Previous Quarterly Editions
Expropriation Risk: 49 50 50 53 Political Violence Risk: 64 65 66 67 Terrorism Risk: 30 30 32 34 Exchange Transfer and Trade Sanction Risk: 62 64 64 67 Sovereign Default Risk: 52 54 54 58
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The political and economic problems facing President Mauricio Macri reached a new level in August as his falling political support was laid bare and the country’s sovereign debt was ruled to be in ‘selective default’. Before the open primaries held in August, opinion polls indicated that Alberto Fernandez and his running mate, former president Cristina Fernández de Kirchner (CFK), would do slightly better than Macri and Peronist senator Miguel Ángel Pichetto. The primaries are meant to help political parties select their candidates for the presidential election in October, but with both tickets already settled, it was instead a preview of the upcoming contest. The outcome was victory for Fernandez/CFK by a much wider margin than anticipated, with success in almost every region of the country. The day after the results, the peso fell by 25% and the stock market lost a third of its value. Macri attributed some of the market reaction to international fears about the likely economic policies of a Fernandez-CRK government. The key questions now for both voters and investors are what policies Fernandez would follow as president and, in particular, how independent he would be from a dominant CFK, who is prevented by term limits from running for the presidency. As CFK's cabinet chief, Fernandez resigned over the protracted dispute with the agricultural sector in 2008 and subsequently became highly critical of CFK and some of her allies. Although current economic conditions do not favour a direct repeat of earlier Kirchner policies, the vast majority of voters, and especially CFK’s supporters, already see foreign investors as part of the problem facing the country and will support measures that appear to ‘protect’ the economy against foreign interests. With real wages falling behind inflation and housing costs, unemployment and poverty all rising, many voters have little sympathy for the Macri government. As a result, Macri’s reliance on the argument that CFK cannot be trusted with the economy is unlikely to help him as the October election approaches. The situation worsened at the end of August when S&P cut Argentina's sovereign debt rating to selective default after the government said that it would 'reprofile' some 101 billion dollars in debt and push back repayments. Both S&P and Fitch had already downgraded Argentina's sovereign ratings in mid-August, and the S&P decision was widely seen as an inevitable response to an inevitable government move. By early September there was growing talk of the need to close the gap between first-round elections on October 27 and the new administration taking office of December 10, on the grounds that the country cannot afford so many weeks without a government. With the IMF appearing unlikely to extend repayments on loans of 44 billion dollars (particularly if it must negotiate with Fernandez, whose lead over Macri continues to widen after he blamed the Fund for the country’s economic situation) the risk of a wider default is growing.
Latest forecasts show a third consecutive year of recession in 2020, with the contraction of 2.5% in 2018 likely to be followed by 2.8% this year and 3.2% next. Investors must now contend with the likely return of CFK claiming a mandate to take an unorthodox approach to an economy already crippled by high inflation and high interest rates, a weakening exchange rate, a lack of credit and falling consumer confidence. The six-month price freeze imposed on basic consumer items in April was followed by the temporary removal of VAT on a basket of foods in August, but the clear electoral motive behind both moves has blunted their effectiveness. Businesses are already looking past Macri and calculating the impact of a CFK presidency, from higher public sector wages to conversion of dollar-denominated electricity generating contracts to pesos.
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Strikes and protests are likely to increase ahead of the elections in October, with some demonstrations merging into CFK rallies. While there are explicit demands for higher pay to compensate for inflation, the general sentiment is frustration at the government’s failure to improve economic conditions. The government is unlikely to try a heavy-handed response in the unlikely event of violence at demonstrations, but the economic disruption could be considerable.
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Small-scale protest bombings, often designed to damage financial targets without causing injury, have continued over the years but incidents may rise as the economy deteriorates. While there has been no major terrorist attack in Buenos Aires since 1994, fourteen people were arrested in November 2018 after homemade bombs exploded at the Recoleta cemetery and at the home of the judge heading a corruption investigation into CFK.
The central bank lowered its benchmark rate from 62.5% to 58% in July, while inflation is now around 55%. Central bank efforts to support the currency were ineffective in August, with the peso ending the month at 60 to the dollar and the dollar futures market for March 2020 being negotiated at 100 to the dollar. Opposition candidate Alberto Fernandez has been highlighting the fact that capital flight has reached 36.6 billion dollars since last year’s deal with the IMF, raising fears that he will impose significant capital controls if elected. He had already indicated that, if president, he would reinstate the control seen during the 2003-07 government of President Nestor Kirchner. These included minimum terms for inward investments and the obligatory deposit of a percentage of those incoming funds in local banks.
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The decision by S&P to declare Argentina in selective default followed the government’s announcement that it will delay repayments on Treasury notes while ‘reprofiling’ another 50 billion dollars in longer-term debt in negotiations with investors. It is also seeking to extend repayment periods for its 44 billion dollars of debt to the IMF. At present, the country faces an estimated 80 billion dollars in debt payments before the end of 2020. The central bank’s attempt to prop up the peso in August saw it draw down almost eight billion dollars in less than two weeks to leave its reserves below 60 billion dollars.
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