CONTACT INFORMATION POLITICAL & REGULATORY RISKS [email protected] Juan Cruz Díaz [email protected] www.cefeidas.com Heidi Lough +54 (11) 5238 0991 (ARG) [email protected] +1 (646) 233 3204 (USA) REPORT Madeleine Elder Torre Bellini [email protected] Esmeralda 950 Megan Cook Ciudad Autónoma de Buenos Aires [email protected] (C1007ABL) República Argentina Rebecca O’Connor [email protected] Political Climate Report - ARGENTINA June 1, 2018 POLITICAL CLIMATE IN THIS ISSUE Page 2 The Macri administration has had a busy month working to respond to Dujovne appointed economic the exchange rate volatility, the first major stress test of President coordinator Mauricio Macri’s ambitious economic reform program since he took Page 3 office in December 2015. The administration made use of many of the Macri vetoes law to halt tarifazos tools in its arsenal in order to restore market confidence, namely starting negotiations with the International Monetary Fund (IMF) to Page 4 open a USD 20-30 billion credit line and reorganizing its economic Politics vs. governability team. Keeping the confidence of the general public will prove more G20 watch: Foreign difficult to navigate, given the Argentine population’s deep-seated ministers in Buenos Aires mistrust of the IMF and sensitivity to the peso-dollar exchange rate. Page 5 The administration must also carefully navigate its relationship with Union opposition mounts the opposition, whose support it will need to advance the remainder of OECD meetings in Paris its legislative agenda, and unions, whose objections to rate hikes and IMF negotiations heighten the risk of social conflict. Page 6 Legislative updates Responding to the exchange rate volatility The Macri administration has spent a considerable amount of political capital responding to the recent exchange rate volatility in order to restore market confidence. The sharp acceleration of the peso’s depreciation in the context of rising global uncertainty and increasing interest rates in the United States led to a massive sell-off of Argentine assets in credit and equity markets in late April/early May. The currency has lost more than 34 percent of its value against the dollar since the beginning of the year, almost 19 percent of which was in the last month alone. The Macri administration has taken two major steps to address the crisis and keep its economic program on track: opening negotiations with the International Monetary Fund (IMF) for an exceptional access stand-by agreement and reorganizing its economic leadership. This follows an initial series of Central Bank interest rate hikes in late April/early May — which jumped from 27.75 percent to 40 percent in eight days — and sell-off of a record amount of dollar reserves to prop up the peso and contain inflation (see April 2018 PCR). Argentina turns to the IMF On May 9, Argentine Treasury Minister Nicolás Dujovne and other members of Argentina’s economic team began negotiations with the IMF for an expected USD 20-30 billion credit line. The decision to open negotiations with the multilateral organization — which Find more about our services Follow @CefeidasGroup President Mauricio Macri announced on have about [the IMF’s] role [in the May 8 — was a politically risky one. The country].” IMF is deeply unpopular in Argentina, as a ARGENTINA large portion of the population believes IMF It is very likely that a deal for a credit – austerity policies played a key role in line will be reached in the coming PCR generating the 2001 economic crisis and weeks; but selling it at home, both to 2002 default, which left one fifth of the opposition politicians and the population unemployed. Opening population at large, will prove negotiations is a step the complicated. Despite IMF overtures and a administration would have preferred series of reassurances from the not to take, as it risks exacerbating government, surveys indicate large Macri’s declining popularity. However, swathes of the population — including the administration has judged that the a slight majority of Cambiemos voters political costs it will incur are worth the — oppose the measure. On May 25, a reassurance an IMF agreement would national holiday, thousands of Argentines give international investors about the protested against the IMF negotiations, as country’s stability. well as high inflation and rising public utility rates, in a march in Buenos Aires. Marches The IMF, for its part, is aware of its poor rejecting the negotiations have also taken reputation in Argentina and has carefully place in other cities around the country. managed its messaging around the potential agreement. Managing Director Treasury Minister Nicolás Dujovne Christine Lagarde has emphasized that any appointed economic coordinator of nine economic program agreed upon will be ministries determined by the Macri administration with the IMF as a partner, and that it will In addition to opening negotiations with the not be an IMF program. The organization IMF, President Macri has restructured his has also stated that the agreement will not economic leadership in an effort to tighten be tied to any particular peso-dollar policy coordination and respond to exchange rate. In recent comments, exchange rate volatility. On May 21, the Lagarde said the IMF has “made a president designated Treasury Minister commitment to President Macri to do [its] Nicolás Dujovne to coordinate economic best to advance quickly and e fficiently in policy and oversee nine ministries — order to change both the perception of Production, Finance, Interior, Labor, Argentina and the perception that people Exchange rate - Argentine pesos per USD January 2, 2017 - May 30, 2018 26.0 24.0 22.0 20.0 18.0 16.0 14.0 2-Jan-18 2-Feb-18 2-Mar-18 2-Apr-18 2-May-18 Source: Central Bank of Argentina 2 Transport, Energy, Modernization, Macri vetoes law that would Agroindustry and Tourism. reverse public utility rate hikes ARGENTINA The consolidation of economic policy under – Another core component of the Macri Dujovne is significant for a number of administration’s plan to reduce the fiscal PCR reasons. Firstly, it is an acknowledgement deficit — reducing costly public utility that the administration’s past decision to subsidies — has run up against a swell of fragment economic decision-making was a political resistance. In a session that ran mistake (see past analysis in January- into the morning of May 31, the Senate February 2017 PCR). In December 2016, approved a bill to return utility rates to the former Economy Ministry was divided in November 2017 levels and eliminate the two: (1) the Treasury Ministry, with recent set of rate hikes (see April 2018 PCR Dujovne at the helm, and (2) the Finance for background). Five hours later, Cabinet Ministry, led by Luis Caputo. The Chief Marcos Peña announced Macri had appointment of Dujovne, effectively re- vetoed the measure. consolidating economic policymaking, is an unusual acknowledgment of a While the veto was not a surprise — the misstep and shows the seriousness Macri administration had previously with which the government is announced its intention to reject the addressing the situation. Additionally, bill — having to exercise this power is Dujovne has a good relationship with a setback for the administration, which Lagarde and his appointment serves to wanted to avoid the political cost demonstrate greater coordination to the associated with doing so. Indeed, IMF. Cambiemos officials worked tirelessly in the days leading up to the vote to stall the bill’s Dujovne’s ascension is also significant momentum, negotiating with members of in terms of its implications for power the opposition more prone to dialogue in an dynamics within the top echelons of attempt to prevent the need for a veto. On the administration. His new role May 28, two days before the vote, Macri represents a loss in stature for other key even made a direct appeal to opposition actors — namely Secretary of senators to, “not let themselves be guided Interministerial Coordination Mario by the crazy ideas pushed by Cristina Quintana and Secretary of Public Policy Kirchner.” In the end the bill squeaked by Coordination Gustavo Lopetegui, who with exactly the 37 votes in favor that it previously coordinated economic policy needed. However, only a two-thirds between ministries — and to a lesser majority in both houses can overturn extent, Cabinet Chief Marcos Peña, though Macri’s decision, which is unlikely as the Peña remains one of the administration’s measure did not reach this threshold in most powerful actors. either house. Dujovne has been given the tools and Cabinet Chief Peña asserted that many of support to take the reins in directing the legislators who voted in favor of the bill economic policy, including broad power to knew it was not financially viable, and had intervene in the budget of the nine even privately requested assurances from ministries he is overseeing in an effort to the administration that they would veto it. reduce the fiscal deficit. He is starting out Even given this, the ability of Peronism with a focus on cutting executive branch to unite around this bill despite costs, a strong symbolic move to show the differing views on how to address the government is working to lead by example. tarifazos demonstrates its growing unity, with the notable exception of Salta Governor Juan Manuel Urtubey and his brother Senator Rodolfo Urtubey, the most high-profile opposition 3 member to vote against the measure. The tarifazos have also made waves within G20 watch: Foreign ministers gather in Macri’s Cambiemos coalition. Though Buenos Aires ARGENTINA Cambiemos senators voted in line with the – administration against the bill this week, Foreign ministers from G20 countries gathered in Buenos Aires on May 20-21 for the third PCR criticisms of the increases in early May from National Deputy Elisa Carrió and Mendoza ministerial meeting of Argentina's G20 presidency.