Argentina: Risk Assessment
Country Risk Rating
|C||A very uncertain political and economic outlook and a business environment with many troublesome weaknesses can have a significant impact on corporate payment behavior. Corporate default probability is high.|
Business Climate Rating
|C||The business environment is difficult. Corporate financial information is often unavailable and when available often unreliable. Debt collection is unpredictable. The institutional framework has many troublesome weaknesses. Intercompany transactions run major risks in the difficult environments rated C.|
The policy adjustment should lead to the contraction of activity in 2016
Private consumption should be particularly affected by the first results of the internal policy adjustment managed by the new president Maurico Macri. It should slow under the impact of the peso’s depreciation, which affects the purchasing power of households that depends on many imported goods because of the weakness of local production. The reduction in subsidized tariffs on electricity (the price could reach up to 700%), gas and transport should also contribute to the decline in the purchasing power. On the public consumption side, a revival of activity by the government seems already compromised: local authorities are committed to reduce public spending in order to redress public accounts. The wait-and-see approach of investors should continue, despite the signing of a historic agreement in principle with the “vulture funds” in February 2016 that should enable the country to regain access to international capital markets in the first half of this year. Investors should expect a more favorable legal framework, notably the reform of the judicial system that was already mentioned by the president, but has not been yet debated in Congress. External trade, the manufacturing industry in particular (especially cars) should also be affected by the Brazilian economic crisis, the largest trading partner of Argentina. By contrast, agricultural exports should grow at least in volume due to the lifting of taxes on agricultural exports (except for soybeans), but remain affected by low commodity prices. Finally, inflation is expected to increase in line with the recovery in energy prices. Its progress will also depend on the ability of the government to gradually remove the indexation of wages and restore the operational independence of the central bank.
Public and current account deficits will not be eliminated in the short term
In 2015, there was a widening in public deficit under the effect of increased spending prior to the election. The government, fearful of the repetition of social unrest, increased the budget for energy subsidies, as well as wages and remuneration for a range of jobs. In 2016, the government will likely apply tightened fiscal and monetary policies. The first measures already taken were to remove capital controls for commercial transactions and let the peso fluctuate freely, leading to a sharp depreciation (30%) of the largely overvalued local currency, and also to remove taxes on agro products (except for soya) and industrial exports. Bringing the growing deficit under control will not be an easy task given the important share of subsidies. The previous government was paying huge subsidies on energy and transport prices, sectors neglected by private investors because of the lack of protection offered by the legal system. The country continues to be excluded from the international markets and will have to continue making use of bilateral financing, mainly from China, to finance its public deficit. The government will likely work to solve the dispute between Argentina and the ‘Vulture Funds’ during 2016 in order to regain access to external private finance and avoid recourse to issuing money to finance the deficit. The lack of a majority in the Congress will, however, be an additional obstacle as any decision relating to any agreement must be submitted to that body.
In terms of foreign trade, the country remains extremely dependent on energy imports because of investment shortfalls in the sector, despite its abundance of natural resources (oil and gas). Agricultural exports (soya, maize and wheat), which account for almost 60% of all export sales, should rise as a result of the depreciation of the peso and the removal of taxes, but harvests could be reduced because of weather events associated with the “El Nino” phenomenon. Exports of manufactured goods (in particular automotive) are likely to decline, hit by the slowdown in demand in Brazil (the leading export market). As a result, the current account deficit should rise slightly in 2016. The resolution of the conflict with vulture funds should nevertheless allow the country to borrow on international markets at a cheaper price and be able to finance its current account deficit in absence of sufficient level of FDI.
The arrival of the Right to power marks the end of ‘Kirchnerism’
Elected in November 2015 with 51.4% of the votes, the new President, Mauricio Macri, a Liberal, led the Right to power for the first time in twelve years. The President, who is part of the “Cambiemos” coalition, is not, however, supported by a majority in Congress and will have to form alliances to get his reforms through. He is facing a number of challenges, in particular that of restoring an economy shaped by populist policies and State interventionism. He can already boast of an important victory in resolving the conflict with the vulture funds. He hopes to be able to restore the relations with the country’s trading partners and rebuild the confidence among investors that was undermined by commercial protectionism, nationalizations and the failure to comply with the rulings of the International Centre for Settlement of Investment Disputes (ICSID) in the context of the policies implemented by the previous administration. These changes are, however, going to encounter resistance from the powerful trade unions and Peronist factions still leading the Congress.