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) 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 May 4, 2018 POLITICAL CLIMATE REPORT IN THIS ISSUE Page 2 Argentina’s Central Bank has scrambled to contain the peso’s historic Tarifazos provoke social slump in recent days, hiking benchmark interest rates three times in unrest, critical response from the past week. The currency’s continued devaluation has forced a more legislators proactive response from the Macri administration, which called a rapid Page 3 press conference on May 4 to respond to the developments that have International visits, regional raised questions about the direction of economic policy. Meanwhile, developments implementing public service rate hikes — a cornerstone of President Page 5 Macri’s economic policy — continues to prove difficult as the public, Abortion reform and tarifazo political opposition and even members of Macri’s Cambiemos coalition dominate congressional agenda question the administration’s approach. These more urgent developments have slowed progress on the administration’s reform G20 update: Meetings in Washington, agenda, although the government continues to benefit from divided DC and Argentina opposition forces, and relatively low levels of social conflict. Page 6 Muted May Day commemorations as labor Central Bank scrambles to contain peso slump, hikes movement divisions linger benchmark interest rate to 40 percent Opposition still in turmoil, as all eyes turn to 2019 In an effort to stem rapidly rising inflation and the depreciation of the peso — which has dropped 17 percent against the dollar this year — on May 4, Argentina’s Central Bank announced a 6.75 percent increase in its benchmark interest rate to 40 percent. The increase was the second within 24 hours, and the third increase in one week. The Central Bank has made increasingly aggressive interventions in the foreign exchange market in recent weeks to stem the peso’s fall in value, selling almost ten percent of its reserves. The devaluation of the peso, combined with rising inflation, challenge the economic agenda of the Macri administration. Additionally, the government must now pursue an even more sizable fiscal tightening regime than planned to reassure investors. These developments have undoubtedly unsettled the population, as historic currency volatility and the 2001 financial crisis remain fresh in the minds of many Argentine citizens. For this reason, the exchange rate remains one of the most sensitive economic indicators for the public. In a press conference on the morning of May 4, Treasury Minister Nicolás Dujovne and Finance Minister Luis Caputo attempted to diffuse the situation, announcing a reduction in the administration’s deficit target from 3.2 percent of GDP to 2.7 percent. Initial market reactions to the changes were very positive, implying investors have been reassured that Argentina will take the necessary steps to meet economic targets, though the government now faces the difficult task of reassuring Argentines that its economic plan is on track. To date, the administration has Find more about our services Follow @CefeidasGroup Exchange rate - Argentine pesos per USD January 2, 2017 - May 3, 2018 ARGENTINA – 22.0 PCR 21.0 20.0 19.0 18.0 17.0 16.0 2-Jan-18 1-Feb-18 3-Mar-18 2-Apr-18 2-May-18 Source: Central Bank of Argentina demonstrated more effective coordination reduced and rates have increased of politics than economic policy, and it will significantly, especially in the City of have to tread carefully both to meet its Buenos Aires (CABA), where subsidies have economic goals and retain public support. traditionally been the most generous. Between 2015 and 2017 average electricity Tarifazos provoke social unrest, rates in CABA went up by 562 percent, critical response from legislators water by 338 percent and gas by 223 on all sides percent in nominal terms. Provinces have also seen significant increases, though less Striking a balance between meeting in percentage terms. economic goals and maintaining public support is further complicated by ongoing The rate hikes complicate one of the rate hikes for public services. Tarifazos, as administration’s main goals, lowering the public service rate hikes are known, inflation, which inches up with every have long provoked a strong public utility price increase. This increases the reaction, and the issue has once again come political costs of implementing tarifazos, as to the forefront as a 32 percent average consumers feel the pinch of spending more natural gas rate hike took effect on April 1, of their salaries on public services while also spurring a widespread social response. losing purchasing power to mounting Around the country, neighbors took to the inflation.1 The increases have outpaced streets with pots and pans for a ruidazo on increases in income: average utility April 18, and a day later, thousands joined expenses have mushroomed from 6 percent a candlelit march in Buenos Aires. of a minimum wage salary in 2015 to 21 percent in 2018. However, the Public services subsidies were a hallmark of administration has maintained a firm the Kirchner administrations, and position that the increases are necessary to maintaining frozen end user utility prices improve the country’s fiscal balance and ballooned to cost 3.6 percent of GDP by promote investment in infrastructure to 2015. Since the Macri administration took deliver public services. office, subsidies have gradually been 1 Inflation for the first trimester of the year reached 6.7 percent, almost half of the government’s 15 percent target for 2018. 2 To limit the impact on inflation, the government has aimed to concentrate International visits, regional the increases in the first half of the developments ARGENTINA year (though additional rate hikes are also – planned in the coming months). However, On April 25-26, Chilean President Sebastián Piñera traveled to Argentina in his first official PCR concentrating the rate increases in the first state visit since assuming the presidency in March half of the year also has a political — a sign of the priority given to the bilateral motivation — as the increases are relationship. During the visit, Macri and Piñera deeply unpopular, the government announced they would send the trade agreement prefers to implement them as far signed between the countries in November to their respective legislatures within 15 days. The ahead of the 2019 elections as agreement is significant for a number of reasons: possible. This also provides the it eliminates bureaucratic obstacles to trade and government with more time to show allows companies from both countries to improvements in economic indicators participate in public bidding processes in either country. It also brings the trade blocs of the Pacific ahead of the vote. Alliance (Chile, Colombia, Mexico and Peru) and Mercosur (Argentina, Brazil, Paraguay and Opposition legislators — including former Uruguay) closer together. President Cristina Fernández de Kirchner (CFK), who currently serves as a senator — As Mercosur and the Pacific Alliance seek further cooperation, Unasur (the Union of South American have seized on the political unpopularity of Nations) is splitting down the middle. Six of the the tarifazos and were quick to criticize the countries that make up the regional organization most recent increases, introducing a series — Argentina, Brazil, Chile, Colombia, Peru and of bills to freeze or slow rate hikes. Paraguay — have suspended their membership. The other member countries — Venezuela, However, the tariff increases also elicited Bolivia, Ecuador, Uruguay, Guyana and Suriname critical responses from Macri’s own — remain active. Unasur was founded by former Cambiemos coalition. Mendoza Governor leftists presidents in Argentina, Venezuela and Alfredo Cornejo, head of the Unión Cívica Brazil to counterbalance the weight of US influence in the region. Since his election, Macri Radical (UCR) Party — a key Cambiemos has prioritized Mercosur over Unasur, and coalition member, criticized the increases ideological differences between the member as too fast moving and attacked national nations have intensified. In addition to Energy and Mining Minister Juan José organizational problems and doubts regarding the bloc’s efficacy, leaving Unasur is another way of Aranguren directly, citing the minister’s cutting ties with the Maduro regime in Venezuela, recent admission that he continues to hold which Macri has forcefully condemned. financial assets outside of the country because of a lack of confidence in Separately, Prime Minister Mariano Rajoy arrived in Buenos Aires on April 9 for Spain’s first official Argentina’s economy. National Deputy Elisa visit to Argentina since 2007. The visit is the first Carrió, another important Cambiemos since former Argentine President Cristina coalition member, also criticized the Fernandez de Kirchner strained relations by re- increases. nationalizing oil company YPF against majority owner Repsol’s wishes. During the state visit, Rajoy expressed confidence that Mercosur and the Government response European Union would successfully negotiate a free trade agreement in the near future. Rajoy Responding