Argentina’s economy is likely to remain in recession until early 2019, while protests and strikes will increase the likelihood of cargo disruption in Buenos Aires and at strategic ports. The risk of expropriation remains low under President Mauricio Macri. However, the outcome of the October 2019 general elections is highly uncertain, and there is a significant risk that a less business-friendly government could be elected.
The risk of social unrest has increased after the government secured a USD 50 billion stand-by arrangement with the International Monetary Fund (IMF) in June 2018, which was subsequently increased to USD 57.1 billion in September 2018. The organisation is highly unpopular in Argentina due to its association with the country’s debt default in 2001, and spending cuts combined with the weak economic outlook are likely to provoke civil unrest. Demands for wage rises are expected to increase in 2018 as the inflation rate has exceeded 30%.
The risk of cargo disruption is particularly elevated at strategic ports and in Buenos Aires, where anti-austerity protesters and labour unions blocked some of the city’s main streets in September 2018. There is an elevated risk of property damage in major cities as protests may become violent. In December 2017, thousands of demonstrators clashed with police in Buenos Aires over new pension laws. Security forces responded with tear gas and rubber bullets, and nearby properties and stores were reportedly looted.
The bailout agreed with the IMF in June 2018 initially stabilised the peso. However, the currency depreciated dramatically in late August 2018 after Macri asked for the accelerated release of bailout funds. The central bank’s decision to raise interest rates to 60% at the end of August 2018 failed to halt the slide of the peso, which has lost 50% of its value this year.
In response to the crisis, Macri's government presented stricter austerity targets to Congress in September 2018, marking a climb-down from its freemarket position and ‘gradualist’ approach to economic reform. The measures aim to balance next year’s budget through new export taxes and wide-ranging spending cuts to capital projects. However, it is unclear if Macri will be able to push through all the austerity measures in Congress, and Argentina remains vulnerable to swings in investor sentiment.
Sovereign credit risks will remain elevated as nearly 70% of total government debt is foreign-currency denominated. Argentina’s central bank estimates that foreign exchange reserves have fallen from around USD 64 billion in January 2018 to just under USD 50 billion in September 2018. Argentina’s economy is likely to remain in recession until at least the beginning of 2019, with real GDP growth forecasted to contract by 1.3% in 2018, before returning to growth of 2.0% in 2019.
The peso is likely to continue to depreciate, and is forecasted at ARS 41.31/USD by the end of 2018. On a more positive note, the IMF has agreed to review the stand-by arrangement, and is expected to permit disbursements along a tighter schedule than agreed in June 2018. Argentina is therefore expected to cover its debt commitments through 2019.
Peso depreciation will make Argentinian goods more competitive, and agricultural exports are likely to rise. Under Macri, the risk of expropriation has decreased, as he has pushed for measures that would improve the investment environment. However, general elections are due to be held in October 2019, and Argentina’s economic difficulties have undermined support for the president. Macri’s approval ratings have fallen from more than 50% at the end of 2017 to 35% in May 2018, and he is likely to face a strong challenge from the Peronist opposition. There is therefore a significant risk that market-friendly reforms could be reversed, which would raise further concerns over Argentina’s ability to pay its debts.
An unfolding corruption scandal will pose legal and reputational risks for firms in Argentina. In September 2018, former President Cristina Fernández de Kirchner was charged over her alleged role in a corruption network. A number of business executives have been arrested, and the growing number of police investigations will increase the risk that public works contracts signed under the de Kirchner administration are revised.
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