Sovereign Stress Tracker: Why have risks moderated in Argentina?

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Two weeks ago, I drew attention to the impressive changes in Argentina’s macroeconomic predictors of sovereign stress.

President Javier Milei has been in office for about a year now, and the about-face in economic policies has been swift.

It is very much a situation of “short-term pain, long-term gain,” with many Argentines currently suffering from increased poverty and government layoffs - though arguably these are the hangover effects of previous governments’ profligacy.

Yet the benefits of these policies are already evident: in this publication’s humble Sovereign Stress Tracker and the 44 market-access middle-income countries that it covers, Argentina went from being ranked as the #1 most at-risk sovereign in 2023 to #40 in 2024.

This makes Argentina, by far, the 2024 Tracker’s most-improved country.

What stood out to me was the chart below, where Argentina’s general government debt plummeted by an eye-popping 64 GDP percentage points in one year.

So this begged the question: how much did this savage debt reduction actually contribute to the probability of Argentina experiencing sovereign stress?

A lot, it turns out. In fact, the Milei government’s fiscal effort to reduce government debt in 2024 accounts for a whopping 55% of Argentina’s sovereign stress score.

It’s only fair, as government debt is dropping from 155% to 91% of GDP.

The next largest effect - a distant, distant second - is from the public debt-to-revenue ratio and explains about 9% of the overall probability of sovereign stress.

At 286, debt-to-revenue in Argentina is quite high compared to many of its peers, so this is a penalizing factor that raises the likelihood of sovereign debt strains.

Governance indicators are also important to the score, and on which Argentina also fares poorly.

The final indicator with a contribution above 7% to Argentina’s likelihood of sovereign stress is external public debt.

At around 18% of GDP, this is firmly in the middle of the pack in the 44-country sample.

Lastly, two cyclical factors have non-negligible contributions to Argentina’s score, both of them raising the likelihood of stress: the credit gap and real exchange rate changes compared to three years ago.

Yet all of these negative signals pale in comparison to the magnitude of the blockbuster decrease in government debt.

A chainsaw indeed.

Stay tuned for more donut charts on sovereign stress contributions to visualize the macro effects rippling through the emerging markets universe.