POLITICAL CLIMATE REPORT Michael Froman, Foreign Minister Susana Malcorra and Prod and Malcorra Susana Minister Froman, Foreign Michael Representative Trade March. US in established (TIFA), Agreement Framework Investment US met underthe Council The Aires. Buenos in held was Investment of US the meeting theinaugural 7, November On ties. economic boost to steps had taken US and the Argentina election, the to just prior weeks relations. bilateral to discuss Trump and Macri between call a phone up to set Obama.” with began relation intelligent mature, this constructive, in working “wecontinue that the with any contact had notyet he had that said 10,Macri November On forward. moving strategy to discuss ministers cabinet select and previously campaign Trump Donald and for Clinton, election This March. to Argentina visit historic Obama’s President during itse aligning on in particular focusing been agenda. on thegovernment’s high remains environment investment trade and reliable open an and FDI, promoting significant of absence continued In the Trump’s election casts shadow of bill a public budget, the2017 including priorities, legislative key government’s of the on several been made has progress setbacks, been Efforts have year. the of end before the Congress through agenda legislative its on getting focused been energy has political government’s of the much recent weeks, In strategy. of reassessment nati Eastern Middle several and theUS with notably investment, and trade to boost intended of agreements spate a has signed and relations commercial bilateral up shore to efforts its in progress to make continues Macri Mauricio President of The government November 11 Political Climate República República Argentina (C1 Ciudad de Autónoma 1322 Suipacha 3204 233 +1 (646) +54 www.cefeidas.com [email protected] CONTACT INFORMATION . 011

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Cabrera co-chaired the meeting. The given the US president-elect’s anti- countries agreed to establish an Innovation free trade rhetoric and more

and Creativity Forum for Economic isolationist approach to foreign policy.

ARGENTINA

- Development to discuss issues of mutual These factors, combined with Trump’s calls interest. for interest rate increases, could have

PCR PCR negative implications for US investment in From October 26-7, a delegation from Argentina as well as for Argentina’s debt Argentina’s Production Ministry visited issuances. That said, Trump has offered Washington DC. On October 26, during the few solid proposals in these areas, and it is inaugural session of the US-Argentina too early to determine what concrete Commercial Dialogue (established in actions his administration will take. In any March), US Secretary of Commerce Penny case, this surprising turn of events will Pritzker and Minister Cabrera met with create new challenges and force business leaders and public officials from Argentina’s government readjust its both countries. Discussion focused on how approach to a changing US political Argentina can play a greater role in the climate in the near-term. The Macri global economy, and how to make doing administration will have to build a business in the country more transparent relationship with the incoming government and predictable. After the session, and find channels through which Cabrera insinuated that Argentina, cooperation can occur. through Mercosur, desires to trade freely with the US—which it hopes in the “Return to the world” takes future will be Argentina’s “top investor”. A government far and wide... concrete takeaway from the visit was the US Trade and Development Agency’s In light of the current uncertainty announcement that it will reopen its offices surrounding the US outlook, it will be in Buenos Aires. Cabrera also requested more important than ever that the that Argentina be reinstated into the government continues efforts to US Generalized System of Preferences diversity economic partnerships. (GSP), which waives import duties on Recent efforts have focused on measures goods and services from developing to increase investment from Middle Eastern countries. Argentina was suspended from countries as well as strengthen intra- the GSP in 2012 due to its failure to meet Mercosur relations and ties to Europe. compensation payments to two US investors. Michetti’s Middle East mission

Coordinating, negotiating and On November 6 Vice-President Gabriela implementing improvements in the US- Michetti (accompanied by Vice-Minister of Argentina trade relationship will fall to the Treasury and Finance Pedro Lacoste and Ministry of Production (Argentina) and the other officials) travelled to the Middle East, Department of Commerce (US), which will including Saudi Arabia, the UAE and Qatar. be responsible for the less contentious In Qatar, Michetti and Sheihk Abdullah bin aspects of the bilateral agenda. Meanwhile, Mohammed bin Saud Al Thani signed an the Argentine Foreign Ministry agreement between the Qatar Investment (Argentina) and the Department of Fund and ANSES’ Sustainability Guarantee State (US) relations will be charged Fund (FGS) to create a USD 1.3-billion with negotiating the finer details of bilateral fund to finance infrastructure (and more challenging) issues (e.g. projects. USD 1 billion will be invested by market access, intellectual property the Qatari fund, and the rest by the FGS. protections). Michetti also signed a bilateral treaty for These recent advances in bilateral the promotion and protection of trade negations could be delayed investments with Minister of Economy and Trade Sheikh Ahmed bin Jassim Al Thani.

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Notably, this is the first promotion and International institutions back Macri’s protection of investments treaty that agenda

Argentina has signed since 2001.

ARGENTINA

- In the last fortnight, the progress the government In Dubai, Michetti met with Sheikh has made towards achieving political and economic

PCR PCR Mohammed bin Rashid Al Maktoum, who normalization has been reflected in actions taken praised the Macri government’s progress to by the OECD and the IMF. date. The UAE and Argentina signed an On November 9, the IMF formally lifted its censure Avoidance of Double Taxation Agreement, motion in place against Argentina since 2013. This aimed at expanding bilateral trade. Michetti followed a revision of the first Article IV economic subsequently led a business forum with review of the country since 2006, completed in September (see here). public officials and local investors. Although attendees expressed interest in Argentina, The OECD on October 29 announced it would raise investors expressed skepticism Argentina’s country risk classification from 7 regarding the government’s projected (representing the highest possible level of risk, shared by countries such as Venezuela, Iran and inflation target (5 percent by 2021). In North Korea). Having been rated at 7 since 2002, addition, the business community the country has now been raised to 6 (Brazil was expressed desires for strengthening of recently downgraded from 4 to 5). The upgrade laws protecting investments. reflects a positive reaction to changes in transparency and economic policymaking. Argentina is in the initial stages of applying to Heading west… become an OECD member; the news will provide an early boost to hopes of eventual memberships. These trips followed Michetti’s mission to Canada in early October, which concluded These developments represent important early steps in the process of normalizing relationships with a meeting with Prime Minister with international institutions—which will Trudeau. Trudeau will visit Cuba and eventually guarantee access to cheaper financing, Argentina from November 15 to 18. as well as help restore legitimacy in the eyes of foreign investors. A signal of this came on Separately, a delegation led by Production November 7, when the Inter-American Development Bank (IDB) announced it will loan Minister Francisco Cabrera visited Spain in USD 6 billion to Argentina—to increase each year— late October. Representatives signed an as part of its 2016-19 Country Strategy. The IDB agreement with the Spanish government to board also approved the removal of restrictions on promote bilateral trade, and met with loans imposed on Argentina in 2014. This stands in contrast to the difficult relationship the CFK business leaders. Cabrera highlighted administration had with the IDB. Argentina's desire to drive Mercosur’s opening towards Europe and the While praise from these institutions will send world—citing recent bilateral talks with positive signals to the international community, we believe the government’s “dollar deluge” will be Brazil and Uruguay. Cabrera further wanting until inflation falls further and investors emphasized the need to “look towards are reassured of policy continuity—which would be Chile, sign trade agreements and open secured if Cambiemos performs well in the 2017 ourselves to the world; the EU-Mercosur elections. deal is a priority for this administration”. This last comment came 2025 Argentina will have grown 30 percent, after a full negotiation round—the first and have incorporated 6 million citizens since the exchange of offers in May—took into the middle classes. place in mid-October in Brussels. The next round of negotiations will be held in Buenos President Macri visited Italy in mid- Aires in March 2017. Cabrera added that October, during which he met with Pope the signing of international trade Francis and President Matteo Renzi. Macri’s agreements—part of the government’s meeting with the Pope was reportedly National Production Plan—will lend amicable, in contrast to the previous institutional stability to Argentina’s occasion the two met (February), widely growth; the government hopes that by described as “less-than-friendly”. The

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president is playing up the apparently of unity in contrast to the strained improved relationship, which will relationship between former heads of

benefit him domestically. However, we state CFK and José Mujica. Aside from

ARGENTINA

- believe their relationship will remain “turning the page” on the construction of a complex. Pope Francis has confirmed he paper pulp mill on the River Negro—the

PCR PCR will not visit Argentina in 2017. main point of contention between CFK and Mujica—the leaders took a joint stance on Separately, on October 6 it was revealed Mercosur-related issues. The two agreed that Argentina will host the 11th WTO the trade bloc should become Ministerial Conference, the first South integrated and outward-looking, and American country to host the bi-annual expressed concern regarding the event. deteriorating situation in Venezuela: “Venezuela cannot be a part of Mercosur, … and closer to home because [the government] does not respect human rights”, said Macri. The government continues to work to boost relations with its closest The government’s efforts to neighbors. On November 2, a delegation strengthen ties with neighboring of representatives from 120 Brazilian countries reflects a recognition that companies arrived in Buenos Aires to Mercosur is Argentina’s platform for explore business opportunities. According negotiating trade agreements with to the Ministry of Production, this was the other regions, and that inter-bloc largest trade mission to visit Argentina cooperation will be necessary to achieving from Brazil in two decades. Investe SP this. At the same time, with the energies of (São Paolo’s investment promotion many Latin American governments focused agency) President Juan Quirós anticipated on domestic challenges, Argentina has an that “large investments… will arrive in the opportunity to take on a regional next 12-18 months”, which he estimated at leadership role. However, we believe the USD 12 billion. government is not fully capitalizing on this opportunity. Meanwhile, on October 24 President Macri met with his Uruguayan counterpart Tabaré Vázquez in Buenos Aires, in a show

Pledged Foreign Investment* - by Sector (December 10 - November 10)

Other Agriculture Wholesale & Retail Hotels & Restaurants Real Estate Power, Water & Gas Financial Intermediation Transport & Communications Manufacturing Mining 0 2000 4000 6000 8000 10000 12000 14000 16000 Millions (USD)

Dec 10 - Aug 4 Aug 4 - Nov 10

*Includes private and private-public investment; figures are pledges and not 4 representative of real FDI this year. Source: Ministry of Finance

Domestic Panorama Economic Activity 2016 (Compared to Same Period in 2015)

ARGENTINA Legislative Agenda

- 2% 1.2% Following a marathon session in Congress

PCR PCR 0% on November 3, the government’s -0.1% budget proposal was approved in the -2% Chamber of Deputies by a vote of 177 to 58 (with 4 abstentions). The bill was -4% -3.8% supported by Cambiemos, Sergio Massa’s -4.5% Renewal Front, and the Peronist Party. -6% -5.2% -5.7% While most members of the Victory Front -6.4% -8% (FpV) and small leftist parties voted against -7.9% the bill, a dozen FpV deputies broke from -10% their bloc to support the proposal. The Senate began considering the bill this week, and it is likely to pass without changes. Source: INDEC

Broadly, the proposal maintains social targets are relatively ambitious, but spending, while also allocating funds not unattainable. for public works projects. It also boosts

disbursements to the provinces by a total The government now expects a fiscal of 25.4 percent, including through the deficit of 4.8 percent this year (up from addition of ARS 5 billion (USD 33 million) its 3.3 percent target), and has resorted to to the Soy Solidarity Fund and through the issuing debt to cover the gap. As of October allocation of ARS 8 billion (USD 54 million) 21, it had issued debt 19 times since taking to help them meet their obligations to office for a total of more than USD 40 billion pensioners. At the same time, deputies (6.5 percent of GDP). Most economists also overwhelmingly voted to reduce have signaled the current debt load is the executive’s “superpowers.” The manageable, but that the government executive will be limited to reallocating 7.5 will need to be cautious moving percent of budgeted funds in 2017 to be forward. This will especially be true if the reduced to 5 percent beginning in 2018. US moves to hike interest rates and Since the passage of a 2006 law, there had implement protectionist measures. The been no legal limits on the executive’s 2017 budget anticipates a fiscal deficit ability to reallocate funds, and in 2015 and of 4.2 percent of GDP, and the 2014, former President Cristina Fernández government has said it will need USD de Kirchner (CFK) reassigned 20 and 35.5 18 billion in financing to meet its percent of the total budget. Imposing this budgeted obligations next year. limit was important to securing Finance Minister Alfonso Prat-Gay said Peronist support of the budget. recently at a regional meeting of financial

institutions that local banks are prepared to No dollar deluge, but a flood of debt offer “billions in financing”. To reduce the fiscal deficit and help fund public works, The budget bill anticipates a strong the government is relying on its tax economic recovery for 2017, amnesty plan to induce Argentines to forecasting 3.5 GDP growth, a sharp drop repatriate undeclared funds and in inflation (to 12-17 percent from around assets held abroad (see below). 40 percent in 2016) and an exchange rate of just under ARS 18 per USD. Private Separately, investment firm Bainbridge de estimates indicate the government’s Bahamas has filed a new lawsuit against

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Argentina in New York seeking USD 65 Following the influx of dollars from the million. The bonds held by the firm did not blanqueo, the Central Bank’s foreign

fall under the agreement Argentina reserves were up by almost USD 10 billion

ARGENTINA

- reached with holdout creditors in April; in October alone—reserves stood at USD although deals were reached with 99 38.07 billion as of November 8.

PCR PCR percent of holdouts, there are an estimated USD 1 to 1.5 billion bonds Other items on the government’s that remain in default. Congressional wish list

“Tax Amnesty” gathers momentum In addition to the budget, the government has also succeeded in After a sluggish start (see here), there are moving forward with a law that would now signs that the government’s tax promote the use of public-private amnesty, or “blanqueo” (launched in partnerships for public works, an July)—which promotes voluntary important show of commitment to disclosure of undeclared assets, improving conditions for foreign including local and foreign currency— investment. This followed a setback in is seeing results. The government has which a previous version of the bill, which focused on increasing incentives for had already been approved in the Senate, individuals to repatriate funds, including was sent back to a legislative committee extending deadlines for declaring cash and following resistance from opposition blocs increasingly using the threat of detection to (Victory Front and the Renewal Front) in induce disclosure. Banks are also exerting the lower house. However, the bill pressure on account holders. On October subsequently passed on November 3 31, JPMorgan Chase & Co warned that if the following modifications demanded by the bank’s Argentine account holders do not Renewal Front (including increasing declare undeclared funds, their accounts national participation to a minimum of 33 would be closed. Tax-sharing agreements percent, the creation of a bicameral and the support of financial institutions for oversight committee, and requiring the tax program are likely to have some justification for using a PPP for a particular impact, although it is unlikely the project). The revised bill received 151 scheme will bring in sufficient inflows votes in favor, 77 against and 6 to fill the fiscal gap, as the government abstentions, and will now return to the had hoped. Senate for consideration, where it will likely pass before the end of the The October 31 deadline for opening a month. Enacting more favorable special bank account to deposit funds has legislation for PPPs will be key in the now passed; as of November 4, USD 5 government’s quest to deliver on its billion in cash had been declared, with highly ambitious infrastructure plans 150,000 accounts created (not all of which and attract long-term investments have deposits). The Finance Ministry has from the private sector; the ultimate said this will bring more than USD 500 success of the bill in Congress is an million in extra tax revenue. It is important step towards this. Some expected that the amount of companies (including Siemens, which has declarations will accelerate as the pledged USD 5.4 billion for infrastructure) deadlines (December 31 for savings have said their investments depend on a and March 31, 2017 for real estate and new and improved PPP framework. other assets) approach—and as scrutiny increases from foreign banks and Another key legislative priority has governments. Prior to the tax amnesty, been passing an electoral reform law. Argentine foreign-held assets and savings The government’s proposal would were estimated to total some USD 400 implement a Unified Electronic Ballot and billion. require that half of congressional

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candidates be women. Proposed reforms to prompted a public outcry, especially the PASO (Primary, Open, Simultaneous given the government’s efforts to

and Obligatory) primary system were avoid reopening collective wage

ARGENTINA

- dropped due to a lack of cross-party negotiations, and led President Macri consensus. It is hoped that the bill to publicly reprimand legislators and

PCR PCR would come into effect for next year’s call on them to “not go too far.” Chamber 2017 midterm elections. The bill was of Deputies President Emilio Monzó approved in the Chamber of Deputies in subsequently suspended some of the mid-October, and will be voted on in the increases, leaving overall pay increase for Senate in the upcoming weeks. The deputies at 31 percent this year, in line government is negotiating with with increases given to many other public- opposition lawmakers, and the bill will and private-sector workers. Senate likely be modified in order to garner President Gabriela Michetti said she would the support of Peronist senators, who consider doing the same upon her return have especially expressed concern about from an overseas tour; no progress has yet the security of the electronic system and been made. called for different auditing measures as well as for gradual implementation of the Despite lacking a majority in both houses new system. The government-backed of the legislature, the government electoral reform would modify the current continues to demonstrate an ability to system to use a unified single ballot instead deftly negotiate major initiatives of party-by party ballot, which benefits through Congress. This has been large parties that are able to print and achieved through concessions made to distribute their ballots more widely. Thus, opposition leaders, especially Renewal implementation of the reform could be Front head Sergio Massa. With 37 affiliated detrimental to the Peronist party in deputies, the bloc is the third-largest in the the mid-terms, and the government is Chamber of Deputies behind Cambiemos anxious to pass the reform this year so and FpV. While Massa’s support has it could be implemented ahead of next been crucial to passing legislation so year’s vote. It will likely be passed once far, he will begin to seek to modifications are agreed on. differentiate himself ahead of the elections, making his bloc’s support The government is also reportedly planning less assured next year. This will likely to send a capital markets reform to make passing key initiatives through Congress shortly. The bill would allegedly Congress more difficult moving forward. create incentives for raising capital on the local exchange, among other measures. Macri’s administration is also Additionally, it would abolish several continuing to work constructively with measures put in place by the previous governors, for example through administration in 2013, including the proposing increased disbursements of co- current law’s “Article 20,” which allowed participation funds in the budget (see the government to intervene in companies here). In exchange, several governors in the case of “irregularities.” Passage of urged their provinces’ legislators to the reform will be important to attract approve the budget, which was important investments to the local market. to securing the bill’s approval in the lower house. It is important to note that, while it At the same time that key initiatives have is still early, almost none of the governors been moving forward, legislators appear to be positioning themselves to generated controversy when news seek the presidency in 2019. As such, they emerged that raises in some of their are focused on governing and getting re- allowances would mean their overall elected at the provincial level. Therefore, remuneration would increase 47 percent they have an incentive to seek compared to January 2016. This additional resources from the national

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CFK, others appear in court hearing such as changes to the income tax system, will delayed until 2017. This

On October 31 and November 1, CFK, former Minister week, a congressional committee

ARGENTINA

- of Planning Julio De Vido and businessman Lázaro composed of 15 deputies and two senators Báez appeared at a Buenos Aires courthouse to travelled to Washington DC and New York.

PCR PCR testify in connection to corruption allegations. The The legislators will participate in US charges relate to the alleged granting of public works election-related activities, including a contracts to Báez between 2003 and 2015, and the seminar organized by the International subsequent laundering of allocated funds. CFK and De Vido refused to answer questions and maintained Foundation for Electoral Systems (IFES). they were victims of political persecution. Báez, for This had led to a suspension of activities in his part, declined to answer questions and handed in the Chamber of Deputies, whose next a written statement denying all charges against him; session will not be until November 16. he also called for an audit of all public works contracted since 2003. In relation to a separate case, Year-end bonuses: social unrest kept the Federal Court of Appeals in Buenos Aires City at bay (for now) ruled November 11 that CFK, former Economy Minister Axel Kicillof and former Central Bank head Alejandro Vanoli and other former officials will stand As anticipated in last month’s report, trial regarding alleged irregularities in dollar futures the government and the tripartite trading. leadership of the General Confederation of Labor (CGT) umbrella It is probable that resolution of these cases will be union successfully reached a deal prolonged, and increasingly likely a verdict will not regarding the end-of-year bonus for be handed down until after next year’s elections. As workers, containing the threat of a such, the cases will remain in the public eye. general strike for now. On October 19, Nevertheless, we believe that this scenario will not the CGT, government and private-sector have a significant impact on CFK’s approval ratings; representatives agreed to a non-obligatory polls demonstrate her popularity slid upon revelations, but has remained steady for the past base bonus of ARS 2,000 (USD 134), several months (a little over 30 percent). This although each union and sector will suggests this bedrock of support, which has been negotiate an agreement separately. A few unswayed by past corruption allegations, is unlikely days earlier, the CGT and the government to withdraw support now, and is sympathetic to also reached a deal that will see pensioners Kirchner’s claims that she is being politically and recipients of the AUH (Universal persecuted. All signs indicate CFK will continue to be Childcare Allowance) receive a bonus of a dominant force in the political landscape even if she ARS 1,000 (USD 67). does not run in next year’s legislative elections. The government is also reportedly government for the provinces, and the developing a plan to give a year-end bonus Macri administration has been of between ARS 2,500 and 3,000 (USD 167 leveraging this effectively to secure to 200) to the 150,000 lowest-earning support for policy priorities. government employees. It has been reported that provinces will not be required The government has said it will consider to give a bonus to workers, and the extending Congress’ sessions, which are national government has said it will not scheduled to end in late November, into earmark funds to help provinces with any December. These extra sessions would be payments. Several provinces have said used to finalize the budget, PPP and they will grant year-end bonuses, while electoral reform bills. They may also be some with more compromised fiscal used to finalize the capital markets reform, situations have said they will not. Given assuming it is submitted soon. That said, that 66 percent of state employees while the government will likely work in provinces that have said they succeed in getting these initiatives do not have cash on hand for bonuses, passed by year’s end, other initiatives, negotiations will be delicate. The final

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agreement is expected to be announced and Deputy, one recent poll showed former later this month. President Cristina Fernández de Kirchner

(CFK) and former presidential candidate

ARGENTINA

- The deal between the private sector, CGT Daniel Scioli polling at around 40 percent and government raised internal tensions in of intended votes, trailed by tickets

PCR PCR the CGT with hardline sectors opposed to comprised of Massa and GEN party head the deal, and the CGT has confirmed that it Margarita Stolbizer (21 percent) and of will join the more militant and leftist CTA Carrió and Jorge Macri (21 percent). Other union in a mobilization on November 18. recent polls have shown a more evenly split That said, the government continues to race. Polls of individual figures show that effectively manage its relationship with the Massa remains most popular pre- CGT; we believe that the threat of candidate in the province, followed by large-scale social unrest in the near CFK. Cambiemos lacks strong candidates future remains low. That said, while in the province, and its two potential political conditions are not currently in candidates, Carrió and Jorge Macri, poll low place for a strike, if economic indicators in a theoretical Senate race. However, do not improve, pressure will increase. Cambiemos Governor María Eugenia Vidal remains among the most popular Looking ahead to 2017 politicians in the country (approval ratings of about 66 percent), and it is possible that The Executive Committee of the her popularity could give a boost to Cambiemos coalition—comprised of Macri’s Cambiemos’ candidates in the province. PRO party, the UCR and Elisa Carrió’s Civic Coalition—on October 27 relaunched their alliance ahead of next year’s midterm Voter intention for elections. This allowed the alliance to Senator/Deputy in BA demonstrate its unity following a Province* dispute in which Carrió broke with the bloc over a bill that would have reformed the CFK-Scioli public prosecutor’s office. A week later, the PRO party’s Executive Council met in Buenos Aires Province to begin defining the Carrió-J.Macri party’s strategy for the elections, in which the province will be a key battleground. Massa-Stolbizer Although candidates have not yet been named, current polls show a three-way 0% 10% 20% 30% 40% 50% race in Buenos Aires province. In a theoretical match-up for provincial Senator Analogías Dicen and Deputy, one recent poll showed former

President Cristina Fernández de Note: Polls published November 4 (Analogías) and

Kirchner (CFK) November 7 (Dicen)

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