Previous Quarterly Editions
Expropriation Risk: 51 49 50 50 Political Violence Risk: 67 64 65 66 Terrorism Risk: 30 30 30 32 Exchange Transfer and Trade Sanction Risk: 60 62 64 66 Sovereign Default Risk: 52 52 54 56
TREND ▲ OUTLOOK ▲
Latest government figures show that economic activity contracted by 2.3% month-on-month and 7.5% year-on-year in November 2018. This is the sharpest annualised fall since August 2009. Retail and commerce, manufacturing, and construction all saw double-digit contractions, and agriculture, which the government sees as one of the drivers of the economy in 2019 despite the impact of last season’s drought, expanded by less than 2%. Although the government hopes that a rise in pensions will have stimulated the economy during the fourth quarter, the IMF still expects final data for 2018 to show an overall contraction of 2.8% and 1.7% in 2019. The dilemma for the government is that to achieve a stronger recovery will require greater spending, which would defeat its efforts to meet the IMF-encouraged target of a zero deficit this year. The head of the central bank has refused to estimate the inflation rate in 2019, other than to say that it will be impossible to reduce it to single digits from the annualised rate of 48% at the end of 2018; the government is hoping that it will fall below 30% by next December. Before then, it must also cope with the prospect of gas shortages during the winter months of June, July and August now that the move to replace cancelled foreign contracts with higher domestic output looks increasingly unrealistic. The situation led to the resignation of the energy minister in January. The fading hopes of an economic recovery during the first half of 2019 would be challenging enough even if the government of President Mauricio Macri were not facing a general election in October. Polling data from the end of December indicates that Macri would beat former president Christina Fernandez de Kirchner in a second round, but the result would be close and the potential Peronist candidate, Sergio Massa, would be a significant factor. Fernandez de Kirchner, now a senator, looks determined to run for the presidency with an anti-austerity campaign despite being indicted by a federal court in December. The charges relate to the ‘notebooks’ that purportedly documented millions of dollars in bribes paid by companies to members of the 2003-15 Kirchner governments. She could face trial in the run up to the election but is capable of playing that to her advantage by alleging political persecution. Argentina is chairing Mercosur, the regional trade group, for the first half of 2019. Macri sees his main task as encouraging more flexibility to lower trade barriers in order to pre-empt much more radical proposals from Brazil’s new president, Jair Bolsonaro, but he will also want to finalise the long-discussed association agreement with the EU.
TREND ► OUTLOOK ▲
In January, the national and provincial governments jointly announced they will seek to reduce the subsidies paid for natural gas production in the Vaca Muerta shale formation in exchange for expediting eight projects that are currently stalled. The Macri government needs to boost gas output quickly ahead of expected shortages during the upcoming winter, but also cannot afford the current level of subsidies. The legal case being pursued by a US vulture fund in relation to the renationalisation of oil company YPF rumbles on, with the US Supreme Court considering whether the government’s takeover was a commercial or a sovereign decision. If the latter, the case will be heard in Argentina rather than in the US. The public private partnership programme launched in April 2018 is effectively on hold because companies cannot borrow at interest rates that make economic sense, and most of the leading construction companies are caught up in the ‘notebooks’ investigation.
More strikes and protests are likely if inflation cannot be tackled quickly and the government’s austerity efforts do not produce tangible results. President Macri claimed that the violence between rival fans of the two main football clubs in Buenos Aires, which resulted in the final of Latin America’s continental championship, the Copa Libertadores, being moved to Madrid, was the result of the Kirchner administration’s ‘connivance’ with football hooligans. In December, security minister Patricia Bullrich broadened the circumstances in which the security forces are authorised to use lethal force. Although the move has been widely criticised, Macri is aware that many voters list personal insecurity as a main concern, and he may choose Bullrich as his running mate this year.
TREND ▲ OUTLOOK ►
Fourteen people were arrested in November following two bomb attacks in Buenos Aires using homemade explosives. One bomb exploded at the Recoleta cemetery and a second was thrown at the home of the federal judge who is heading the corruption investigation of Fernandez de Kirchner. Small-scale bombings, usually on targets such as bank branches, have continued over the years although there has been no major terrorist attack since 1994. The G20 summit held in the city in December passed off without incident amid tight security.
Concern about the independence of the central bank, together with more general worries about the economy, led to a major sell-off of Argentine assets and saw the peso lose almost half of its value against the dollar during the first three quarters of 2018. A subsequent recovery following a rise in interest rates to 72% has steadied the situation, but the lack of confidence in the peso will see rates remain high even as real wages and domestic purchasing power continue to fall.
In November, Standard & Poor’s cut its rating for Argentina from B+ to B on the deteriorating debt profile, while Fitch downgraded its outlook from stable to negative. The IMF expects the debt-to-GDP ratio of 81% in 2018 to fall slightly to 73% by the end of 2019. Foreign currency debt ended 2018 around 77%, compared to 68% a year earlier, but could reach 99% in the event of a foreign exchange shock. Despite these figures, there has been no immediate panic as the IMF will be covering the government's financing needs during 2019. However, once current IMF funding is exhausted by 2020, doubts will quickly re-emerge over the country’s repayment capacity.
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