Risks to watch as Argentina seeks IMF assistance

05 June 2018

Sharp depreciation in the value of the peso led Argentina to seek a loan from the International Monetary Fund (IMF) in May 2018. While an IMF standby arrangement would support investor confidence, it would also be likely to entail additional spending cuts that undermine President Mauricio Macri’s approval ratings and raise the risk of social unrest.

Security Environment

Protests against Macri’s economic reform agenda remain frequent in Argentina. The risk of social unrest is likely to rise further after the government entered negotiations in May 2018 with the IMF. The organisation is highly unpopular in Argentina due to its association with the country’s economic crisis of the early 2000s. Additional austerity measures would be likely to accompany an IMF deal, and would further elevate the risk of demonstrations and strikes by Argentina’s powerful trade unions.

Cargo in Buenos Aires faces a high risk of disruption. In February 2018, Argentine truck drivers established roadblocks in a number of neighbourhoods in Buenos Aires in protest against Macri’s economic policies. 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.

Trading Environment

Rapid depreciation in the value of the peso in late April 2018 led Argentina’s central bank to raise interest rates on three occasions until they reached 40% on 4 May 2018. However, renewed currency pressure prompted Macri to seek a credit line from the IMF worth a reported USD 30 billion on 8 May 2018. The peso’s volatility has been triggered by rising interest rates in the US, Argentina’s upward revisions of its inflation targets in December 2017 and the introduction of a new capital gains tax in April 2018. Argentina is likely to secure a loan agreement with the IMF, which would be positive for investor sentiment as it would signal a commitment to fiscal and economic reform.

Since he assumed office in December 2015, Macri has made gradual progress on improving Argentina’s macroeconomic fundamentals. However, while inflation has decreased from around 47% in mid-2016, it is likely to remain elevated at around 23% in 2018. The fiscal deficit remains elevated, reaching 6% of GDP in 2017. However, the government adjusted its 2018 fiscal deficit target from 3.2% to 2.7% of GDP in May 2018, and it is likely to meet this more ambitious goal. GDP growth is forecasted to slow from 2.9% in 2017 to 2.6% in 2018, driven by market volatility and drought.

Sovereign credit risks are elevated, as central government debt is forecasted to rise from 57% in 2017 to 63% in 2018. The depreciation of the peso will contribute to a rising debt burden, as nearly 70% of total government debt is foreign-currency denominated. Argentina’s foreign reserves have increased under Macri, but some of the progress has been undone in recent weeks. Due to attempts to support the peso, reserves fell from USD 64 billion at the start of the year to USD 55 billion by early May 2018.

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Investment Environment

Presidential elections are due to be held in October 2019. Although Macri remains likely to be re-elected, he will face a much stronger challenge from the Peronist opposition than was previously expected. However, Macri is likely to continue pursuing market-friendly policies. In early May 2018, Congress approved a law to reform capital markets that loosens restrictions on investments in Argentina and protects private firms from government interference.

Labour reform that would reduce costs and enhance contract flexibility for employers will remain a key government priority in 2018. However, the reforms may encounter opposition in Congress, increasing the likelihood that proposals are watered down. In addition, the labour reforms are likely to be delayed as measures to stabilise the peso and reduce the fiscal deficit will be prioritised in the coming months.

Argentina Pricing Outlook
† Appetite is very limited due to the uncertainty regarding the request for an IMF loan and the conditions that will be attached to this. Pricing would be dependent on the strategic nature of the underlying deal and the length of the tenor.

In this month's Risk Outlook, we also provide a detailed forward looking assessment of developments within the security, trading and investment environments for Iran, Armenia, Côte d'Ivoire and Mozambique all of which have been the subject of recent enquiries from JLT's client base.

World Risk Review June2018

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.

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For further information, please contact Eleanor Smith, Political Risk Analyst on +44 (0)121 626 7837 or email eleanor_smith@jltgroup.com.