Previous Quarterly Editions
Expropriation Risk: 51 51 51 52 Political Violence Risk: 35 35 35 35 Terrorism Risk: 34 34 35 33 Exchange Transfer and Trade Sanction Risk: 45 45 64 64 Sovereign Default Risk: 27 27 37 57
TREND ▲
President Alberto Fernández took office in December 2019 in a challenging environment, following two years of recession and faced with the need to restructure USD66bn in debt. Fernández initially enjoyed a considerable reservoir of support, but any hope of improving the economic situation was scuppered by the outbreak of COVID-19 in March 2020. Fernández’s draconian response, involving a strict and lengthy lockdown, initially enjoyed considerable support but public approval of the measures dwindled as cases continued to rise, the economy deteriorated, and the President became increasingly personally associated with widely questioned restrictions.
Despite, or perhaps because of, the severe impact of the pandemic, the government succeeded in agreeing a debt restructuring with private creditors at the end of August, which staved off the risk of default (although some provincial governments have had less success and face greater short-term debt pressures). While the full-year gross domestic product contraction of 9.9% in 2020 was somewhat less severe than initially feared, recovery this year is unlikely to come close to compensating for the fall, and unemployment and poverty rates will continue to rise.
Although controversial Vice-President Cristina Fernández de Kirchner (CFK) maintained a fairly low profile in the early months of the government, she has become increasingly visible and strident in recent months, apparently seeking to distance herself from Fernández’s unpopular policies, and the apparent shift towards radicalisation in the government has concerned investors.
CFK’s apparent influence in the government’s controversial judicial reform plans (widely seen as designed to increase political control over the judiciary and safeguard CFK from a series of pending corruption cases) and in the decision to focus on acquiring COVID-19 vaccines from Russia and China has further undermined Fernández’s popular support. However, there are currently no opposition leaders with very high ratings either, and CFK and her son Maximo Kirchner garner more negative opinions than Fernández.
The roll-out of vaccines has thus far been limited, disorganised and politicised. A second wave of COVID-19 cases is already well underway, forcing renewed restrictions that will affect economic recovery and the government’s support. The fiscal position, although somewhat more balanced than a year ago, does not allow scope for the level of social welfare spending needed to offset the pandemic’s impact.
At the same time, despite efforts to restrain spending, the forthcoming mid-term elections in October are certain to drive spending pressures and will delay any agreement to renegotiate outstanding debts with the International Monetary Fund (IMF). An IMF deal is now unlikely before those elections.
TREND ►
In early June 2020, President Fernández announced that the government would take control of Vicentin, the country’s sixth agricultural exporter by size but mainly the handler of soya oil and flour exports. The company had declared bankruptcy in February 2020 after defaulting on USD1.3bn of debt. In practice, 80% of the company was already held by state banks, and the government intended to have the National Agricultural Technology Institute assume management.
By the end of the month, the government had stepped back from expropriation, arguing that its only aim was to keep the business afloat and ensure that state-owned Banco de la Nación, its largest creditor, could recover its debt. The outcome was a setback for the Fernández government, and there has thus far been no repeat, although the recent replacement of the head of state oil company YPF by a CFK loyalist may raise concerns over increased interference in state-controlled companies.
Protests have been mounting in recent months over government policies such as planned judicial reforms and primarily over its handling of the pandemic. This will continue in coming months and protests are likely to increase given the long economic downturn, the new rise in cases coming into the Southern Hemisphere winter and the poor performance of the vaccination programme thus far. However, this is unlikely to lead to major violence.
Personal security and the risk of violent crime will remain a key concern. Earlier cross-party support for the government's anti-coronavirus measures has fractured, and Fernández's hopes of sustaining a moderate discourse appear increasingly illusory as political polarisation and economic angst mount.
TREND ▼
While there has been no major terrorist attack in Buenos Aires since 1994, 14 people were arrested in November 2018 after two homemade bombs exploded in the capital. There have been no such significant incidents under the current government.
The government is tightening import controls to protect international reserves. In January, the Central Bank of Argentina restricted access to the official exchange market for imports of some luxury goods, while the government asked companies to present their foreign trade estimates for 2021 and suggested that it would not approve any rise in imports unless this was offset with higher exports.
However, while official restrictions relate to luxury goods, the main concern is about unwritten measures that have proliferated in recent months seeking to discourage imports more broadly. Auto parts, construction inputs, footwear, textiles, toys, furniture, kitchenware and car tyres were among the products facing the longest delays.
The government expects that the second-quarter rise in foreign exchange inflows due to agricultural exports will allow it to relax controls after April. The official peso exchange rate has now fallen to some 97.5 Argentinian pesos to the US dollar, from around 65 pesos a year ago; the parallel rate is currently around ARS150:USD1. As its foreign reserves dwindle, the central bank will increasingly limit access to US dollars.
Despite reaching a debt restructuring agreement with private creditors last year, the likelihood of a deal to renegotiate USD44bn in debt to the IMF and debts to the Paris Club (which is a group of officials from major creditor countries) looks increasingly remote this year. No deal is likely to happen before the mid-term elections in October 2021, and there are sharp disagreements within the government on whether to pay.
CFK firmly stated that Argentina cannot pay, and Fernández, after initially proposing to pay, has fallen in line now agreeing with her position.
Lawsuits in the United States against the federal and some provincial governments may see new payment orders in coming months which may well not be met. Although the preference of Economy Minister Martin Guzman (and probably Fernández himself) would be to reach new debt deals, the economic and political situation leaves little room for manoeuvre.
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