains “cautious” on Argentina.

“There has been a strong fiscal, monetary, and economic adjustment that cannot be denied,” he said, adding that the measures have been much more “forceful” than the agency and the market expected.

Argentina has a long history of debt defaults and abrupt changes in economic policies. The country has been out of the voluntary international debt market since 2019, but President Javier Milei’s market-friendly reforms appear to be shifting this situation.

“The government will likely be entering the international markets by the end of this year,” Reusche pointed out. The ongoing economic program, however, has a weakness: external finances. 

“The peso has undergone a strong appreciation that is taking away some of [the country’s] competitiveness and generating some appetite for foreign exchange outflows through tourism.” 

In its report, Moody’s said that Milei’s “decisive fiscal adjustment, alongside measures to halt monetary financing” proved effective in addressing imbalances. They pointed out that trimming 5% of the country’s GDP was the main policy anchor, explaining that widespread cuts involved substantial reductions in public investments, transfers to state-owned enterprises and provinces, and public servants’ wages.

The report said that vulnerability risks remain and new ones will emerge as the country moves to the next phase of adjustment, which will involve the removal of controls on movements of capital and foreign currency. 

While Moody’s argued that lifting controls could bring in new investments, they warned that the complex nature of removing the currency restrictions known collectively as the cepo could jeopardize payment sustainability.

“If excessive positive domestic sentiment overstimulates the nascent economic recovery, import demand could strengthen, increasing the vulnerability to an economic or political shock that could derail the ongoing adjustment of the country’s external accounts,” the report added.

The document stated that Moody’s would upgrade the rating if international reserves increase steadily, foreign direct investment improves payment balance sustainability, and if the ruling party does well in this year’s mid-term legislative elections. A win could “increase political support for the government’s policy agenda” and enhance its ability to adopt additional reforms. 

On the other hand, the agency could downgrade its rating either because political or economic shocks “undermine macroeconomic stability,” or increased financial volatility impairs its ability to repay external debt. An abrupt devaluation that reinstates a “vicious inflation-devaluation cycle” may also result in a rating downgrade.

The creditors

Reusche pointed out that the bulk of Argentina’s debt is in international bonds, for some US$65 billion. For the analyst, the country’s biggest credit risk is not going through with its payments to bondholders as scheduled. While Argentina paid them almost US$600 million in principal last year, it will have to disburse US$2.9 billion in 2025.

This year, the country will pay around US$4.7 billion to private investors between interest and principal, Reusche said. He added that he doesn’t foresee a default, but didn’t rule out a reprofiling or renegotiation. 

“I think that there is concern that, at some point, the government will point to all the adjustments they’ve made and ask investors to give them a hand and extend the terms a little bit,” Reusche said.

Moody’s added that the possibility of Argentina signing a new deal with the International Monetary Fund (IMF) could further support the country’s external liquidity position. Argentina owes around US$45 billion to the Fund, and this year it will pay interest for US$3.5 billion over that amount.

 “The flow naturally starts to get complicated in terms of bond repayment, because amortization of the principal is beginning,” Reusche said. 

“That interest rate is going to stay more or less the same going forward, but [the country] will begin paying principal to the Fund in 2026  — one billion, then US$4 billion, and then US$6 billion in 2028. So that new loan would help give you air and defer the debt a bit,” he said. 

Reusche added that he did not believe the Fund was playing the usual role of a “guarantor” that demands austerity measures. 

“Here, the adjustments are clearly coming before having a program with the Fund,” he explained, stating that a new deal would not necessarily entail a showing of weakness. 

“It gives you a little more sustainability in a rather complex context.”