Excerpt
Table of Contents
„FINANCIAL PLANNING & RATING“
List of Illustrations
1 . Introduction
2 . Description of Argentina and its economy
3 . Country Rating of Argentina
3.1. Economic Strength
3.2. Institutional Strength
3.3. Fiscal Strength
3.4. Susceptibility to Event Risk
3.5. Final Rating.
4 . A u t om otive Industry in Argentina.11
4.1. Potential risks.
4.2. Implication of the country rating
5 . Statistically-based forecast of vehicle sales
6 . Conclusion
Bibliography
List of Illustrations
Illustration 1 – Argentina’s Exports
Illustration 2 – Argentina’s Imports
Illustration 3 – Determining the Overall Grid-Indicated Outcome
Illustration 4 – Mapping Factors to the Rating Categories
Illustration 5 – Argentina’s scoring range in Factor 1 “Economic Strength”
Illustration 6 – Argentina’s scoring range in Factor 2 “Institutional Strength”
Illustration 7 – Argentina’s scoring range in Factor 3 “Fiscal Strength”
Illustration 8 – Argentina’s scoring range in Factor 4 “Susceptibility to Event Risk”
Illustration 9 – Argentina’s Long Term Rating
Illustration 10 – Vehicle Sales per Month
Illustration 11 – Pegel Classification
Illustration 12 – Moving Averages
Illustration 13 – De-Trended Series
Illustration 14 – Double Exponential Smoothing – Excel
Illustration 15 – Double Exponential Smoothing – Graphical Solution
Illustration 16 – Remaining Error
1. Introduction
This paper constitutes a country rating of the Argentine Republic. Firstly, the country and its economy will be described briefly. In the following, the Argentine Republic will be rated by the usage of the methodology of the credit rating agency Moody’s. Moody's is an essential component of the global capital markets, providing credit ratings, research, tools and analysis that contribute to transparent and integrated financial markets cf. (Moodys, 2018).
After that, an example of an export-oriented sector serves as a case-study to be closer analyzed with regard to potential, arising risks, while doing business with Argentina and the implicated country rating. Finally, a statistically-based forecast for the underlying business sector will be developed.
2. Description of Argentina and its economy
Argentina is the largest country in South America after Brazil, with a population of over 44 million inhabitants in 2018. The government of Argentina, within its framework of a federal system, is a presidential representative democratic republic. Currently, the presidential seat is hold by “Mauricio Marci”, since December 2015. The legal currency is the “Argentine Peso” and the official language is “Spanish”, among others.
Argentina is moderately dependent on its exports and imports, as demonstrated by the following “Illustrations 1 and 2”.
Illustration 1 – Argentina’s Exports:
Abbildung in dieser Leseprobe nicht enthalten
Source: https://atlas.media.mit.edu/en/profile/country/arg/
Illustration 2 – Argentina’s Imports:
Abbildung in dieser Leseprobe nicht enthalten
Source: https://atlas.media.mit.edu/en/profile/country/arg/
The most essential exports are soybean meal and corn. This leads to the fact, that the agricultural industry states their most important business sector. A more detailed description will be outlined in the following. Their favored destinations are Brazil, China, USA, Vietnam and Chile. Additionally, it can be realized that Argentina is going to face many challenges concerning the topics of trade and import taxes, initiated by the USA. In general, Argentina exported $59 billion in 2016, which made it the 44th largest exporter worldwide. On the import side, the most important goods were led by cars and vehicle parts. This specific industry sector, the automotive industry, will be analyzed more precisely in “Chapter 4 and 5” by describing the risk of doing business with Argentina within this specific business sector, concluded by a statistically-based forecast of the vehicle sales in “Chapter 5”. All in all, the imports amounted to $55,8 billion in 2016, which ranks Argentina the 46th largest importer in the world. Argentina’s most recent import partners constitute Brazil, China, USA, Germany and Mexico. Since 2011, a slight decrease in both exports and imports can be recognized cf. (Atlas, 2016).
As mentioned earlier, Argentina’s agricultural industry states the most important and valuable business sector in the country.
Due to its rich and fertile lands, Argentina possesses enormous agricultural and energy resources. Food processing and beverages companies are mainly located at the Buenos Aires area, which constitutes the country’s most essential area in the agricultural sector. Besides that, Cordoba represents the globally recognized industrial center in Argentina, which leads to the other important business sectors cf. (Kiprop, 2018).
Some of the other economical cornerstones are mainly the appliances and electronics industry, the textile industry and the oil industry. Especially the growing innovative sector in appliances and electronics further increases Argentina’s GDP, which depicts $554 billion in 2016.
The textile industry, with an estimated value of $12 billion, attracted global fashion designer icons to source for their high-quality clothing materials from Argentina. Furthermore, more than 11.500 manufacturing textile companies, mostly family-owned, constitute a production value of $2.7 billion per year cf. (Kiprop, 2018).
Since Mauricio Macri was elected in 2015, he enacted business-friendly reforms in order to turn Argentina again into an attractive market for foreign direct investments. These reforms lead to huge investment plans worth about $33 billion, which mainly are notified by companies based in the United States, Germany, Canada, Spain and Brazil. Some examples of companies to invest in Argentina are Siemens AG, Dow Chemical Co, Axion Energy, Banco Santander SA and Coca-Cola Co cf. (Reuters, 2017).
The biggest and most successful companies in Argentina are the Brazilian company Petrobras with an annual revenue of $88,8 billion in 2017, followed by Argentina’s governmental owned oil company YPF SA with an annual revenue of $15,3 billion in 2017 cf. (Amigobulls, 2017); (Ycharts, 2018).
As mentioned earlier, Argentina’s GDP amounted $554 billion in 2016. This leads to a GDP per capita of $10.206, which is only the 73rd highest worldwide.
To summarize, since Mauricio Marci’s election, Argentina can constitute a huge upswing and will probably escape from decreasing economical performances and its disappointing history of political corruption cf. (Ieconomics, 2017).
3. Country Rating of Argentina
A country rating’s purpose is to assess the capability and willingness of a sovereign to fulfill contractual payment obligations in local and foreign currencies. The result of a country rating is an indication of a country’s access to capital markets for sovereign institutions, provides a link between good rating quality and interest rate costs and the improvement of debt profile by the possibility to issue long-term debt.
Moody’s assessment of sovereign credit risk is based on the interaction of four key factors: Economic Strength, Institutional Strength, Fiscal Strength and Susceptibility to Event Risk. As illustrated in the following, the four key factors have different relations towards each other.
Illustration 3 – Determining the Overall Grid-Indicated Outcome:
Abbildung in dieser Leseprobe nicht enthalten
Source: (Moody's Investors Service, 2016, S. 4)
Each key factor contains of a certain amount of sub-factors. After estimating or calculating each of them, the results are mapped to one of 15 ranking categories, ranging from Very High Plus (VH+) to Very Low Minus (VL-), which are in the next step converted to the mid- point of the score range for the particular category according to the following “Illustration 4”.
Illustration 4 – Mapping Factors to the Rating Categories:
Abbildung in dieser Leseprobe nicht enthalten
Source: (Moody's Investors Service, 2016, S. 4)
3.1. Economic Strength
To determine a country’s resilience capacity it is essential to value the intrinsic strength of the economy by focusing on growth potential, diversification, competitiveness, national income and scale. The ability to generate revenues and service debt is dependent on fostering economic growth and prosperity. Past sovereign defaults showed that lacking in “Economic Strength” seems to be the main issue, which often occurs in countries with weak economic prospects. Moreover, a countries competitiveness is highly influenceable by trade shocks. In that case, large diversified economies are much more persistent against external shocks than smaller non-diversified countries.
The following “Illustration 5” shows the results of the individual rankings of the “Economic Strength’s” sub-factor indicators:
- Average Real GDP Growth
- Volatility in Real GDP Growth
- WEF Global Competitiveness Index
- Nominal GDP
- GDP per Capita
Illustration 5 – Argentina’s scoring range in Factor 1 “Economic Strength”:
Abbildung in dieser Leseprobe nicht enthalten
Source: (Moody's Investors Service, 2016, S. 9) ,own illustration
As mentioned earlier, after identifying the individual ranking from VH+ to VL- for each sub- factor, these rankings are converted to the mid-point of the score range according to Exhibit2 in Illustration 4“. After completion of this step, they are multiplied by the “Indicator Weighting” (towards Sub-Factor), before being summed up and multiplied by the “Sub- Factor Weighting” (towards Factor). In the last step, the sum of the individual factors is calculated and ultimately reconverted into “VH+” to “VL-“ (again by the usage of Exhibit 2 in “Illustration 4”), which depicts our “Final Rating” for the key factor “Economic Strength”.
By analyzing the individual sub-factors, it can be assumed that most of them are ranked moderately to high. The only exemption displays the “Global Competitiveness Index” being ranked “VL” (very low). As mentioned earlier, a country’s competitiveness is highly impressionable by external shocks (trade shocks). Furthermore, it is the case that large diversified economies are much more resilient to external shocks. After analyzing Argentina’s economy in “Chapter 2”, it can be said, that Argentina is not known for its diversified economy and is rather highly dependent on its agricultural performance. Moreover, the agricultural industry is enormously amenable to influence of the weather, which is one indicator for the low scoring of the sub-factor “Global Competitiveness Index”.
3.2. Institutional Strength
The “Institutional Strength” is an indicator for a country’s capability and willingness to repay its debt and obligations. An essential aspect is the capacity of the government to conduct suitable economic policies that drive economic growth and prosperity. As mentioned in “Chapter 2”, Mauricio Macri started off with business-friendly reforms to generate economic growth. In the following “Illustration 6”, it is shown, if these reforms can be interpreted as successful or not, by assessing the sub-factors as listed:
- Worldwide Government Effectiveness Index
- Worldwide Rule of Law Index
- Worldwide Control of Corruption Index
- Inflation Level
- Inflation Volatility
Illustration 6 – Argentina’s scoring range in Factor 2 “Institutional Strength”:
Abbildung in dieser Leseprobe nicht enthalten
Source: (Moody's Investors Service, 2016, S. 14), own illustration
The assessment of the key factor “Institutional Strength” does no differentiate between individual government forms. Both democratic and authoritarian governments have more or less the same probability to default. Nonetheless, mature democratic systems have the lead in the highest rating level “Aaa”. As shown in “Illustration 6”, the Index of Government Effectiveness, Rule of Law and Control of Corruption are rated in the middle range, which is not untypical for a country in South America trying to escape from economic down-paths and high inflation levels. The latter, as shown in “Illustration 6”, constitutes a very high level of inflation, which negatively influences the overall rating of “Institutional Strength”. In comparison to Macri’s economic policies, especially the high degree of inflation volatility can be interpreted as a struggling indicator for future economic predictions and moderately successful rewards of his first political initiatives. Furthermore, past sovereign’s performances indicate that almost one third of sovereign’s defaults have been directly related to institutional and political weaknesses, ranging from political instability to weak budget management and governance problems or to political unwillingness to pay.
3.3. Fiscal Strength
The third key factor “Fiscal Strength” provides information regarding the overall health of government finances. This goes from calculating debt burdens and debt affordability to assessing the structure of government debt. The highest contribution to the overall “Fiscal Strength Score” comes from adjustment factors like future trends and events.
In the following “Illustration 6”, the observed sub-factor indicator’s rankings are shown, as listed:
- General Government Debt/GDP
- General Government Debt/Revenues
- General Government Interest Payments/GDP
- Debt Trend
- General Government Foreign Currency Debt/General Government Debt
Illustration 7 – Argentina’s scoring range in Factor 3 “Fiscal Strength”:
Abbildung in dieser Leseprobe nicht enthalten
Source: (Moody's Investors Service, 2016, S. 18), own illustration
Many defaults result from continuing external and fiscal imbalances of the past, which over time lead to an unsustainably high debt burden. Due to Argentina’s sub-indicator ranking of medium to high valuation, it can be assumed that Argentina is not equipped with high debt burden. The exceptional case displays the “General Government Foreign Currency Debt per General Government Debt”, with a very high percentage of Foreign Currency Debt leading to the worst possible rating of “Very Low Minus”. Despite of the afore mentioned, the overall rating of the “Fiscal Strength” can be evaluated positively, especially when taking into consideration that in almost every second case a high debt burden expressed to be the primary driver of default. Moreover, besides a variety of issues, mainly the inability to generate stable economic growth and continuous reduction of outstanding debt causes unsustainable high debt burden. Not to be ignored are the “Adjustment Factors”, as mentioned at the outset of this chapter. Especially important is the “Debt trend” and the “General Government Foreign Currency Debt/General Government Debt (%)”. Those two are negatively impacting the rating score, by causing the largest possible down-grad of minus nine scoring points due to its bad values. The latter can lead to sceptic, tentative and frightened foreign countries in their intention to invest in Argentina or to give borrowing or loans in their home currency.
3.4. Susceptibility to Event Risk
Ultimately, the last key factor to take into account is a country’s “Susceptibility to Event Risk”. While the first three key factors focus on the government’s ability to withstand shocks from a medium-term perspective, the fourth factor analyzes unpredictable risks ensuing from extreme events. The consequences of such events can be burdens on public finances leading to an increased sovereign’s probability of default. In the following “Illustration 8”, the observed sub-factor indicators are analyzed, as listed:
- Worldwide Voice and Accountability Index
- GDP per Capita
- Gross Borrowing Requirements/GDP
- Non-Resident Share of General Government Debt
- Moody’s Market Implied Ratings
- Average Baseline Credit Assessment
- Total Domestic Bank Assets/GDP
- Ranking System Loan-to-Deposit Ratio
- (Current Account Balance + FDI Inflows)/GDP
- External Vulnerability Indicator (EVI)
- Net International Investment Position/GDP
Illustration 8 – Argentina’s scoring range in Factor 4 “Susceptibility to Event Risk”:
Abbildung in dieser Leseprobe nicht enthalten
Source: (Moody's Investors Service, 2016, S. 23) ,own illustration
A significant amount of past sovereign defaults have resulted of systemic banking crises, in which costly bank restructuring contributed to a large and unexpected build-up of public debt over a couple of years in the consequences of the banking crisis. As we can abstract from “Illustration 8”, sub-factors concerning banking indicators like “Total Domestic Bank Assets per GDP”, “Banking System Loan-to-Deposit Ratio” or “Current Account Balance plus FDI Inflows per GDP” are rated in the range of Very Low to Very Low Minus. Therefore, it can be interpreted, that Argentina is still very susceptible to defaults caused by unpredictable risks of extreme events. Additionally, the “External Vulnerability Indicator” (EVI) is not to ignore. This indicator reflects the increased cost of foreign-currency debt resulting from currency depreciation. Declining currency values cause increased competitiveness of exports and more expensive imports. Furthermore, this contributes to inflationary pressure that could be observed by the “Inflation Level” in “Chapter 3.2” cf. (Pettinger, 2016).
Therefore, it is not surprising that the “EVI” is rated “Very Low Plus”, equal to the “Inflation Level”. As argued earlier, this sub-indicators reflect possible fields of actions for political interference, as well as need for improvements.
[...]