POLITICAL CLIMATE REPORT Prior to the Prior to to assuage the uncertainty that has been plaguing the Argentine economy since April this year. for and 2018 2019 by a total of USD 19 billion. deal the of amount the from increase USD 50 billion terms to US new the that announced Dujovne Minister short its themarkets. in confidence guarantee to funds additional disbursement earlier requesting to addition In 31. and 30 August on peso the by suffered depreciation drastic a after September, early started he IMF terms and renegotiated Dujovne Nicolás Minister Treasury On September 26, in a press conference at the Argentine Consulate in New York City, Argentine People’s Bank of China IMF New week. this resigned who Caputo, Luis th cutting and budget 2019 tightening (IMF), Fund stand Monetary billion International the 50 with USD agreement the renegotiating including markets, the in confidence restore and culmina crisis The to a fresh plunge in the already respond to scrambled administration Macri the September, early and August late In bank central agreement, IMF changes, and the 2019 budget the together: all it Tying short mitigating between act balancing longer achieving unrest and delicate a perform to s have will government the 2019, in reelection for bid Macri’s announced brewing With economy. local into ongoing corruption the and investigations previous administrations the stabilize to pivotal strategy and the ongoing debate to finalize the 2019 budget may prove and the International Monetary Fund, changes in follo The Macri administration is looking to restore confidence in the markets September 28 Political Climate República República Argentina (C1 Ciudad de Autónoma 950 Esmeralda Torre Bellini 3204 233 +1 (646) (11)+54 0991 5238 www.cefeidas.com [email protected] CONTACT e number of ministries. The latest victim of the crisis is now is crisis the of victim latest The ministries. of number e 007 wing weeks of economic turmoil. A modified agreement between between agreement modified A turmoil. economic of weeks wing A BL INFORMATION )

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2018, while 2019 disbursements totaled Separately, Argentina seeks to add the USD 11.4 billion. Now, these will total USD equivalent of approximately up to USD

13.4 billion and USD 22.8 billion, 9 billion in yuans to its swap deal with ARGENTINA

respectively, bringing total funding received the People’s Bank of China, reaching a – by the end of 2019 up to USD 36.2 billion. total of approximately USD 20 billion. In the

PCR PCR Furthermore, Dujovne clarified that these case of the swap deal, debt would only be funds are no longer subject to certain incurred should Argentina need to use these restrictions established in the original reserves. The swap deal is a way to doubly

deal, and that they can now be used to insure Argentina’s ability to tackle possible fully support the budget. According to dips in the peso. the minister, the renegotiated deal, along with a greater effort to tighten fiscal policy Changes in central bank leadership for 2019 and 2020, “reduces and insures the Treasury’s debt program.” The USD 7.1 Central bank President billion addition to the stand-by agreement presented his resignation to President is more than enough to cover 2019 and on September 25.2 He left 2020 debt payments, according to the post only three months after accepting 1 government officials. it, following weeks of economic turmoil and weakening relations with Treasury Minister Argentina had already received USD 15 Dujovne. , now-former billion of the agreement reached in June, political economy secretary, was but this proved insufficient to address its named as the new central bank needs. International reserves continued to president. Sandleris was nominated to his dwindle after the central bank struggled to previous Treasury Ministry post in June 11, stabilize the exchange rate following recent and is close to Minister Dujovne. plunges in the peso.

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1 According to the Ministry of Treasury, taking into 2 Luis Caputo is the second central bank president to account a full renewal of treasury bills, loans for USD resign this year, after left the 4.6 billion from multilaterals, and the previously- post June 14 following a plunge in the peso to U.S. expected USD 12 billion in disbursements from the dollar exchange rate. IMF (prior to renegotiation, which increased this amount), the government only needed to allocate USD 2.5 billion more in debt in domestic markets.

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The timing of the change was surprising (though not entirely unexpected) given Government reduces cabinet ministries

both the mixed message it conveyed - since in effort to show austerity ARGENTINA

President Macri was in New York City in – meetings meant to reassure investors - and On September 3, the government drastically cut and fused the number of ministries in a gesture to

PCR PCR Caputo’s closeness to the president. Among try assuage political unrest caused by the peso’s other things, Caputo had been criticized for plunge on August 30 and 31. The changes, made intervening in the exchange market when effective on September 3, cut the number of

the IMF deal had committed Argentina to a ministries down to 10 (from 19). Current floating exchange rate. In a press ministries include: the Ministry of Treasury, Ministry of Production, Ministry of Social statement, Caputo cited “personal reasons” Development, Ministry of Education, Ministry of for leaving the post and mentioned he Justice, Ministry of Transport, Ministry of Security, leaves “with the conviction that the new IMF Ministry of Defense, Ministry of Foreign Affairs, agreement will reestablish trust in the and Ministry of Interior. Former ministries that became secretariats include: the ministries of fiscal, financial, monetary, and exchange Tourism and Environment (now directly under the rate situations.” The nomination of presidency), the Ministry of Modernization (now Sandleris to the post is meant to bring under Cabinet Chief Marcos Peña), Ministry of clarity and certainty to the economic Energy (now under Treasury), ministries of Labor and Agroindustry (now under Production), plans following the renegotiation of Ministry of Health (now under Social the IMF deal. Development), and the ministries of Culture and Science (both under Education). Now-President Sandleris announced new central bank strategies in a press conference a day after his nomination and exacerbate the public perception of just hours after the new IMF deal was economic contraction over the coming announced. A floating exchange rate will be months, which will come at a political cost. enforced unless the ARS/USD exchange rate rises to more than 44 pesos per U.S. Changes in central bank leadership now dollar or drops to less than 34. If the peso centralize decision-making power under depreciates past its upper bound, the bank Minister Dujovne’s inner circle. This will sell up to USD 150 million per day to suggests that government and central bank satisfy dollar demand. If the peso interests will now be more aligned, which appreciates past its lower bound, the bank will be crucial in order to stick to the will buy U.S. dollars to limit this process. guidelines established by the new IMF The non-intervention boundary will adjust agreement and achieve the targets defined at a monthly rate of 3 percent at least until in the 2019 budget. the end of the year, when it could be recalibrated. Inside the 2019 budget proposal

The central bank maintains its primary The 2019 budget, introduced to goal of reducing , but it will Congress on September 17 and switch from an inflation-targeting pending debate, contemplates cuts to strategy to fixing monetary public spending as well as tax aggregates. This means that the central increases in an effort to close the fiscal bank will stop intervening in exchange deficit. It takes into account revised markets (with the aforementioned economic projections for 2018 and 2019, exceptions) and rather focus on regulating responding to recent macroeconomic the amount of money in circulation through events. Though the proposal transfers interest rates. This looks to achieve a zero many costs to provinces as it attempts to percent increase in nominal terms of the decrease the national deficit, general monetary base until June 2019, so as to consensus from provincial governors is that restrain inflation in the longer run. it would be irresponsible to fully oppose it. However, these changes are likely to The budget is expected to ultimately

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pass in Congress with the support of On the income side, the government seeks some of the opposition, though it will to ratify the 12 percent export tax3

likely be subject to spirited debate and announced on September 3 as an ARGENTINA

several modifications. “emergency measure” to stabilize the – Argentine currency. Articles 83 and 84 in

PCR PCR Cuts to public spending in the budget the budget proposal ask Congress to grant include transferring costs to provinces and the government the discretionary power to reducing the national government’s capital modify this tax to a maximum of 33 percent

expenditure. The former includes a through the years 2019 and 2020. Although reduction in transport and electricity this would leave an open door for even subsidies to provinces by an amount equal higher taxes on exports, these would come to 0.7 percent of GDP (0.3 percent of GDP at a high political cost. We believe the for transport and 0.4 percent for government will be reluctant to resort to electricity), as well as a cut to current such measures, but it is a sign of how little transfers to provinces by an amount equal room there is to maneuver with regards to to 0.3 percent of GDP. Separately, its fiscal targets. reductions to capital expenditure by an amount equal to 0.5 percent of GDP would The budget in the frame of new focus mostly on the energy and transport economic projections sectors, putting pressure on the Public- Private-Partnership (PPP) program The 2019 budget proposal assumes implemented this year to take over projections of 42 percent cumulative infrastructure developments. The success inflation for 20184 (government estimates of this program will rely on how effectively from August had predicted a 31.8 percent these projects can attract investment. inflation rate) and 23 percent inflation for

National Inflation Figures January 2017 - August 2018

6% 40% 35% 5% 30% 4% 25%

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2% on 10% - Monthly Inflation Monthly 1%

5% Year 0% 0%

Monthly Inflation Year-on-year Inflation

3 Up to a maximum of four pesos per U.S. dollar on the 4 The latest data from the National Statistics and taxable amount or official FOB price for primary Census Institute (INDEC) reported a cumulative exports; three pesos per U.S. dollar maximum on inflation through August of 24.5 percent (inflation for other exports. August alone was 3.9 percent). Revised estimates also include a 2.4 percent decrease in GDP in 2018 and a 0.5 percent decrease in GDP in 2019. 4

2019. It also assumes an average decreased 6.4 percent year-on-year up to exchange rate of 28.3 pesos per U.S. dollar August 2018.

for 2018 and 40 pesos per U.S. dollar for ARGENTINA

2019. In order to achieve the 2018 In other words, the effects of the volatility – average, the exchange rate by year- will likely continue to be felt - or even

PCR PCR end would need to be between 37 and worsen - in the coming months before the 38 pesos. Doubts have been cast over stabilizing effects of the 2019 budget and whether these estimates are realistic, given the IMF deal targets can take place. The

that past strategies to stabilize or reduce challenge for the Macri administration inflation have not been fruitful and market is to balance stabilizing the economy projections estimate the exchange rate will and minimizing political damage and close 2018 at 42 pesos per U.S. dollar. social unrest in the short term.

Thus, current account and fiscal account Unions hold fourth general strike targets (2.7 percent of GDP for 2018, 0 while Macri dines with the IMF in percent for 2019 and 1 percent surplus for New York 2020) in the budget could prove difficult to achieve with an exchange rate above On September 25, labor unions staged predictions. Higher costs could still erode a general strike, disrupting export competitiveness in the coming year, transportation and public services while excessive currency depreciation could across the country. The walk-off was the cancel out new revenues collected from the fourth of Macri’s presidency and the second export tax. These ambitious targets seem this year (another general strike was held to be as much about highlighting the June 25 to protest the IMF deal and call for government's commitment to their fiscal re-opening of wage negotiations - see here goals as they are about sending a clear for background). signal to international markets in order to restore confidence. While the backing of Umbrella union General Confederation of the IMF makes the zero fiscal deficit for Labor (CGT) announced this week’s strike 2019 goal highly achievable, the costs in late August as a measure to protest the of these austerity measures could government’s economic policy and the IMF come in the form of social unrest and deal, whose targets are formalized through political damage as shown by the cuts laid out in the recently-introduced September 25 labor strike (see below). 2019 budget proposal. The CGT has expressed particular concern about Economic consequences manifest workers’ loss of purchasing power in the context of high inflation. At the same time, Meanwhile, the consequences of a the more combative alternative Argentine weakening economy are beginning to Workers' Central Union (CTA) announced a manifest. National statistics agency INDEC 36-hour strike, which began Monday at reported an unemployment rate of 9.6 noon with a large mobilization to the Plaza percent for the second trimester of 2018 de Mayo, to protest the “budget of the IMF.” (up from 8.7 percent year-on-year), the The strike coincided with Macri’s trip to New highest rate of reported unemployment in York for the U.N. General Assembly, which 12 years. In July, formal jobs decreased by allowed the unions to criticize the approximately 60,000 posts, bringing the government’s economic plan, effectively tally of lost jobs up to 177,000 for 2018. On contrasting the plight of workers with the September 25, a general strike paralyzed opulent dinner Macri shared in New York the Argentina as its largest trade-union group previous evening with IMF head Christine protested public spending cuts and growing Lagarde. unemployment. In addition, inflation has affected private consumption, which has

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Given worsening economic conditions, another general strike was almost Carlos Rosenkrantz named as new

inevitable, especially as unions come president of Argentina’s Supreme ARGENTINA

under increasing pressure from their Court – bases to respond with concrete action. In mid-September, it was announced that Carlos

PCR PCR More generally, the last few weeks have Rosenkrantz would replace Ricardo Lorenzetti as seen an uptick in social mobilization, president of Argentina’s Supreme Court starting including ollas populares5 organized by October 1. Lorenzetti, an environmental and civil leftist social movements, marches against law specialist who was nominated in 2004 by proposed budget cuts to public universities, then-President Néstor Kirchner, steps down after 11 years in the position though he will remain a and strikes by teachers calling for wage judge on the Court. A former advisor to President increases. Raúl Alfonsín, Rosenkrantz was nominated to the Supreme Court by Macri in August 2016. Although The September 25 strike had widespread not entirely surprising, his election as president comes at an unexpected time and reflects adhesion from the majority of unions. Lorenzetti’s waning support in the Court and a tilt However, even though protests occurred in in favor of the current administration. downtown Buenos Aires and other major urban centers, these mobilizations - like Rosenkrantz is a 59 year-old lawyer who studied at Buenos Aires University (UBA) and later those of June - were fairly muted in obtained a masters and a doctorate in law from comparison to the strikes held earlier in Yale University. He is the first president of the Macri’s presidency. The triumvirate leaders Argentine Supreme Court with Jewish ancestry. of the CGT offered harsh criticism of the Prior to his appointment to the Supreme Court, he was president of the San Andrés University government's economic policy, but (Universidad de San Andrés) and before that refrained from calling for mobilization by its occupied various professorial positions at NYU, members. In the current economic and Richmond School of Law, Denver University, political climate, there are few incentives Universitat Pompeu Fabra, and UBA. for mainstream union leaders to take aggressive action against the government. Strong actions risk the unions incurring that the combative truckers’ union, headed blame for undermining governability. They by Hugo Moyano, took a predominant role also risk aggravating public sentiment, in the mobilizations. Earlier in the year, which even amid widespread perception Moyano and his son Pablo resigned from the that the economy is faring poorly, is not CGT’s board of directors, and on August 20, sympathetic to roadblocks and more Moyano and several other prominent aggressive actions. Additionally, the unionists (including the head of the banking announcement of Luis Caputo’s resignation and auto industry workers’ unions) from the presidency of the central bank on presented a new front called Trade Union the same day distracted media attention Front for the National Model (Fresmona) to from the strike, somewhat reducing its dispute leadership of the CGT. Fresmona impact. leaders are seeking more protagonism for their unions and calling for the postponed The strike once again laid bare the renovation of authorities of the CGT to take ongoing divisions between those place, with the hopes of taking a formal factions in the labor movement that leadership role. are open to dialogue with the government and those that take a more Activism is likely to remain elevated oppositional stance. The CTA’s decision to through the end of the year, and there is a organize mobilizations contrasted with the possibility that another general strike will CGT’s more passive approach. It also meant be called before year’s end. This is due both

5 An olla popular is a form of protest in which participants demonstrate and prepare stews as a way to draw attention to social hardships. 6

to the outlook for an economic contraction Fernández de Kirchner to be stripped of the in 2018, as well the fact that the end of the congressional immunity granted to

year is generally a period of increased social legislators. Although the march was ARGENTINA

unrest in Argentina. Moyano and Fresmona organized by government supporters and – have already called for mobilizations on largely targeted at the previous

PCR PCR October 20 in the town of Luján, Buenos administrations, demonstrators also called Aires province, and have suggested that for measures to fight corruption more they will demonstrate when the budget is generally (such as a law that would allow

discussed in the Chamber of Deputies and for the seizure of goods obtained through during the G20 summit. Meanwhile, the illicit means, which is currently under CGT has said that there will be “no truce” debate in Congress but has been stalled due until its demands - including a meeting to lack of consensus between blocks). between the government and the main CGT leaders - are met. The same day, CFK presented a letter in which she consented to searches of her For its part, the government has said it properties (this requires authorization from remains committed to pursuing the Senate, given congressional immunity) dialogue with union actors. We believe it under certain conditions, which included not will continue its strategy of seeking allowing media to be present. A day later, agreement with the dialogue-friendly on August 22, the Senate voted 67-0 to elements of the CGT, while attempting to allow the searches to move forward (five sideline the more combative unions. The Senators were absent, and CFK voted in government has thus far rejected calls to favor). CFK’s support for the measure, negotiate with the top CGT leadership in which had previously failed to receive the favor of continuing its strategy of sector- necessary votes to advance, seems to be a by-sector discussions. It has shown challenge to the accusations levelled willingness reopen salary discussions. The against her and came as it seemed Macri administration argues that sector-by- increasingly likely an additional vote would sector negotiations are more appropriate succeed anyway. Shortly thereafter, given that conditions vary by industry. government agencies searched the former However, the strategy also serves a president’s properties. In a video published political purpose of undermining afterward, CFK alleges that the search was unified opposition from the labor excessively damaging to her property. She movement. has also argued that seizing items such as her and her late husband Néstor Kirchner’s More chapters in the notebooks presidential batons was intended as scandal deliberate humiliation.

In recent weeks, the probe into the On September 17, the federal judge notebooks scandal6 has continued to overseeing the case, Claudio Bonadio, expand, reaching some of the most issued a 551-page resolution in which he prominent business leaders in Argentina’s indicted 42 individuals connected to the private sector as well as high-level officials case for “illegal association.” This includes from the previous Kirchner administrations. CFK, who he alleges was the head of the “illicit association,” although he On August 21, thousands of people acknowledges that the raids have not been marched to Congress to call for former able to find proof that she received president and current Senator Cristina payments. Bonadio requested that CFK be

6 The notebooks scandal relates allegations that companies in exchange for lucrative public works between 2003 and 2015 government officials of the contracts. These transactions were allegedly detailed former Kirchner administrations received illicit in a series of notebooks (cuadernos), thus giving rise payments in cash from construction and electricity to the name.

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put into preventative detention, issued an embargo for 4 billion pesos and also

reiterated a request that the immunity she ARGENTINA

has as a Senator be removed. Bonadio also – charged several former high-level officials

PCR PCR from the previous government with involvement, including former Planning Minister Julio de Vido and Planning

Undersecretary Roberto Baratta. On September 25, the reach of the probe widened with Bonadio requesting that two of Argentina’s leading business leaders - Paolo Rocca of Techint and Marcelo Mindlin of Pampa Energía - give statements in October. In recent days, more individuals with links to the Kirchners have been detained in relation to the investigation. ICFK continues to maintain that the charges against her amount to “political persecution” and are meant to “distract public attention from a political, economic and social debacle that can no longer be hidden.”

Implications

Although the investigation continues to widen, we still believe that the impact of the notebooks scandal will not reach the scope of Brazil’s lava jato investigation, which had wide-ranging consequences for Brazil’s political and business classes. Instead, the politicization of Argentina’s judicial system is likely to hinder investigations and prevent it from implicating sitting officials.

As we have said before (see here), the investigation benefits the Macri administration, which is able to draw attention to what they call “Corrupción K.” This aligns well with the government’s rhetoric that much of the current economic situation is due to external factors, and the situation is inherited from the previous administration. This argument also plays past. Some recent polls, in fact, show a well with Macri’s base and distracts slight uptick in support for CFK over the last attention from the current economic month. This suggests that her base remains situation. However, the allegations and the resilient, and she has likely benefited politicization of the issue have not seriously somewhat from the difficult economic affected CFK’s base of support, especially situation. as they allow her to portray herself as a victim, a strategy effectively used in the

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CFK’s solid base of support would make her non-Kirchnerist, Peronist front. The a competitive presidential candidate (at front, known “an alternative for Argentina,”

least in a first round, although a second will compete in next year’s elections. This is ARGENTINA

round victory would be difficult to achieve the first clear sign that moderate Peronists – given her high disapproval ratings), and will seek to unite behind one candidate. As

PCR PCR there is a real chance that she may decide we have said before, there are increasing to mount a bid next year. Although she has incentives for the Peronists to decide on a not yet publicly confirmed whether she unity candidate as next year’s elections

plans to run, recent days have provided approach given that divisions between more clarity on how the rest of presidential various strains of Peronism have race will shape up. On September 27, four undermined electoral success in the recent high-profile Peronists - Salta Governor past. For his part, President Macri Juan Manuel Urtubey, Córdoba confirmed this week that he will seek Governor Juan Schiaretti, head of the reelection next year, resolving any Peronist bloc in the Senate Miguel doubts about whether he would step aside Ángel Pichetto, and Frente Renovador and allow another candidate from his party leader Sergio Massa - announced a new to compete.

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