Previous Quarterly Editions
Expropriation Risk: 53 51 49 50 Political Violence Risk: 69 67 64 65 Terrorism Risk: 30 30 30 30 Exchange Transfer and Trade Sanction Risk: 62 60 62 64 Sovereign Default Risk: 52 52 52 54
TREND ▲ OUTLOOK ▲
Argentina has once again been grappling with a major fiscal crisis. During the last week of August, the peso fell from 31.5 to 38 to the dollar. At one point it was as low as 42 when a confusing announcement from President Mauricio Macri about early release of IMF funds to cover the 2019 financing programme prompted new fears of a sovereign default. Financing needs for 2019 were initially estimated at about 10 billion dollars, to be covered by IMF disbursements of 3 billion dollars per quarter. However, the availability of IMF funds was made dependent on several factors that include a reduction in the 2019 primary deficit to 1.3% of GDP, something that can only be achieved by negotiating major cuts in the 2019 budget with the congressional opposition. Doubts about the government's ability to achieve these triggered a sell-off of securities that drove the worst run on the peso since the 2001 financial crisis.
Over the weekend of September 1-2, multiple meetings between Macri, government allies and representatives of his Cambiemos coalition, that supports him in the legislature, fuelled rumours of cabinet changes. While the two seasoned figures that investors were hoping to see, former economy minister Alfonso Prat-Gay and former central bank president Carlos Melconian, were not recalled, the two individuals most closely identified with the government's relaxation of inflation targets at end-2017, which is widely seen as starting the economic deterioration in recent months, were dismissed. As part of the move to cut spending, Macri has cut the number of ministries from 22 to 10, although it is not clear that this will improve the coordination of economic policies. With the deficit now to be reduced to zero next year, rather than in 2020, capital expenditure and spending on subsidies and public sector salaries will be cut while export taxes will be raised to boost revenues. Although the previous president, Cristina Fernandez de Kirchner, has lost her immunity as a sitting senator and faces corruption charges involving over-charging for public works, she retains a strong support base and is promising a robust defence.
By contrast, most Argentinians now blame the current government rather than Fernandez de Kirchner for the crisis, making more strikes and protests likely if inflation increases as expected. As a result, Macri’s chances of re-election next year are fading, with his approval rating dropping from 66% in October 2017 to 30% in July, and this opens up a new element of political uncertainty. The divisive debate over abortion that preoccupied the country in recent months, and which ended with Senate voting down by 38-31 a bill that would legalise abortion, is likely to feature heavily in the October 2019 elections. The completion of a Chinese satellite control centre in Argentina earlier this year has led Washington to raise fears that Beijing is building hemispheric surveillance capabilities.
TREND ▲ OUTLOOK ►
The latest crisis has forced the Macri government to row back from its earlier efforts to stimulate the economy by reducing or eliminating trade-related taxes. Taxes on all exports will be re-imposed for two years, with primary products taxed at four pesos for each dollar exported. Services exports face the same tax but only during 2019. All other exports will be taxed at three pesos for each dollar. The gradual fall to an 18% export tax on soya by end-2019 has been delayed.
Export tax revenues are expected to reach 68 billion pesos in 2018 and 280 billion in 2019. However, as export taxes are denominated in pesos, exporters could delay sales if they expect further depreciation. At least two major lawsuits are underway against state-controlled oil company YPF in US courts, and these could eventually require the government to make substantial settlements. They could also set back development of the Vaca Muerta unconventional hydrocarbons resources, which are key to boosting domestic output.
A 24-hour general strike in June, called to demand an end to government limits on wage negotiations, paralysed most of the country, with about 90% of union members in the transport sector taking part. Cracks are already appearing in the government’s position, with the truckers' union recently winning a 25% wage increase despite government efforts to limit pay rises to 15-20%.
The cuts involved in tackling the fiscal deficit will not be popular, and the government hopes to offset the impact on the most vulnerable by raising the amount given per child to recipients of the universal child allowance and increasing funding for school meals. However, voters increasingly blame the current government rather than its predecessor for the crisis and more strikes and protests are likely if, as expected, inflation increases.
TREND ► OUTLOOK ►
The risk of international terrorism remains low but, with the security forces and intelligence services still underfunded and poorly coordinated, the ability of the state to identify developing threats in this area remains questionable.
Interest rates reached 60% at the end of August having begun the month at 40% and been at 30.25% at the end of April. The upper end of the central bank’s inflation target band is 15% but the monthly year-on-year rate was twice that in July as the country copes with the legacy of printing money under the previous administration. The government wants the IMF to allow the central bank to use more international reserves to shore up the peso but the exchange rate is currently at a competitive level for exports and further depreciation would likely end in an inflationary spiral.
TREND ▲ OUTLOOK ▼
If Argentina manages to renegotiate the 50 billion dollar stand-by facility agreed with the IMF in June to gain an early disbursement of 29 billion dollars for 2019, it should ease immediate concern about a possible need to default and allow it to regain access to capital markets. In June, the Fund expected the country’s debt to GDP ratio to peak at 65% at the end of 2018 before falling to 56% in 2021. Foreign reserves are sliding as the central bank defends the peso but remain above 50 billion dollars.
Return to contents Next Chapter