Argentina: Risk Assessment
Country Risk Rating
Business Climate Rating
- Natural, agricultural, energy and mineral resources
- Improvement in the business environment
- Education level higher than the regional average
- Return of the country onto business market
- Weakened current account
- Dependency on agricultural commodity prices
- Sticky inflation
- Bottlenecks in infrastructure
Economy has Resurged from Economic Recession
After contracting in 2016, the Argentinian economy rebounded in 2017. Both household consumption and gross fixed investments increased strongly. On the supply side, growth has affected all sectors. The construction sector has been the largest contributor, up 9.7% year-over-year (GA), essentially supported by increasing public investment. Agriculture, transport, and communication and financial intermediation have also recorded strong results, reaching respective peaks of 4.9%, 4% and 4.4% during the same period.
The success of the ruling coalition (center-right Cambiemos) in the midterm elections of October 2017 is expected to further boost business confidence in 2018, improving prospects for private investments, with GDP growth expected to pick up over the next year. It is worth noting, however, that inflation remains a concern: while it slowed, the target range of 12-17% established for 2017 by monetary authorities has not been reached. In response, the central bank has implemented a tightening monetary cycle to try to accelerate the disinflation process. The unemployment rate eased from a peak of 9.3% in the first quarter of 2016 to 8.7% in the second quarter of 2017. The recovery of the job market should gain further strength this year, supported by the further consolidation of activity growth.
Twin Deficits Still a Point of Concern
The government attained the primary fiscal target of 4.2% of GDP in 2017. However, this fiscal outcome was highly supported by resources obtained from tax amnesty – a one-time source of funds. This scenario is unlikely to repeat itself in 2018, especially given that the following target requires a tighter fiscal discipline (3.2% of GDP). Following its strong victory in the midterm elections, the government is now set to reduce the fiscal support that has contributed to the rebound in activity. Policymakers will now focus on fiscal reforms to narrow the budget deficit (containing social and pension spending growth). The government has defended the establishment of a cap to the real growth of provincial and federal primary expenditures to zero.
During the same period, the current account deficit has widened, driven by the increase in domestic demand. While imports grew by 12% year-on-year during the first ten months of 2017, exports rose by 0.7% in the same period. The larger trade and current deficits have been so far predominantly financed by debt issuance abroad, as foreign direct investment remains weak (roughly 1% of GDP). Hence, the rising external vulnerability together with the still high inflation may cause a further weakening of the Argentinean Peso. A sharp rise of the US dollar would certainly take a toll on climbing foreign currency debt.
A Strong Showing for Cambiemos in Midterm Elections, though a Majority in Congress Was Not Reached
Argentina held midterm elections in October 2017, with the dispute that renewed one third of the Senate and half of the Lower House being seen as a preview of the 2019 presidential race. President Mauricio Macri of the center-right Cambiemos coalition assured an impressive showing at the elections (including the five most populous cities). The ruling coalition raised its nationwide vote share from the 2015 presidential elections and obtained over 40% of the national vote in both legislative houses. In the Senate, it gained an additional nine seats, taking its total to 24 (out of 72), and in the Lower House it gained an additional 21 seats, taking its total to 107 (out of 257).
Although an absolute majority was not achieved, the outcome left the fragmented opposition in disarray and without any strong leader (former President Cristina Kirchner came in second only in the race for a Senate seat in Buenos Aires). The result has strengthened President Macri’s governability, which is critical to moving forward with his reform agenda, which consists of three pillars: reducing fiscal deficit, inflation and tax burden; reinvigorating job market and assuring a sustainable social security system; and institutional reforms (such as the electoral and judicial institutions). Despite the need to reach consensus with the opposition to pass the reforms, the government should benefit from a proposed schedule of gradual implementation, its increased political capital and a fragmented opposition. Indeed, the government has so far moved quickly, and sent its tax and labor reforms to Congress a few weeks after the legislative elections.