Previous Quarterly Editions
Expropriation Risk: 51 51 52 53 ▲ Political Violence Risk: 35 35 35 36 ▲ Terrorism Risk: 34 35 33 33 ► Exchange Transfer and Trade Sanction Risk: 45 64 64 64 ► Sovereign Default Risk: 27 37 57 66 ▲
TREND ▲
President Alberto Fernández took office in December 2019 in a challenging environment, following two years of recession and faced with the need to restructureUSD66bn of debt. He initially enjoyed considerable support, but any hope of improving the economic situation was scuppered by COVID-19. Fernández’s draconian response was popular but public approval of the measures dwindled as cases continued rising, the economy deteriorated and the president became personally associated with widely questioned restrictions.
He has been particularly damaged first by the ‘Vaccinegate’ scandal earlier this year, in which influential political figures were found to be receiving vaccines on a preferential basis, and more recently by the ‘Olivosgate’ scandal. He has now been charged with violating an emergency presidential decree prohibiting social gatherings and non-essential movement during the COVID-19 quarantine last year. The charges relate to a birthday party held at the presidential residence for the first lady in July 2020, videos of which emerged recently. The scandal has badly damaged Fernández’s declining approval ratings, weeks before primary elections ahead of November’s mid-term legislative polls. A recent impeachment petition will not prosper given the government’s congressional majority, but the president is unlikely to recover his authority and will lose influence to more radical voices within the government for the remainder of his term.
Despite, or perhaps because of, COVID-19’s severe impact, the government succeeded in agreeing a debt restructuring with private creditors at the end of August last year, 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 will not 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, especially as Fernández’s own troubles have mounted, and the apparent shift towards radicalisation in the government has concerned investors.
CFK’s apparent influence in the government’s controversial judicial reform plans (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, no opposition leader currently has very high ratings either, and CFK and her son Máximo Kirchner (as well as opposition leader and former President Mauricio Macri) still garner more negative opinions than Fernández.
The roll-out of vaccines has gathered some pace but to date less than one-third of the population is fully vaccinated and shortages of vaccines (especially the Russian Sputnik V) remain a problem. The public is increasingly unwilling to heed renewed restrictions that will affect economic recovery, despite a severe wave that pushed total cases and deaths above 5.1 million and 111,000, respectively. 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 and is in any case again deteriorating.
At the same time, despite efforts to restrain spending, the forthcoming mid-term elections in November are driving spending pressures and will delay any agreement to renegotiate outstanding debts with the International Monetary Fund (IMF). An IMF deal will not happen before those elections and may be in doubt thereafter depending on the election results, with more radical sectors of the government coalition reluctant to pursue an agreement.
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.
Expropriation risk to foreign investors per se is relatively limited at present, given the number of companies that have already exited Argentina, lack of government funds and the fact that there are currently no politically or emotionally significant companies (such as YPF or Aerolíneas Argentinas) to be targeted.
However, there are questions over the future of some concession contracts such as the Hidrovia concession to manage the Parana river and the road concessions operated by Spanish-controlled Abertis. In the former, the concession contract (with a consortium led by Belgian Jan De Nul) has already expired and a second extension will not be granted; there are tensions within the government over whether to tender a new concession or maintain the management of the riverway in state hands. In the latter, the government is unilaterally reviewing the terms of the contract, renegotiated under the Macri administration, and there is a risk that the case will end in international arbitration.
TREND ►
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 poor performance of the vaccination programme thus far and the ‘Olivosgate’ scandal. 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.
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 significant such 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 hoped that the second-quarter rise in foreign exchange inflows due to agricultural exports would allow it to relax controls after April, although this has not been the case to any significant degree (not least given the impact of prolonged drought on shipping costs for agricultural exports).
The official peso exchange rate has now fallen to some 97.5 Argentine pesos to the US dollar, from around 65 pesos a year ago; the parallel rate is currently around ARS176: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 some USD44bn in debt to the IMF and debts to the Paris Club looks increasingly remote this year. No deal is likely before the mid-term elections in November, and there are sharp disagreements within the government on whether to pay, with CFK having firmly stated that Argentina cannot pay and Fernandez, after initially proposing to pay, falling into line 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 Fernandez himself) would be to reach new debt deals, the economic and political situation leaves little room for manoeuvre. Guzman himself could well leave the government after the November elections, if the results strengthen more radical factions demanding cabinet and policy changes.
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