Previous Quarterly Editions
Expropriation Risk: 50 50 53 60 Political Violence Risk: 65 66 67 66 Terrorism Risk: 30 32 34 34 Exchange Transfer and Trade Sanction Risk: 64 64 67 68 Sovereign Default Risk: 54 54 58 67
TREND ▲ OUTLOOK ▲
As expected, Alberto Fernández won a clear first-round victory over incumbent Mauricio Macri in the October presidential election. Much of the new president’s electoral appeal came from his vice-presidential running mate, former president Cristina Fernández de Kirchner (CFK). She retains significant popular support, especially among the young, and this broadened in recent months as Macri failed to show the benefits of switching to more orthodox, pro-business economic policies. President Fernández, who took office on December 10, faces two main questions in the early months of his administration: how much power CFK will have, and what he will do about the economy. CFK was very much centre stage on election night, with celebrations dominated by images of her and her late husband, former President Nestor Kirchner. Moreover, the convincing victory of her former economy minister, Axel Kicillof, in the election for Argentina's largest governorship, Buenos Aires province, gives an even more radical figure a key position in the new political landscape. CFK, who will preside over the Senate as vice president, has strong support in the chamber having returned there after the end of her presidential term, and her son will lead the Peronist bloc in the lower house. However, the more pragmatic Alberto Fernández is also a skilled political operator and more likely than CFK to build consensus with the provincial governors and moderates in Congress. This is important because results from the legislative elections that were also held in October mean that the new administration will have to work with the Cambiemos coalition that backed former president Macri in order to pass any significant reforms. The new president is likely to avoid being overshadowed by CFK but he cannot risk becoming distracted by infighting within his administration as he needs to cope simultaneously with the economic crisis at home and the crushing debt repayments due to international lenders who have been made nervous by CFK’s return. The government faces maturing debt equivalent to almost 10% of GDP during 2020, while the economy contracted by some 3% during 2019 with a further contraction of 1% expected during 2020. The annual inflation rate, which was above 50% in 2019, is only expected to fall modestly to around 40% in 2020. Unemployment remains in double figures and a third of the population are now living below the poverty line. This last figure is crucial because Fernández faces a choice between meeting debt repayments, if amounts can be negotiated down somewhat, or meeting the costs of maintaining a social safety net. He has already announced an increase of 40% in spending on emergency food assistance for 2020. At the end of 2019, he was preparing to propose deferral of debt payments for as much as three years, a period in which some 150 billion dollars in capital and interest payment come due, while hoping that a raft of emergency economic measures would promote growth. Regionally, the new administration’s leftist positions have quickly put it at odds with the Bolsonaro government in Brazil, and this is increasing tensions within a Mercosur trade bloc that is already struggling to achieve a long-awaited free trade agreement with the EU.
The government’s emergency economic package, submitted within days of taking office in December, raised export taxes and taxes on personal assets while adding a 30% surcharge on overseas credit card purchases and a new tax on cash withdrawals by companies. Provincial governors have also agreed a one-year suspension of the 'fiscal pact' reached with Macri to lower local taxes, and a new round of agricultural export taxes looks likely. The announcement of a freeze on utilities tariff rises means higher subsidies, suggesting that more taxes affecting the commercial sector may be inevitable. There is already evidence of CFK loyalists moving into senior positions at the state-run airline, and a similar move at state-controlled oil company YPF could raise serious concerns for investors.
Although the election result and the promise of a new government has eased the immediate prospect of major protests, this risk may have been deferred rather than defused if there is no visible progress on social and economic issues in the coming months. Fernández is currently counting on the support of a temporarily united trade union movement, but that support is conditional and could dissipate rapidly if his short honeymoon period brings no sign of economic improvement. The new government will not resort to a heavy-handed response in the unlikely event of violence at demonstrations, but the economic disruption from sustained protests could be considerable.
TREND ► OUTLOOK ▲
Small-scale protest bombings, often designed to damage buildings associated with the financial sector without causing injury, have continued intermittently over the years but could 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.
TREND ▼ OUTLOOK ▲
The central bank lowered its interest rate from 63% to 58% in December, continuing the decline from the extraordinary peak of 86% seen in August. The official rate for the peso ended the year at 60 to the dollar thanks to support from Macri-era capital controls, while the parallel rate was closer to 80. As a candidate, Alberto Fernández stressed the dangers of capital flight, and fears grew that he may impose stricter capital controls when he praised the impact of the ones put in place during the economic recovery under President Nestor Kirchner. These included minimum terms for inward investments and the requirement to deposit a percentage of those incoming funds into local banks.
Foreign reserves were below 45 billion dollars at the end of 2019, having been almost 70 billion in July. With maturities of some 40 billion dollars falling due in 2020, equivalent to almost 10% of GDP, some renegotiation is inevitable and a haircut of as much as 40% has been widely seen as realistic. 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, but he has yet to set out how this will be achieved.
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