Province of Salta 'B' Foreign And Local Currency Ratings Affirmed; Outlook Remains Stable

  • Tariff adjustments and efforts to contain spending have led to the Argentine province of Salta's improved fiscal results, and have established a recent track record of more sophisticated financial management.
  • However, low GDP per capita and limited budgetary flexibility continue to constrain the ratings.
  • We're affirming our 'B' foreign and local currency ratings on Salta.
  • The stable outlook on Salta reflects our expectation of operating surpluses and minor deficits after capital expenditures (capex) over 2019-2021, which should allow debt stock to remain low.
RATING ACTION
On April 5, 2019, S&P Global Ratings affirmed its 'B' foreign and local 
currency ratings on the province of Salta. The outlook remains stable. We also 
affirmed the 'B' issue-level ratings on the province's secured and unsecured 
notes.


OUTLOOK
The stable outlook on Salta reflects our expectation of balanced fiscal 
accounts over 2019-2021, with average operating surpluses of 6% of operating 
revenue and minor deficits after capex. The outlook also reflects our 
expectation that Salta's debt will stay low, while structural limitations 
stemming from its narrow budgetary flexibility and low GDP per capita will 
remain.

Downside scenario
We could downgrade Salta over the next 12-18 months if its fiscal results 
worsen, reflecting management's inability to rein in spending and leading to a 
significant erosion of liquidity and higher debt levels. Given our opinion 
that we cannot rate Argentinean local and regional governments (LRGs) above 
the rating on the sovereign because they operate under a very volatile and 
underfunded institutional framework, a downgrade of Argentina would result in 
a downgrade of Salta.

Upside scenario
Given that we don't believe that Argentine LRGs meet the conditions for us to 
rate them above the sovereign, we could only upgrade the province of Salta if 
we take a similar action on Argentina within the next 12 months. An upgrade 
would also have to be backed by continuity in policies and improved financial 
management practices, while fiscal results and liquidity remain robust. 


RATIONALE
The 'B' ratings and 'b' stand-alone credit profile (SACP) reflect the 
province's individual credit profile and the very volatile and underfunded 
institutional framework under which it operates. We expect Salta to post only 
minor deficits after capex, given its recent record of robust performance 
stemming from tariff adjustments and spending containment efforts last year. 
These measures have already led to a significant recovery in fiscal results, 
and, in our opinion, reflect the administration's commitment to fiscal 
sustainability. We believe debt levels will remain low at around 30% of 
operating revenue, which we consider a rating strength. On the other hand, 
Salta's low GDP per capita, resulting in a weak revenue base and high 
infrastructure needs, together with a rigid spending structure and uncertain 
access to external liquidity, limit the rating. 

Adjustment measures in 2018 strengthened Salta's finances, reflecting 
improving financial management and commitment to fiscal sustainability
Governor Juan Manuel Urtubey from the Peronist party reshuffled his cabinet, 
replacing the chief of staff and five ministers following a disappointing 
midterm election in October 2017. Fiscal consolidation has been at the 
forefront of the cabinet's focus, in particular, reducing the fiscal deficit 
and avoid resorting to financing in the market. The administration took a 
series of revenue and cost control measures at the end of 2017 that resulted 
in strong fiscal results in 2018. Cost control monitoring improved, even amid 
volatile economic conditions, and we believe there have been enhancements in 
the level of sophistication of the province's cash flow management. We expect 
continuity in the administration's policies until the end of Governor 
Urtubey's term in December 2019. However, we believe the level of 
institutionalization of adequate financial practices is low, which results in 
uncertainty about policy continuity after this year's election.

We continue to view the institutional framework for Argentine LRGs as very 
volatile and underfunded. However, we believe that there's a positive trend in 
the predictability of the outcome of potential reforms and the pace of their 
implementation amid an increasing dialogue between LRGs and the national 
government to address various fiscal and economic challenges that we expect to 
remain in the next few years.

On the economic front, Salta's low per capita GDP is a key rating constraint. 
According to our estimates, it was $2,704 last year, which was only around 
one-third of the estimated national GDP for the same year ($8,628), and was 
lower than those of other provinces such as Cordoba ($5,150) and Neuquén 
($10,654). Salta's economy represents only about 1% of the national GDP and is 
relatively diversified. Although mining currently represents only around 5% of 
 the local GDP, it may grow due to lithium resources in the province. There 
are currently over 50 lithium-related mining projects in development and 
foreign companies have made investments in these projects, although we expect 
production won't begin for two to three years.

Fiscal results to remain balanced, with fewer financing needs gradually 
leading to a lower debt burden
Tariff adjustments and spending containment efforts in 2018 resulted in the 
province's operating surplus of 9.1% of operating revenues and a 6.7% surplus 
after capex, which was a significant improvement from the 2015-2017 average 
deficits of 3.4% and 7.9%, respectively. Our base case assumes policy 
continuity, resulting in operating surpluses around 6% of operating revenue 
and minor deficits after capital accounts during 2019-2021. Adjustment 
measures last year included changes in gross receipt tax rates and measures to 
rein in spending such as reducing the number of ministries, a retirement 
program and hiring freeze to reduce the number of public employees, and 
creating a spending control office, among other initiatives. We believe 
Salta's fiscal performance could be volatile because of potential shifts in 
political priorities and inflation dynamics over the next two to three years.

Salta faces structural budgetary constraints, given that it generates only 
around 28% of its total revenue and receives the remainder from the national 
government. Moreover, its operating structure is very rigid because provincial 
payroll and interest payments account for around 65% of Salta's operating 
expenditures. We also believe that Salta's infrastructure needs are 
significant and it's highly unlikely that the province could reduce capex 
levels from our estimates of 8%-9% of total expenditures over the next three 
years, highlighting its weak financial flexibility. 

Salta's more robust fiscal results strengthened liquidity levels in 2018, and 
we estimate the available free cash currently covers slightly over 90% of 
projected debt service payments for the next 12 months. Its liquidity 
practices have also improved, with daily monitoring of cash positions and 
optimization of available liquidity though investments in low-risk assets, 
while it safeguards savings in U.S. dollars for foreign currency debt service 
payments. However, higher-than-expected spending could lead to liquidity 
erosion and a volatile coverage ratio. 

At the same time, our liquidity assessment is limited by our view that the 
province's overall access to external liquidity is uncertain because of 
Argentina's weak banking system, which our Banking Industry Country Risk 
Assessment (BICRA) scores in group '8'. We also view access as uncertain 
because of the Fiscal Responsibility Law's restrictions on provincial debt 
issuances. The law doesn't allow subnational governments to use such debt for 
operating expenditures and requires the national government's authorization 
for issuances. 

We expect the province will have only minor deficits after capex, which should 
result in debt levels around 30% and interest payments of about 3% of 
operating revenue in 2019-2020. We expect Salta's borrowing this year to be 
composed of mainly pre-arranged financing with Inter-American Development Bank 
(IADB) and funding from the National Social Security Agency fund FGS-ANSES. In 
addition, we believe the province could potentially attempt to issue a small 
amount in the market for specific infrastructure projects. As of December 
2018, 69% of Salta's debt was dollar-denominated, highlighting potential 
currency risks. Although this percentage is lower than that of other provinces 
such as Cordoba, steeper-than-expected depreciation of the local currency 
could exacerbate this risk.

As of this March, Salta's outstanding structured notes totaled $65.3 million. 
On March 16, 2012, Salta issued $185 million in the capital markets for 
long-term infrastructure investments. The oil and royalties that the province 
receives from various oil and gas producers (the dedicated concessionaires), 
which secure the notes, represent 12% of the oil and gas production value of 
these dedicated concessionaires. We rate these notes the same as Salta's other 
direct, general, unconditional, and unsubordinated obligations, given that we 
believe their creditworthiness is directly linked to that of the province.

We believe Salta's overall exposure to contingent liabilities is very low. 
Guarantees to municipalities and government-related entities (GREs) are 
included in the province's debt stock. Salta's two largest public companies 
are the transportation enterprise, SAETA, and the water and sanitation 
company, CoSAySA. The province has historically supported both companies 
through subsidies, but more recently has planned to lower transfers by 
increasing the tariffs of its GREs.

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