Previous Quarterly Editions
Expropriation Risk: 50 53 60 57 Political Violence Risk: 66 67 66 66 Terrorism Risk: 32 34 34 34 Exchange Transfer and Trade Sanction Risk: 64 67 68 69 Sovereign Default Risk: 54 58 67 70
TREND ▲ OUTLOOK ▲
Having only taken office in December 2019, President Alberto Fernández must now cope with the twin and intertwined challenges of resolving the country’s debt crisis and coping with the impact of COVID-19. He moved quickly in mid-March 2020 to institute a full national quarantine, closing all borders, airports and ports before the virus had really become apparent in the country. This was a potentially risky move given that his counterpart in neighbouring Brazil was actively dismissing any threat from the virus, but President Fernández has been careful to lay out the reasons for the steps he has taken and been rewarded with strong public support for the restrictions he has put in place. In some respects, Argentina is better placed to weather the crisis than others in the region. It has about four hospital beds per 1,000 residents, slightly above the global average and the highest number in South America. Although many are in private hospitals, they can be utilised in a national emergency. Twelve mobile hospitals are being completed around the country for COVID-19 patients, and the government has received a 35-million USD loan from the World Bank to purchase medical supplies and protective gear. The government extended the lockdown provisions twice but began a tentative easing of some provisions around the Easter holidays by widening exceptions for some areas of the public sector, public transport, food production, and banks, although these exceptions have caused some tensions with the city government in Buenos Aires, which has responded by making face masks obligatory on public transport and in commercial and office spaces. Having embarked on this course, it will come under increasing pressure to set out an exit strategy that will restore economic activity. The virus has hit an economy that was already in dire recession. After contracting by 2.5% in 2018 and 2.2% in 2019, both the IMF and World Bank now expect an even deeper contraction of around 5.5% this year. Over 40% of employment is in the informal sector, and those unable to work face severe economic hardship. Private sector construction, which is a key generator of employment, remains closed down and trade unions in many sectors are negotiating wage cuts and suspensions in exchange for guarantees that jobs will be maintained when activity reopens. For many, the lack of access to income has been exacerbated by the closure of schools, possibly until September 2020, as they provide meals to children. The cost of the lockdown has been particularly high among the urban poor. Data gathered in 2019 and released in early April 2020 show that over a third of people in the country’s urban areas are now living in poverty, with that number rising to over 40% in Greater Buenos Aires. The poorest areas also show the greatest support for Vice-President Cristina Fernández de Kirchner. The former president, who was prevented by term limits from running for the post again last year, has kept a low profile during the current emergency and appears to have lost some influence as Fernández proved equal to the task. However, she could have an important role to play if the government needs to forestall serious protests among the disadvantaged. Governors are getting 1.8 billion USD to compensate for revenue lost during the lockdown, but funds are limited. A freeze on utility costs has already meant higher subsidy costs for the government, and an increase in taxes announced in December 2019 will bring in less than expected in the current global context.
TREND ▼ OUTLOOK ▲
Investors are aware that the adverse international climate will make Argentina’s recovery from deep recession protracted and painful but they are closely watching its latest proposal for debt restructuring, which was announced in April 2020. This includes a three-year moratorium on both capital and interest payments, a 5.4% write-down on principal, and a 62% reduction in interest. It has a range of different proposals for the 21 different debt instruments included, with these figures representing an average. The fact that the proposal involves a modest write-down in capital and was presented in less aggressive terms than anticipated may facilitate a deal, although the impact of the virus on the country’s already struggling economy will raise doubts over whether a default can be avoided. The IMF has expressed initial support for the restructuring.
TREND ► OUTLOOK ▲
The scenes on a day in early April 2020 when banks were allowed to reopen to pay out pensions show that the government will need to be very careful of the risks of renewed infection as it eases the tight lockdown restrictions. Many thousands of vulnerable people queued for hours outside banks with no attempt at social distancing. Banks will now only be open on an appointment basis, and welfare recipients who lack bank cards will be given a PIN number to withdraw their payments from cash machines. The government moved quickly to cushion the economic impact as far as possible, with price controls on a number of basic consumer goods, increases in unemployment benefits and child subsidies, extra help for the hardest hit sectors, and an additional 1.6 billion USD for the public works budget, together with soft loans for home construction or extension. This has helped maintain public support and demonstrations against government policy are not expected in the short term.
There have been incidents over the years involving the use of homemade bombs to damage buildings associated with the financial sector, and these could conceivably rise again 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 two homemade bombs exploded in the capital.
The central bank has cut interest rates eight times since President Fernández took office in December 2019, with the rate down to 38% in March 2020. The initial cuts were linked to falling inflation but softening the impact of the virus is now the priority. The peso fell to a historic new low below 65 to the dollar (USD) just before the government unveiled its latest debt restructuring proposals and it will remain vulnerable during the subsequent negotiations.
Foreign reserves were below 45 billion USD at the end of 2019, having been almost 70 billion in July 2019. This is substantially below the country’s debt and makes agreement on the latest restructuring proposals increasingly urgent. President Fernández has reiterated that any debt deal must allow Argentina enough breathing space to grow, on the grounds that this is the only way to make any agreement sustainable. Although it has proposed a moratorium on capital repayments to the IMF, the government is hoping for assistance from the Fund as it tackles the COVID-19 outbreak.
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