Argentina is in recession and the short-term economic outlook is bleak. The Macri government has to implement severe fiscal and monetary retrenchment policies to regain market confidence. Austerity will prove unpopular and is likely to trigger protests and strikes. This will weaken President Mauricio Macri’s popularity ahead of the October 2019 elections and increase the likelihood of a return to left-wing populism.
Politically and economically motivated protests are likely to remain frequent in 2019 and intensify around the 27 October 2019 general election.
President Macri’s austerity measures, in conjunction with the International Monetary Fund (IMF), are controversial and deeply unpopular with Argentines.
Protests led by labour unions and civil society groups are a daily occurrence and pose a significant risk of disruption to businesses and individuals situated in Buenos Aires and exporters based at the country’s major agricultural port in Rosario.
Crime in Argentina remains at low levels by regional standards.
However the risk of theft, robbery and express kidnapping on the outskirts on Buenos Aires has increased in recent years.
Official figures recorded 111 extortive kidnappings in 2018, a decrease from 185 in 2017.
Political and economic considerations mean the Macri government is also likely to de-escalate diplomatic and economic pressure in support of its claim to the Falkland and South Atlantic Islands.
GDP is estimated to have contracted by 2.2% in 2018 and a further contraction of 1.5% is forecasted in 2019.
Economic recession threatens thousands of redundancies, increasing the risk of protests and industrial action.
This could further destabilise the economy. The Argentine Industrial Union (UIA) reported that industrial activity had declined by 10.7% y-o-y in December 2018.
Textile production and auto-manufacturing also fell by 32.2% and 18.6% respectively.
Inflation is likely to reach a 28-year high at 47% by mid-2019.
The Argentine peso was the worst performing currency against the US dollar in 2018, depreciating by more than 50%.
As a result of the peso’s depreciation, government debt is forecasted to rise to around 82% of GDP by 2020, while interest payments will account for 15% of government revenue by 2020.
Under the deal with the IMF, the Central Bank of Argentina (BCRA) agreed to freeze the monetary base until June 2019.
The decrease in money supply will eventually cool the inflation rate and help maintain the Argentine peso within the ARS 34-44/USD band.
In addition, the BCRA has set a ‘no-Central-Bank-intervention’ trading band for the peso in Q1 2019.
In February 2019, the peso strengthened and bridged the lower-end of the no-intervention zone, allowing the government to buy US dollars for the first time since June 2017.
This kept the peso within the trading band agreed with the IMF.
Sovereign risks will remain elevated in 2019, with nearly 70% of Argentina’s debt foreign currency-denominated.
Large fiscal and current account deficits make Argentina highly vulnerable to external shocks and these are likely to translate into currency volatility in 2019.
The economy is expected to receive a much-needed injection of foreign currency in the agricultural sector.
After recovering from its worst drought in 50 years, agricultural production is expected to strongly recover in the 2019 harvest.
According to the Rosario Grain Exchange, a record 126 million tonnes is forecasted, worth USD 8 billion.
The centre-right Macri administration is unlikely to expropriate private assets.
However, there has been no indication of a widespread reprivatisation after years of nationalisation under the previous administrations.
Potential privatisation targets are the railways and water utility companies.
This would be a politically sensitive move given the poor record of service-delivery in sectors under private-sector control.
Contract revision risks are likely to increase in 2019, as new investigations into bribery and public works are launched.
Contract frustration is widespread and exacerbated by an inefficient judiciary, subject to attempts at political influence in recent years.
Dispute resolution in particular can be a lengthy process and can take between one and six years.
President Macri came to power with the aim of reducing the tax burden in order to incentivise investment.
However, in the framework of the 2018 agreement with the IMF, the government has had to refocus its efforts on eliminating the fiscal deficit in 2019.
In November 2018, Congress approved a tax reform that will reduce corporate tax from 35% to 25% by 2021, but this is unlikely to be implemented in 2019.
The monthly Risk Outlook is supported by JLT’s proprietary country risk rating tool, World Risk Review (WRR) which provides risk ratings across nine insurable perils for 197 countries. The country risk ratings are generated by a proprietary, algorithm-based modelling system incorporating over 200 international sources of data.
5 Key Takeaways
- Politically and economically motivated protests are likely to remain frequent in 2019
- Argentina is expected to remain in recession in 2019, with industrial activity declining significantly
- Currency volatility is likely to persist in 2019, raising risks for investors
- Argentina has sizeable foreign-denominated debt, and sovereign credit risks will remain elevated
- The centre-right Macri administration is unlikely to expropriate private assets.
In this month's Risk Outlook, we also provide a detailed forward looking assessment of developments within the security, trading and investment environments for Cambodia, Cameroon, Oman and Zimbabwe all of which have been the subject of recent enquiries from JLT's client base.
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For further information, please contact Eleanor Smith, Senior Political Risk Analyst on +44 (0)121 626 7837 or email email@example.com