Argentina will face a number of security, investment and trading challenges in the coming months. In this article we provide a detailed forward-looking assessment of developments in the country.
With Argentina in the middle of an economic crisis, incoming President Alberto Fernández is yet to specify his economic agenda, increasing uncertainty for investors.
The return of Peronism to Argentina’s presidency is likely to raise concerns of greater government intervention in the economy.
On October 27, 2019, leftist-populist candidate Alberto Fernández was elected as president, securing 48% of the vote, against incumbent Mauricio Macri’s 40.5%.
The outcome was widely expected following Fernández’s victory in August 2019’s primary election, and Fernández will take office on December 10, 2019.
As a Peronist, Fernández is a natural ally of Argentina’s labor unions. He has stated his plans to secure a “social agreement” between unions and the private sector, with unions accepting salary controls in the near term to give the government space to operate.
However, this is only likely to be a short-term measure, as it is anticipated unions will seek large wage increases again amid persistently elevated inflation rates.
As a result, the risk of strikes and protests is likely to increase in the medium term. Unions can attract thousands of people to demonstrations, and any incidents are likely to be concentrated in Buenos Aires. Protests may cause significant business disruption in urban areas, and the police may respond with the use of tear gas.
Fernández inherits an economy in crisis, but is yet to outline his economic policies in detail. In the near term Fernández may retain his predecessor’s austerity measures in an effort to stabilize the fiscal position.
However, with former President Cristina Fernández de Kirchner as his vice president, the medium term may entail increased government intervention in the economy.
Capital controls are likely to be maintained in the coming months. Macri reintroduced capital controls in September 2019, limiting residents and non-residents to foreign exchange purchases of US$10,000 and US$1,000 a month, respectively.
Exporters must now repatriate earnings within five to 15 days, and businesses need permission to repatriate profits or buy dollars abroad.
Following the election result, the Banco Central de la República Argentina (BCRA) further tightened controls, limiting monthly foreign currency purchases to US$200 for bank accounts.
These measures are likely to slow capital outflows, providing some support to the value of the peso. However, the BCRA is also likely to continue dollar sales to support the currency.
In November 2019, gross international reserves were US$43.4 billion, a 40% reduction from April 2019. However, controls will also weigh on trade and investment, exacerbating the country’s recession. The economy is forecast to contract by 2.6% in 2019.
Sovereign credit risks in Argentina have sharply risen in recent months. Fallout from August’s primary election led the finance ministry to extend the maturities of some of its short-term debt obligations, and enter talks with external bondholders.
Fernández is generally seen as a pro-market leader within Peronism, and may seek a negotiated debt restructuring with private creditors.
However, Kirchner’s prominent role in government elevates the risk of a default, given her reticence to strike a deal with holdout investors during her presidency.
Fernández’s ability to reach a deal with private bondholders is likely to be influenced by relations with the IMF.
Fernández may look to extend debt maturities under its stand-by arrangement. However, any agreement would likely come with a requirement to implement pension and labor reforms, which Fernández opposes.
Fernández’s election has increased policy uncertainty in the agricultural sector. Kirchner’s presence in his administration has raised concerns of a confrontational and interventionist approach to agricultural producers, as seen during her own presidency.
However, the incoming administration is likely to maintain, rather than raise, taxes on agricultural exports.
In September 2018, in a bid to shore up the fiscal position, Macri introduced an export tax of four pesos per export dollar on many agricultural exports, having previously cut the heavy tax burden imposed by Kirchner.
Fernández is yet to indicate whether taxes will be increased further, although he has historically demonstrated a pragmatic approach to the sector.
In 2008, he resigned from Kirchner’s cabinet, in part over a decision to impose export taxes on the agricultural sector.
The agricultural sector is also an important source of hard currency, which should reduce the likelihood that Fernández will reintroduce the strict export quotas of Kirchner’s presidency.
5 Key Takeaways
- In October, leftist-populist candidate Alberto Fernández was elected as president, securing 48% of the vote.
- The risk of strikes and protests is likely to increase in the medium term. Labour unions can attract thousands of people to demonstrations, and any incidents are likely to be concentrated in Buenos Aires.
- Capital controls are likely to be maintained in the coming months. Exporters must now repatriate earnings within five to 15 days, and businesses need permission to repatriate profits or buy dollars abroad.
- Following the election result, the Banco Central de la República Argentina (BCRA) tightened controls, limiting monthly foreign currency purchases to US$200 for bank accounts.
- Vice President Cristina Fernández de Kirchner’s involvement elevates the risk of a sovereign default, given her reticence to strike a deal with holdout investors during her presidency (2007-2015).
The monthly Risk Outlook is supported by our 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.