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Fitch Affirms Province of Salta at 'B'; Outlook Stable.

Monterrey: Fitch Ratings has affirmed the Province of Salta's Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) at 'B' with a Stable Rating Outlook. Fitch has also affirmed both the 'B' long-term ratings on Salta's 9.5% senior secured notes for USD185 million due March 16, 2022 and 9.125% senior unsecured notes for USD350 million due July 7, 2024.


Salta's ratings and their Stable Outlook are underpinned by the entity's low debt levels and recently improved fiscal policies. However, the main weaknesses considered are the province's vulnerable fiscal performance and tight liquidity, which are expected to improve during 2018;and the weak local economy, given the national inflationary and volatile macroeconomic context with high infrastructure needs.

Institutional Framework: Weak, Stable

Fitch considers Argentina's institutional framework to be weak, given the country's structural weaknesses, including its complex and imbalanced fiscal regime with no equalization funding. With recent reforms and agreements, several important tax and federal revenue distribution changes are underway. Fitch will monitor the implementation of these measures and their impact on the province's public finances, expecting that agreements will track fiscal improvements.

Economy: Weak, Stable

Fitch evaluates Argentine subnational economies as weak, due to the country's macroeconomic context of high inflation and currency depreciation. Salta's economy is concentrated in the tertiary sector, with an important weight from social services and the public sector of around 23% of local GDP; the primary sector is also important and includes hydrocarbon extraction.

In 2017, hydrocarbon royalties only represented 2.5% of operating revenues and these have recently increased mainly due to currency depreciation, better national sector policies, and higher global hydrocarbon prices. Salta has a low GDP per capita and a higher than average percentage of population with unsatisfied basic needs: 23.7% versus the national average of 12.5%. This translates into structurally high infrastructure needs.

Management and Administration: Neutral, Stable

Fitch evaluates Salta's management as neutral. In previous years, Salta's policies had focussed on countercyclical capex projects to fuel local economic growth. During 2015-2017, the province executed around ARS12.5 billion in capex works. Then, at year-end 2017 and during 2018, Salta enacted several fiscal convergence policies aiming toward revenue collection and expenditure controls. The entity also adhered to the 2017 Fiscal Consensus between the nation and provinces, which should additionally underpin targeted fiscal improvements throughout 2018.

Fiscal Performance: Weak, Stable

During 2016 and according to preliminary 2017 figures, Province of Salta registered a downturn in its operating margins due to inflationary pressures on wages and expenses also due to increased capex projects. During January-April 2018, the sanction and implementation of new fiscal policies resulted in a positive trend for the entity's operating margins, which improved to 11% from 0.5% in April 2017. Although we expect Salta's margins to improve in the short term and to recover to a positive approximate 5% of operating revenues; Fitch considers that compared to international peers, Salta has a vulnerable budgetary performance in relation to its high infrastructure and expenditure needs.

Debt, Liabilities & Liquidity: Weak, Stable

This attribute is evaluated as weak, due to Salta's tight liquidity resulting from its weak operating margins. Also, although leverage is low, debt carries unhedged currency exposure and refinancing risk.

During 2017, liquidity tightened due to a concentration of debt maturities and the negative operating margins of 2016 and 2017. Net cash deposits decreased to ARS286 million. In April 2018, better policies have already improved Salta's cash position to ARS2.6 billion. Also, the entity has been drawing ahead federal co-participation funds intra monthly, these funds are payed and cancelled each month. Aside from budgetary savings, another liquidity tool for 2018 includes an authorized ARS2.389 billion of short-term treasury bills, which have not been issued given that local interest rates recently increased up to 40%. If treasury bills are not issued, refinancing pressures would decrease for 2018, but would remain toward the medium term given market volatility and uncertainty.

Regarding public debt, according to year-end 2017 preliminary information, total debt was ARS16.357 billion, equivalent to a low level of 40% of current revenues. During 2017, debt increased mainly due to higher debt agreements with the nation, an issuance in the local market, and currency depreciation. Issued debt represents around 53% of the entity's debt and is composed by two external market bonds and a local market issuance. Regarding foreign currency (FC) exposure, around 61.2% of debt is in FC, and this is partially mitigated by the entity's revenues linked to the USD from hydrocarbon royalties.

For 2018, authorized debt amounts to ARS3.13 billion. Fitch expects that debt will remain low and estimated at around approximately 44% of 2018 budgeted revenues or less, considering potential debt compensation because of the 2017 Fiscal Consensus agreements. Debt agreements with the nation will continue to be a financing source in 2018, as the province does not plan to issue debt on capital markets given current high interest rates and currency depreciation.

Regarding contingent liabilities, it is important to note that Salta is among the provinces that transferred its pension funding to the national government; therefore, the province is not responsible for funding deficit shortfalls. And regarding public companies, to date, Fitch does not foresee any topics contingent to Salta's finances.


Salta's ratings could be negatively affected if the entity is not able to consolidate its operating margins in the coming years and if refinancing risks rises. On the other hand, ratings could be positively affected if Salta has a more stable and positively sustained budgetary performance provided that Argentina's sovereign rating increased.
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Publication:Daily the Pak Banker (Lahore, Pakistan)
Geographic Code:3ARGE
Date:Sep 4, 2018
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