Previous Quarterly Editions
Expropriation Risk: 49 50 50 53 Political Violence Risk: 64 65 66 67 Terrorism Risk: 30 30 32 34 Exchange Transfer and Trade Sanction Risk: 62 64 64 67 Sovereign Default Risk: 52 54 54 58
TREND ▲ OUTLOOK ▲
The government of President Mauricio Macri continues to look in vain for good economic news ahead of the presidential, legislative, and gubernatorial elections in October. But the figures from March show industrial output down by 13% year-on-year, marking the eleventh consecutive monthly fall and bringing the contraction for the first quarter of 2019 to 11.4% year-on-year. Most sectors of the economy anticipate that the contraction will continue in the coming months. Inflation rose by 16.4% over the first four months of the year, and the latest forecast from the central bank suggests a year-end figure of 40%. This is despite the extent to which the effects of the recession and a poverty rate of 32% are reducing consumption. The General Confederation of Labour (CGT) called a general strike for the end of May to protest the government's economic policies and demand quarterly rather than annual wage adjustments. Support appears strongest in Greater Buenos Aires, the region hardest hit by cost of living inflation. The president has responded by extending his invitation to discuss a governability and stabilisation package beyond the opposition Peronist party to include trade unions, business and the Catholic Church as well as provincial governors and a wide range of political leaders. However, with the elections less than six months away, Macri’s economic problems are compounded by political ones. In May, just before the start of her trial for corruption that could last up to a year, former president Cristina Fernandez de Kirchner made the surprise announcement that she would seek the vice-presidency, with Alberto Fernandez, previously her cabinet chief, as her party’s presidential candidate. The decision to take second place on the ticket seems intended to broaden support beyond her personal base, although it is widely assumed that Alberto Fernandez would be a figurehead or even may resign to enable her to return to the presidency. Although Fernandez de Kirchner remains a highly divisive figure, the economic crisis and an absence of solid alternative candidates gives her momentum. Polls taken two weeks before her announcement showed her not only with a lead over Macri, but with disapproval ratings significantly lower than his. As such, she poses a twin threat to the president. One is her support amongst those already protesting about economic conditions, with her candidacy encouraging them to reject any deal with Macri while reminding the electorate of Macri’s previous campaign promise of ‘zero’ poverty. The other is that the possibility of another Kirchner administration will frighten off potential investors and end any hopes of a near-term recovery. The domestic economic crisis has prevented Argentina from gaining much advantage from its chairing of Mercosur, the regional trade group, during the first half of 2019.
In its April announcement of a six-month price freeze on basic consumer items, transport fares and utility tariffs, the government was careful to describe the measure as a "gentlemen's agreement" with producers and supermarkets. It is keen to distinguish the move from the price controls imposed by the previous government that Macri has consistently criticised. Although his efforts to attract more foreign investment have been frustrated by many factors, the underlying problem remains that, at 15% of GDP, Argentina’s investment rates are too low to support stronger growth. As levels of domestic investment fall, it becomes more difficult to persuade foreign investors to commit funds to projects when domestic investors fail to do so, particularly in a country that has not always proved friendly to foreign investment. The Public-Private Partnership programme launched in April 2018 is effectively on hold because companies cannot borrow at interest rates that make economic sense.
The transport strike on the May 1 holiday, coming just a day after a wider union walkout, halted road, rail, metro and domestic air services and began a series of union-led one-day national strikes. While the explicit demands are for exemption from income tax on weekend, holiday and overtime pay, the general sentiment is frustration at the government’s failure to improve economic conditions. The announcement of a six-month freeze on prices for 64 basic consumer items has bought Macri little extra support and more strikes and protests are expected over the coming months. In December, security minister Patricia Bullrich broadened the circumstances in which the security forces are authorised to use lethal force.
TREND ▲ OUTLOOK ►
Small-scale bombings, usually on targets related to finance such as bank branches, have continued over the years and the risk of more incidents in the future may rise as the economy deteriorates. While there has been no major terrorist attack since 1994, 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 heading the corruption investigation of Fernandez de Kirchner.
The peso followed a fall of almost 50% against the dollar in 2018 with a further drop of 15% during the first quarter of 2019. The central bank raised interest rates on its liquidity notes (Leliqs) to 70% in April as the peso fell to 47 to the dollar on the government’s inability to control inflation and speculation about Macri’s future. At the end of April, the government agreed a plan with the IMF to strengthen the exchange rate through expanding daily dollar sales. Concern about the independence of the bank will return if another Kirchner government looks likely.
Although the ability to expand daily dollar sales should ease the immediate pressure on the peso, it also runs the risk of running down central bank reserves and reducing the funds available to meet debt repayments, including to the IMF, from next year. Together with the growing burden of interest payments on foreign debt, which is already more than 50% of GDP, the next government will face debt maturities of 156 billion dollars which may prove difficult to roll over. This is likely to increase default fears, which could become a self-fulfilling prophecy.
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