Fitch warns that new economic measures in Argentina aggravate uncertainty

The risk rating agency Fitch warned on Tuesday that the new economic measures adopted by the Government of the Argentine president, Javier Milei, “aggravate uncertainty” about the outlook for the South American country’s sovereign debt. “Argentina’s debt service outlook remains unclear following the latest policy measures,” the agency said in a report.

With the aim of ending monetary emission to lower inflation and relieve exchange rate pressure, Milei’s government has launched ‘phase 2’ of its economic stabilization plan with important changes in the monetary policy scheme.

The Central Bank, which had already stopped issuing pesos to finance the Treasury – whose expenses fell abruptly due to Milei’s fiscal shock plan – now does not issue pesos to buy dollars in the official market, or, if it does, it “sterilizes” the Argentine pesos issued, selling the equivalent amount of dollars in the financial exchange market.

But the new scheme implies a lower accumulation of monetary reserves, which are already at very low levels.

In addition, the Treasury will absorb the Central Bank’s interest-bearing debt.

“Argentina’s latest economic adjustment measures have exacerbated uncertainties over its ability to accumulate international reserves and regain access to global capital markets,” Fitch Ratings said.

The agency noted that exchange controls and negative real interest rates remain in place, “with no clear prospects” for their gradual elimination.

Regarding the new scheme, he said that the Government intends to “strictly limit the supply of Argentine pesos”, hoping that “this will further anchor a reduction in inflation and improve the conditions for eliminating exchange controls without major disturbances in the exchange rate and financial markets.”

However, Fitch cautioned, “it is unclear how much of a difference this plan will make.”

He noted that by assuming the Central Bank’s debt, the Argentine Treasury will accumulate a new stock of short-term debt “that could be a potential source of demand for dollars in the event of a confidence shock.”

He also noted that the change from negative real interest rates to positive ones, which would be necessary to eliminate exchange controls, “could further increase this volume of debt.”

And to reduce it, “an even larger fiscal surplus could be needed, which could stifle the economic recovery,” Fitch added.