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POLITICAL CLIMATE REPORT Prior to the Prior to to Assuage the Uncertainty That Has Been Plaguing the Argentine Economy Since April This Year

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POLITICAL CLIMATE REPORT Prior to the Prior to to Assuage the Uncertainty That Has Been Plaguing the Argentine Economy Since April This Year CONTACT INFORMATION POLITICAL & REGULATORY RISKS [email protected] Juan Cruz Díaz [email protected] www.cefeidas.com Madeleine Elder +54 (11) 5238 0991 (ARG) [email protected] +1 (646) 233 3204 (USA) Megan Cook Torre Bellini [email protected] Esmeralda 950 Sergio Espinosa Ciudad Autónoma de Buenos Aires [email protected] (C1007ABL) República Argentina Political Climate Report - ARGENTINA September 28, 2018 POLITICAL CLIMATE REPORT IN THIS ISSUE The Macri administration is looking to restore confidence in the markets Page 3 following weeks of economic turmoil. A modified agreement between Government reduces cabinet ministries Argentina and the International Monetary Fund, changes in central bank in effort to show austerity strategy and the ongoing debate to finalize the 2019 budget may prove Page 5 pivotal to stabilize the local economy. With brewing social unrest, Unions hold fourth general strike ongoing corruption investigations into the previous administrations and Page 6 Macri’s announced bid for reelection in 2019, the government will have Carlos Rosenkrantz named new to perform a delicate balancing act between mitigating short-term president of the Supreme Court unrest and achieving longer-term objectives. Page 7 More chapters in the notebooks scandal Tying it all together: the IMF agreement, central bank Page 8 changes, and the 2019 budget G20 watch In late August and early September, the Macri administration scrambled to respond to a fresh plunge in the already-depreciated Argentine peso (relative to the U.S. dollar). The crisis culminated in a series of measures taken by the government to reassure investors and restore confidence in the markets, including renegotiating the USD 50 billion stand-by agreement with the International Monetary Fund (IMF), tightening 2019 budget and cutting the number of ministries. The latest victim of the crisis is now-former central bank President Luis Caputo, who resigned this week. New IMF agreement for USD 57.1 billion and probable increase in swap deal with People’s Bank of China On September 26, in a press conference at the Argentine Consulate in New York City, Argentine Treasury Minister Nicolás Dujovne and IMF head Christine Lagarde announced renegotiated terms for the stand-by agreement between both parties. Renegotiations started early September, after a drastic depreciation suffered by the peso on August 30 and 31. In addition to requesting earlier disbursements, the government also looked to secure additional funds to guarantee its short- and medium-term financing needs and restore confidence in the markets. Minister Dujovne announced that the new terms increase the amount of the deal from USD 50 billion to USD 57.1 billion, and at the same time increase disbursements for 2018 and 2019 by a total of USD 19 billion. With the new deal, the government seeks to assuage the uncertainty that has been plaguing the Argentine economy since April this year. Prior to the renegotiation, planned disbursements totaled USD 6 billion for what remains of Find more about our services Follow @CefeidasGroup 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 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 Luis Caputo billion addition to the stand-by agreement presented his resignation to President is more than enough to cover 2019 and Mauricio Macri 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. Guido Sandleris, 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. Exchange Rate - Argentine Pesos per USD 40 30 20 10 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 Federico Sturzenegger 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. 2 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 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 inflation, 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 3 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.
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