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Argentine provinces comply with country's fiscal responsibility law, a credit positive On 21 June, Argentina's (B2 stable) Federal Fiscal Responsibility Council, the organization responsible for measuring Argentine provinces' compliance with the fiscal responsibility law (FRL), published the results of its evaluation for 2018 and first-quarter 2019, which showed that the provinces generally were in compliance. The results are credit positive because compliance with the FRL signals a healthy fiscal position in 2018, which is advantageous in the current context of Argentina's prolonged recession and inflation. Moreover, the provinces' compliance with the law is a necessary requirement to obtain authorization from the federal government to access the capital markets and secure any needed liquidity for refinancing or capital expenditures. Except for some minor exceptions, all provinces complied with the rules of the FRL in 2018. For instance, the law establishes that provinces’ nominal growth rate of primary expenditures cannot exceed the growth rate of the consumer price index, a rule to which all but one province adhered (see Exhibit 1). The fiscal results are related to the containment of personnel expenses: because salaries had already been negotiated by the time that Argentina's currency crisis triggered an acceleration of inflation in the second half of 2018, expenditures on wages and salaries decreased in real terms that year. Exhibit 1 Argentina's provinces adhered to the FRL's current expense rule in 2018 Growth of current primary expenditures compared to 2017 levels 0% 5% 10% 15% 20% 25% 30% 35% 40% Source: Argentina's Fiscal Responsibility Council Although the first-quarter 2019 compliance report did not cover all provinces, the results also show overall compliance regarding current expense (see Exhibit 2). The provinces that were noncompliant reflect higher expenses to adjust for high and persistent inflation levels. 36 Credit Outlook: 27 June 2019 Exhibit 2 Argentina's provinces showed some non compliance in the first quarter of 2019 Growth of current primary expenditures versus first-quarter 2018 0% 10% 20% 30% 40% 50% 60% Tierra del Fuego Formosa City of Buenos Aires Entre Ríos Salta Catamarca Santa Fe La Rioja Mendoza Tucumán Source: Argentina's Fiscal Responsibility Council Although personnel expenses account for about 60% of current expenditures and regional governments historically have had difficulty limiting the growth of payroll and salary increases, provinces complied with the FRL rules in 2018. Both the federal government and regional government cannot exceed 2017 ratios of public-sector employees to total provincial population (see Exhibit 3). Keeping the number of employees on the payroll under control is especially important this year because we expect provinces to face considerable challenges containing personnel expenditures. After high inflation levels of 47.6% at year-end 2018 and high inflation expectations for 2019 (40% at year-end), we expect labor unions and constituents to demand higher wages ahead of the upcoming elections this October. Moreover, provinces will need to compensate workers for the lost purchasing power in 2018. Exhibit 3 Argentina's provinces kept their employees on the payroll below the FRL's requirements Public employees per 1,000 inhabitants 0 20 40 60 80 100 120 140 160 2018 Requirement Source: Argentina's Fiscal Responsibility Council In terms of indebtedness, all but two provinces adhered in 2018 to the rule of not surpassing a ratio of 15% of debt service to current revenue (net of transfers to municipalities). For those jurisdictions with a significant share of debt in foreign currencies, we expect that their ratio of debt service to current revenue will rise as a result of the significant local currency depreciation that occurred in mid-2018. (See Exhibit 4.) 37 Credit Outlook: 27 June 2019 Exhibit 4 Most Argentine provinces kept their ratios of debt service payments to current revenue below the 15% threshold established by the FRL Debt service to current revenue Foreign currency debt to total debt Santa Fe 1.0% 97% Formosa 1.2% 17% Santiago del Estero 1.5% 25% Misiones 1.7% 8% Catamarca 2.1% 16% Tucumán 2.2% 3% Corrientes 2.6% 10% San Juan 3.5% 50% Córdoba 3.7% 95% La Rioja 5.5% 86% Salta 5.8% 71% Chaco 6.3% 61% Entre Ríos 7.3% 83% Tierra del Fuego 7.7% 61% Santa Cruz 8.7% 1% City of Buenos Aires 8.9% 68% Jujuy 11.1% 47% Mendoza 13.4% 60% Neuquén 13.5% 82% Buenos Aires 13.5% 80% Río Negro 16.5% 67% Chubut 17.3% 85% Source: Argentina's Fiscal Responsibility Council Ursula Cassinerio, Analyst Moody’s Investors Service [email protected] +54.11.5129.2645 Alejandro Olivo, Associate Managing Director Moody’s Investors Service [email protected] +1.212.553.3837
Argentine provinces comply with country's fiscal responsibility law, a credit positive On 21 June, Argentina's (B2 stable) Federal Fiscal Responsibility Council, the organization responsible for measuring Argentine provinces' compliance with the fiscal responsibility law (FRL), published the results of its evaluation for 2018 and first-quarter 2019, which showed that the provinces generally were in compliance. The results are credit positive because compliance with the FRL signals a healthy fiscal position in 2018, which is advantageous in the current context of Argentina's prolonged recession and inflation. Moreover, the provinces' compliance with the law is a necessary requirement to obtain authorization from the federal government to access the capital markets and secure any needed liquidity for refinancing or capital expenditures. Except for some minor exceptions, all provinces complied with the rules of the FRL in 2018. For instance, the law establishes that provinces’ nominal growth rate of primary expenditures cannot exceed the growth rate of the consumer price index, a rule to which all but one province adhered (see Exhibit 1). The fiscal results are related to the containment of personnel expenses: because salaries had already been negotiated by the time that Argentina's currency crisis triggered an acceleration of inflation in the second half of 2018, expenditures on wages and salaries decreased in real terms that year. Exhibit 1 Argentina's provinces adhered to the FRL's current expense rule in 2018 Growth of current primary expenditures compared to 2017 levels 0% 5% 10% 15% 20% 25% 30% 35% 40% Source: Argentina's Fiscal Responsibility Council Although the first-quarter 2019 compliance report did not cover all provinces, the results also show overall compliance regarding current expense (see Exhibit 2). The provinces that were noncompliant reflect higher expenses to adjust for high and persistent inflation levels. 36 Credit Outlook: 27 June 2019 Exhibit 2 Argentina's provinces showed some non compliance in the first quarter of 2019 Growth of current primary expenditures versus first-quarter 2018 0% 10% 20% 30% 40% 50% 60% Tierra del Fuego Formosa City of Buenos Aires Entre Ríos Salta Catamarca Santa Fe La Rioja Mendoza Tucumán Source: Argentina's Fiscal Responsibility Council Although personnel expenses account for about 60% of current expenditures and regional governments historically have had difficulty limiting the growth of payroll and salary increases, provinces complied with the FRL rules in 2018. Both the federal government and regional government cannot exceed 2017 ratios of public-sector employees to total provincial population (see Exhibit 3). Keeping the number of employees on the payroll under control is especially important this year because we expect provinces to face considerable challenges containing personnel expenditures. After high inflation levels of 47.6% at year-end 2018 and high inflation expectations for 2019 (40% at year-end), we expect labor unions and constituents to demand higher wages ahead of the upcoming elections this October. Moreover, provinces will need to compensate workers for the lost purchasing power in 2018. Exhibit 3 Argentina's provinces kept their employees on the payroll below the FRL's requirements Public employees per 1,000 inhabitants 0 20 40 60 80 100 120 140 160 2018 Requirement Source: Argentina's Fiscal Responsibility Council In terms of indebtedness, all but two provinces adhered in 2018 to the rule of not surpassing a ratio of 15% of debt service to current revenue (net of transfers to municipalities). For those jurisdictions with a significant share of debt in foreign currencies, we expect that their ratio of debt service to current revenue will rise as a result of the significant local currency depreciation that occurred in mid-2018. (See Exhibit 4.) 37 Credit Outlook: 27 June 2019 Exhibit 4 Most Argentine provinces kept their ratios of debt service payments to current revenue below the 15% threshold established by the FRL Debt service to current revenue Foreign currency debt to total debt Santa Fe 1.0% 97% Formosa 1.2% 17% Santiago del Estero 1.5% 25% Misiones 1.7% 8% Catamarca 2.1% 16% Tucumán 2.2% 3% Corrientes 2.6% 10% San Juan 3.5% 50% Córdoba 3.7% 95% La Rioja 5.5% 86% Salta 5.8% 71% Chaco 6.3% 61% Entre Ríos 7.3% 83% Tierra del Fuego 7.7% 61% Santa Cruz 8.7% 1% City of Buenos Aires 8.9% 68% Jujuy 11.1% 47% Mendoza 13.4% 60% Neuquén 13.5% 82% Buenos Aires 13.5% 80% Río Negro 16.5% 67% Chubut 17.3% 85% Source: Argentina's Fiscal Responsibility Council Ursula Cassinerio, Analyst Moody’s Investors Service [email protected] +54.11.5129.2645 Alejandro Olivo, Associate Managing Director Moody’s Investors Service [email protected] +1.212.553.3837