Moody’s expects Milei to seek a more radical change in the energy regulatory framework

The Argentines They chose Sunday, November 19th Javier Milei as its president. Moody’s analyzes the implication – in the various sectors and sovereign level – of the new head of state.

Milei identifies as a libertarian and proposes a drastic change in policies to address social and economic problems in Argentina. His proposals include cutting public spending by 15% by eliminating government spending and ministries, as well as privatizing state-owned companies, Moody’s details in its Nov. 6 report.

“His most prominent idea is to completely dollarize the economy and eliminate the Argentine peso and the Central Bank of the Argentine Republic (BCRA) as a way to control inflation”.

Although the rating agency’s document corresponds to days before the second round, it points out that the adoption of forceful measures such as those proposed by Milei would be effective in addressing imbalances and eliminating macroeconomic distortions, “This solution would imply a strong and deep economic adjustment and a sudden drop in domestic demand. “His ability to execute these policies will also be tested, as the support he receives from political parties in Congress is limited.”

“(…) We hope that Javier Milei seeks a more radical change in the energy regulatory framework. Eduardo Rodríguez Chirillo, Milei’s main energy advisor, has already established some guidelines for electricity and power generation policies. The basis of his plan is to improve market efficiency through price signals, which offers an incentive for savings in consumption due to the setting of tariffs that progressively offset the real cost of supply. However, a sharp increase in electricity prices will require a large possession of political capital.”

“(…) Concern about customers’ ability to pay in the face of falling purchasing power and increasing social pressure will make any structural change extremely difficult.”

Five points to consider

» A macrofiscal adjustment. The significant macroeconomic and fiscal imbalances—which slow down Argentine economic activity, distort relative prices, and reduce purchasing power—require measures on the part of the candidate who is elected. The likelihood of a more politically divided Congress will also influence the next administration’s ability to implement policies that address these issues.

» Economic distortions increase the risk of a sovereign credit event in 2024-2025. The outcome of the runoff will determine whether the economy is prepared to face a prolonged period of gradual deterioration. “Javier Milei’s government will be limited by governance challenges that will hinder his ambitious reform agenda.”

» The credit quality of non-financial companies will worsen due to economic problems. Capital controls make it difficult to refinance external debt, and this increases credit risk. Despite this situation, the financial strength of Argentine companies will remain relatively solid, with a gross debt/EBITDA ratio much lower than that of other companies qualified in the Food Code. Argentinian – Caa. Short-term bond redemptions are manageable, but refinancing risks will increase in 2025, especially for external debt.

» Sovereign exposure increases banks’ risk, while political uncertainty puts pressure on deposits. While there is a risk that profits will not be sufficient to replenish capital in real terms, banks’ capital and liquidity support their credit quality. Banks have low credit penetration, a contained – although growing – exposure to sovereign public debt and a low level of intermediation of savings in foreign currency.

» There will be rate changes and subsidies in public services, the energy sector and regional governments. For utilities, there is some concern around customers’ ability to pay, which will make any structural change difficult. Under Milei, provinces will likely be given more fiscal autonomy, but their ability to achieve this will be limited.

The current scenario of Argentina

Argentina has 12 series of global bonds and Eurobonds in force for a nominal value of US$67.6 billion and a staggered coupon structure (step-up) that are amortized between July 2024 and July 2046.

The Argentine economy has a long history of having gone through difficult economic situations, but it has rarely accumulated such large imbalances. The most widespread of these is the control of the official exchange rate, which promotes important distortions of relative prices and is increasingly behind the parallel market exchange rate. Instead of being a nominal anchor, the exchange rate situation fuels inflation and raises inflation expectations.

The deterioration of macroeconomic conditions has accelerated since the beginning of the year, with inflation reaching 138% in the 12 months ending in September. Additionally, the effects of a severe drought in early 2023 have accelerated the loss of international reserves due to declining export earnings from the agricultural sector. As a result, pressure increases on the country’s external financing sources, as the BCRA’s gross reserves fell to US$26.9 billion (4.1% of GDP) at the end of September from US$44.6 billion in December 2022, leaving the BCRA’s net reserves in negative territory.

The BCRA’s low level of hard currency reserves would represent a major obstacle to Milei’s plans to dollarize the economy and would allow the sovereign to stay up to date with its external debt obligations. Furthermore, despite the firm will to adopt strong adjustments, such as the adoption of the dollar as the official currency, Milei’s political support in Congress would be limited, especially with regard to measures that generate economic unrest.

Regulated utilities, retail, consumer and telecommunications companies face increased currency risk due to the large number of operations denominated in local currency, limited cash generation in foreign currency or lack of hedging against peso depreciation.

Amortizations of bonds maturing in 2024 are relatively lower, but refinancing risks will increase in 2025, especially for external debt. Argentina’s rated companies have about $2.6 billion in bond amortizations due in 2024, a manageable amount given their liquidity and cash generation capacity, and which can be addressed through local institutions and lenders. However, refinancing needs will nearly double to $5.5 billion in 2025, primarily in dollar-denominated bonds and dollar-linked bonds.

The refinancing and external liquidity risk in 2025 is mitigated to some extent, because many of these companies are in the energy sector and have significant foreign currency-denominated revenues. This includes bond maturities of YPF SA for US$1.5 billion, MSU Energy SA for US$600 million and Transportadora de Gas del Sur SA for US$482 million.