Argentina Press Clips – Dec 18, 2015


1. ARGENTINA’S NEW PRESIDENT IS ALREADY CHANGING EVERYTHING (The Washington Post)

2. WINNERS AND LOSERS OF ARGENTINE CURRENCY DEVALUATION (The Washington Post)

3. PESO TUMBLES AFTER DOLLAR LIMITS ARE LIFTED (The Washington Post)

4. CURRENCIES: ARGENTINE PESO SINKS AFTER CONTROLS LIFTED (The Wall Street Journal)

5. A CRYING SHAME ABOUT ARGENTINA (The Wall Street Journal Blog)

6. ARGENTINE PESO FALLS BY ALMOST A THIRD AS CONTROLS ARE LIFTED (Financial Times)

7. ARGENTINE PESO: A 30% DROP BUT NO PANIC THIS TIME (Financial Times)

8. NO MAD RUSH FOR DOLLARS SEEN IN ARGENTINA AFTER PESO DEVALUATION (Bloomberg News)

9. PESO SLUMPS 30% AS MACRI PROPELS ARGENTINA INTO NEW CURRENCY ERA (Bloomberg News)

10. ARGENTINE DEVALUATION TO GET $2.4 BILLION FROM CROPS BY YEAR-END (Bloomberg News)

11. U.S. JUDGE URGES ARGENTINA TO SETTLE BOND LITIGATION (Reuters News)

12. ARGENTINA LIFTS CONTROLS ON THE PESO (The Economist)

13. ARGENTINA RISK: RISK OVERVIEW (Economist Intelligence Unit – Risk Briefing)

14. ARGENTINA RISK: ALERT – RISK SCENARIO WATCHLIST (Economist Intelligence Unit – Risk Briefing)

15. ARGENTINA’S NEWLY ELECTED PRESIDENT COMMITTED TO PRO-BUSINESS AGENDA, BUT TRANSITION COULD
BE SLOWED BY SERIOUS MACROECONOMIC IMBALANCES (IHS Global Insight Daily Analysis)

16. MOODY’S: ARGENTINA’S RAPID POLICY CHANGES ARE CREDIT POSITIVE; BUT WILL BRING NEAR-TERM CHALLENGES (Moody’s Investors Service Press Release)

17. ARGENTINE PESO DEVALUATION SEEN SPURRING SOYBEAN EXPORT INCREASE (Reuters News)

18. ARGENTINA LAUNCHES 3 NEW IXPS (Business News Americas)

1. ARGENTINA’S NEW PRESIDENT IS ALREADY CHANGING EVERYTHING (The Washington Post)
By Joshua Partlow
December 17, 2015

MEXICO CITY — After he named two Supreme Court justices, slashed export taxes, ended a controversial agreement with Iran, called the pope to wish him a happy birthday and caused the Argentine peso to lose nearly a third of its value against the dollar, Mauricio Macri now faces this question: What’s he going to do in his second week?

Macri was sworn in as Argentina’s president on Dec. 10 in a ceremony that was boycotted by the outgoing leader, Cristina Fernández de Kirchner, and since then has launched himself on a mission to reverse many of Fernández’s defining economic and political moves. His eventful first week ended with the biggest change of all, a lifting of currency controls and the biggest devaluation of the peso in years.

Macri’s moves, many of them telegraphed in his campaign, are intended as part of his pro-business agenda to attract more foreign investment and improve relations with the United States, Europe and Latin America. In the process, he’s reversing the direction Argentina has taken in the past 13 years under President Néstor Kirchner and then his wife, who increased the role of the state in the economy, nationalized companies and increased subsidies to the poor.
They also aligned themselves more with with the anti-American left in Latin America, such as Venezuela and Cuba.

As Graciela Mochkofsky wrote in the New Yorker, Macri has stacked his cabinet with former chief executives and other corporate executives, part of his push to make Argentina more attractive to businesses.

By getting rid of currency controls — Argentina for the past four years had limits on the sale of U.S. dollars — and letting the peso float, Macri’s administration hopes to revive an economy that has suffered from high inflation, government corruption and a lack of confidence in the accuracy of government statistics.

The peso on Thursday fell from what had been the official rate of about 9 pesos to the dollar to about 14 pesos per dollar, around the rate that the black market had already established for its value. The big worry in the days ahead is whether the peso will continue to fall erratically or the devaluation will accelerate inflation.

Macri has made several other big moves in his few days as president. He cut most of the taxes paid by agricultural exporters, an important part of the economy in Argentina. He named two Supreme Court justices by decree, avoiding the normal process of Senate approval, which caused protests. But then it appeared their appointments would be postponed.

Macri’s administration also said it would not abide by an agreement made by Fernández to jointly investigate with Iran the country’s worst terrorist attack, the 1994 bombing of a Jewish community center in Buenos Aires. Former Iranian officials have been charged in Argentine courts for participating in the attack, and Interpol in 2007 issued several arrest warrants. Many Argentines felt the agreement — which Fernández’s administration argued was the only path left to find justice — ensured the truth would never come to light.

That case was at the heart of one of the main scandals of the Fernández era, the mysterious death of prosecutor Alberto Nisman, whose body was found in his apartment just before he was to testify on his accusations that Fernández had conspired with Iran.

On Thursday, the investigating prosecutor, Viviana Fein, was removed from the stalled case, and the judge in charge said she was personally going to lead the investigation.

2. WINNERS AND LOSERS OF ARGENTINE CURRENCY DEVALUATION (The Washington Post)
By Peter Prengaman 
December 17, 2015

BUENOS AIRES, Argentina — A look at the winners and losers from the sharp devaluation of Argentina’s peso Thursday following the lifting of currency controls:

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EXPORTERS (Winners)

Any business that exports is likely celebrating. The previous administration of President Cristina Fernandez overvalued the peso with a fixed exchange rate. The last year, that fixed rate was around 9 pesos to the dollar while on the black market a dollar fetched up to 16 pesos. Because international markets are largely conducted in dollars, and all business in Argentina was done at the official exchange rate, exporters experienced a constant “haircut” in the payments for their products.

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CONSUMERS (Losers)

Even before the devaluation, annual inflation was estimated at around 30 percent. Since Mauricio Macri won the Nov. 22 presidential election, prices rose even more than usual as businesses got ready for the devaluation. Foreign Minister Alfonso Prat-Gay said Wednesday that the government aimed to get businesses to maintain the same prices they had at the end of November, but many Argentines are skeptical.

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REAL ESTATE (Winners)

Because of the gap between the official exchange rate and black market rate, property transactions had become increasingly difficult the last several years. Sellers based their prices in dollars, but buyers had limited access to dollars because of the currency controls. What’s more, because of Argentina’s high inflation, property loans are rare and almost always come with eye-popping interest rates.

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ILLEGAL CURRENCY TRADERS (Losers)

The byzantine currency system spawned an industry that employed thousands of people to buy and sell currencies on the black market. At one end were the young men and women who hung around tourist areas and shouted “Change your dollars!” At the other end, high-level business people moved millions of dollars in illegal exchange houses called “cuevas,” or “caves.”

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INTERNATIONAL INVESTORS (Winners)

In general, the currency restrictions made Argentina a tough place to do business. Imagine you were an American who wanted to invest $1 million in an Argentine business. Because all banking transactions had to be done at the official rate, your initial investment was worth about 9 million pesos, which meant a haircut on your deposit from the start. Getting your profits out of the country was also difficult because of the restrictions.

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EXPORTERS (Winners)

Any business that exports is likely celebrating. The previous administration of President Cristina Fernandez overvalued the peso with a fixed exchange rate. The last year, that fixed rate was around 9 pesos to the dollar while on the black market a dollar fetched up to 16 pesos. Because international markets are largely conducted in dollars, and all business in Argentina was done at the official exchange rate, exporters experienced a constant “haircut” in the payments for their products.

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CONSUMERS (Losers)

Even before the devaluation, annual inflation was estimated at around 30 percent. Since Mauricio Macri won the Nov. 22 presidential election, prices rose even more than usual as businesses got ready for the devaluation. Foreign Minister Alfonso Prat-Gay said Wednesday that the government aimed to get businesses to maintain the same prices they had at the end of November, but many Argentines are skeptical.

___

REAL ESTATE (Winners)

Because of the gap between the official exchange rate and black market rate, property transactions had become increasingly difficult the last several years. Sellers based their prices in dollars, but buyers had limited access to dollars because of the currency controls. What’s more, because of Argentina’s high inflation, property loans are rare and almost always come with eye-popping interest rates.

___

ILLEGAL CURRENCY TRADERS (Losers)

The byzantine currency system spawned an industry that employed thousands of people to buy and sell currencies on the black market. At one end were the young men and women who hung around tourist areas and shouted “Change your dollars!” At the other end, high-level business people moved millions of dollars in illegal exchange houses called “cuevas,” or “caves.”

___

INTERNATIONAL INVESTORS (Winners)

In general, the currency restrictions made Argentina a tough place to do business. Imagine you were an American who wanted to invest $1 million in an Argentine business. Because all banking transactions had to be done at the official rate, your initial investment was worth about 9 million pesos, which meant a haircut on your deposit from the start. Getting your profits out of the country was also difficult because of the restrictions.

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TOURISTS (Losers)

Argentina is one of the most visited nations in South America, with several million tourists coming each year to enjoy tango dancing to rodeo shows to typical barbeques. Most bring in dollars, euros or reais, the currency of neighboring Brazil. In recent years, many tourists eagerly traded their cash on the black market and got a much higher rate. With the peso floating freely, tourists no longer enjoy a more favorable rate as a cushion against Argentina’s rising prices.

3. PESO TUMBLES AFTER DOLLAR LIMITS ARE LIFTED (The Washington Post)
18 December 2015

Argentina’s currency sharply devalued against the U.S. dollar on Thursday as the new administration lifted deeply unpopular limits on the buying of foreign currencies, a major change that will expose Latin America’s third-largest economy to international market forces in ways not seen in more than a decade.

The devaluation, frequently hinted at by new President Mauricio Macri, could exacerbate already soaring prices and spook Argentines.

Minutes after exchange houses and banks opened Thursday, the peso traded at about 15 to one U.S. dollar. The peso ended the day at about 13.40. Over the past year, the government has kept the official rate fixed around 9.

Attempting to stop capital flight, the preceding administration of President Cristina Fernà¡ndez de Kirchner instituted the restrictions on buying foreign currency in 2011. People who wanted to buy dollars, a common practice in a South American country with a long history of financial collapses, had to meet several requirements. Businesses, especially those needing to deal in dollars, were deeply affected.

Although the Fernà¡ndez administration insisted that dollars coming into the country trade at the official rate, getting dollars out at that rate, if at all, proved difficult. The result was an often baffling system of multiple official exchange rates.

With the devaluation, the biggest fear is that inflation – estimated at about 30 percent – will worsen. There are also concerns that the lifting of currency rules could lead to a run on banks by Argentines eager to buy dollars.

4. CURRENCIES: ARGENTINE PESO SINKS AFTER CONTROLS LIFTED (The Wall Street Journal)
By Taos Turner
18 December 2015

BUENOS AIRES — Argentina’s peso lost more than a quarter of its value against the U.S. dollar Thursday, a day after the new government of President Mauricio Macri said it would lift currency controls to attract investors and kick-start the economy.

Within minutes of trading, the peso weakened to 13.9 per dollar from 9.8 the previous day, its biggest percentage decline since January 2002, following the abandonment of the peso-dollar parity. The move lower will hit multinationals that operate in Argentina and ordinary Argentines who will see the value of their savings cut in dollar terms.

Late Thursday in New York, the dollar bought 13.3085 pesos, from 9.8164 pesos late Wednesday, down 26% on the day and 36% for the year.

Economists had expected Argentina’s currency to weaken following Wednesday’s news that the government was ending a four-year policy of strict limits on the sale of U.S. dollars, a policy that restricted imports, hurt economic growth and spawned a thriving black market in the currency. The previous black-market rate on Wednesday was about 14.50 pesos to the dollar.

In the days since he took office, Mr. Macri has moved quickly to undo the economic legacy of 12 years of populist policies by his predecessors, Cristina Kirchner and her late husband, Nestor. The pair expanded the government’s role in the economy, including nationalizing some companies, expanding subsidies and launching price controls.

Mr. Macri’s administration has eliminated most farm export taxes, cut personal income taxes, begun restaffing Argentina’s discredited statistics agency, and replaced the central-bank president.

But scrapping currency controls is the biggest move so far and one that will shape the coming months of his administration.

The decision to let the peso float is aimed at sparking growth by getting Argentina’s agribusiness sector to start exporting again due to a more competitive exchange rate. Those exports will bring badly needed dollars to the country. It also is aimed at giving a jolt of confidence to investors.

The key in coming days will be whether the central bank can prevent the currency from sliding further and entering an unpredictable tumble. To keep the lid on price increases and attract investment, Argentina’s central bank on Tuesday raised its benchmark rate as high as 38%.

“We are still going through the process of price discovery,” said Goldman Sachs economist Alberto Ramos. “The fact that there wasn’t a crazy move early in the morning to 15.50 or 16, and the central bank had to show its hand very quickly, is in itself evidence that they prepared the ground relatively well and communicated the move relatively well to make this a successful experiment.”

Argentina’s central bank said it didn’t intervene to support the peso on Thursday.

According to one currency trader, volume was low in U.S. dollar-peso trading due to problems that banks and other market makers had in reprogramming their operating software to accommodate new central-bank regulations. The trader said volume and demand will increase after these adjustments, adding he believes the peso will then fall further.

Other economists said they expected the move to succeed in the short term.

“I don’t expect to see strong pressures on the local currency over the short term, as an adjustment in the exchange rate to 14 or 15 pesos per dollar has been already assimilated,” said Jose Luis Machinea, who served as Argentina’s economy minister from 1999 to 2001.

“A lot will depend on inflationary pressures over the next two months, as the government has implemented several policy measures at once that could have a strong impact on prices, just as unions prepare for wage negotiations early next year,” he said.

Many ordinary Argentines said they anticipated the decline, which is expected to raise the country’s 25% inflation rate by making imports more expensive in local currency terms.

Retailers and their suppliers have been marking up prices in anticipation of a devaluation.

Retail prices rose 1.2% in the first week of December alone, the fastest clip since Argentina devalued the peso by 20% in January 2014, according to Elypsis, an economic research firm.

Still, the move to let the peso float freely is fraught with risks. For many in Latin America, the price of their currency in dollars is seen as a gauge of economic well-being.

“The losers from this are Argentine consumers that will now face a higher import bill, foreign investors that have assets in Argentine pesos — they’re the textbook losers — and Argentine companies that have dollar debts but revenue streams in Argentine pesos,” said Neil Shearing, chief emerging-markets economist at Capital Economics.

Argentina doesn’t have deep dollar reserves to defend the peso, by buying the currency to prop up its price against the greenback. Over the past four years, the central bank’s foreign-currency reserves have plummeted to about $24 billion from more than $52 billion.

5. A CRYING SHAME ABOUT ARGENTINA (The Wall Street Journal Blog)
By Spencer Jakab
Dec 17, 2015

While most Argentines are glad to see the back of Cristina Kirchner, who has presided over years of economic decline, those weren’t tears of joy they were shedding Thursday morning. The new government’s sharp devaluation of the peso may have formalized the “dolár blue” black market rate, but it also lopped tens of billions of dollars off of gross domestic product. The move caps off a stunning decline in per capita terms.

A little more than a century ago, Argentines were some of the wealthiest people on the planet by that measure, exceeding most modern European countries. As of now, the figure lies somewhere between $9,000 and $10,000 per capita. That makes Argentina worse off than neighboring and traditionally poorer Brazil, but also Gabon, Mexico and Turkey, according to World Bank data. And Argentina’s people are now a quarter poorer than those of the ex-Soviet republic of Kazakhstan, which is far from “greatest country in the world.”

Jagshemash!

6. ARGENTINE PESO FALLS BY ALMOST A THIRD AS CONTROLS ARE LIFTED (Financial Times)
By Daniel Politi in Buenos Aires
December 17, 2015

The Argentine peso fell by as much as 30 per cent against the dollar on Thursday after Mauricio Macro, the country’s newly elected president, lifted capital controls late on Wednesday night.

But there was little sense of the market panic that followed the last devaluation in January 2014 when Mr Macri’s predecessor Cristina Fernández de Kirchner allowed the currency to devalue by 13 per cent in just 48 hours.

That is because unlike previous devaluations, the unwinding of capital controls was understood by the market as a key — albeit painful — part of Mr Macri’s plan to open and reform Argentina’s ailing economy.

“The market is very calm as the new rates make sense,” said Fernando Izzo, director at ABC Cambios, a wholesale foreign exchange brokerage. “There are no surprises for anyone.”

The move to undo what was popularly referred to as the “dollar clamp” is the biggest step taken yet by Mr Macri toward opening up Argentina’s economy since he was sworn-in as president on December 10.

The wholesale market closed at 13.4 pesos to the dollar, implying a devaluation of 27 per cent. The retail market closed at 14 pesos to the dollar, implying a devaluation of 30 per cent. But there were few operations, with most banks and foreign exchange houses not operating in the foreign currency market.

“This is a much smaller devaluation than what we were expecting,” said Alejo Costa, chief of research at Puente, a local brokerage. “It’s a reflection of just how optimistic the market is right now.”

Gustavo Quintana, a broker at PR Casa de Cambios, a local foreign exchange brokerage, said the true exchange rate against the dollar would not be know until next week. In the meantime, volatility would continue.

“Dollars came in but there were very few importers participating in the market because they have yet to adjust to the new rules,” he said. Some analysts say the peso still has room to fall.

The total amount traded was $129m compared to some $250m on an average day and the wholesale market was volatile, going as low as 11 pesos per dollar at one point.

The current rate actually puts the peso at a stronger footing than the 14.5 pesos per dollar level the currency was trading at in the black market the day before.

http://im.ft-static.com/content/images/0bb84712-a4ed-11e5-a91e-162b86790c58.img

Bank of America Merrill Lynch cheered the move. Analysts at the bank raised the recommendation for the country’s bond investments to “overweight”.

“We expect a fast correction of external imbalances, after the recent FX [foreign exchange] announcements, and an agreement with the [creditor] holdouts by 3Q16,” said the bank, referring to a group of creditors who have been battling for full payment on Argentine bonds after rejecting debt restructurings.

One of Mr Macri’s challenge now is to make sure that the devaluation does not lead to a spiralling of already high inflation. To that end, finance minister Alfonso Prat-Gay has made clear that the central bank will be intervene if it thinks the peso is falling too much too fast in what he described as a “dirty float” system.

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7. ARGENTINE PESO: A 30% DROP BUT NO PANIC THIS TIME (Financial Times)
December 17, 2015

All things considered, the Argentine peso is doing ok.

As expected, the peso plunged 30 per cent against the dollar on Thursday after the country’s newly elected president, Mauricio Macro, lifted capital controls late Wednesday night. The dollar is fetching between 13.90 and 14 pesos, compared to 9.8 pesos per dollar yesterday.

But there is little sense of the panic that followed the last devaluation in January 2014 when Mr Macri’s predecessor, Cristina Fernández de Kirchner, allowed the currency to devalue by 13 per cent in 48 hours.

That’s because the unwinding of capital controls is understood as a key, albeit painful, part of Mr Macri’s plan to open and reform Argentina’s ailing economy. Tough medicine, reports Daniel Politi.

“The market is very calm as the new rates make sense,” said Fernando Izzo, director at ABC Cambios, a wholesale foreign exchange brokerage. “There are no surprises for anyone.”

With two-and-a-half hours of operation, only $8m had been traded in the wholesale market, compared to $50m on a normal day, according to Rizzo. Some $250m is traded on an average day.

The current rate actually puts the peso at a stronger footing than the 14.5 pesos per dollar level the currency was trading at in the black market yesterday.

At retail banks, the dollar is being sold at around 14.20 pesos after opening the day at 15. But analysts cautioned that was more a reflection of a lack of information on the market than a real value. Many retail banks were not even carrying out foreign-exchange purchases as they adapt their systems to a spate of new regulations issued late last night by the Central Bank.

The move to undo what was popularly referred to as the “dollar clamp” is the biggest step yet by Mr Macri toward opening up Argentina’s economy since he was sworn-in as president on December 10.

Bank of America Merrill Lynch is already cheering the move. Analysts at the bank raised their recommendation for the country’s bonds to overweight.

We expect a fast correction of external imbalances, after the recent FX announcements, and an agreement with the holdouts by 3Q16.

One of Mr Macri’s challenges now is to ensure the devaluation doesn’t lead to a spiralling in the already high inflation rate. To that end, finance minister Alfonso Prat-Gay has made clear the central bank will intervene if it thinks the peso is falling too fast in what he described as a “dirty float” system.

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8. NO MAD RUSH FOR DOLLARS SEEN IN ARGENTINA AFTER PESO DEVALUATION (Bloomberg News)
By Carolina Millan
December 17, 2015

* Finance minister says dollar supply outpaced demand in market
* Currency declined less than expected, below black market rate

Argentina’s finance minister declared the first day of a free-floating peso a success, saying its decline was in line with his expectations and showed there’s no outsize demand for dollars in the country.

“We’ve very calm,” Finance Minister Alfonso Prat-Gay told reporters in Buenos Aires.

Argentina’s peso tumbled as much as 30 percent after President Mauricio Macri lifted currency controls to fulfill campaign pledges to kick start economic growth by implementing free-market policies. The decline, which moderated to 27 percent by the end of the day, brought the peso’s official value closer in line with where it traded in the unregulated markets that Argentines used to skirt the controls.

“It was a highly telegraphed move, so it happened very smoothly,” said Daniel Freifeld, a partner at Callaway Capital Management, who invests in Argentina. “The biggest risk is that there would be hesitation or some halting transition.”

Freifeld said the peso’s closing price of 13.4 per dollar on the local electronic exchange was stronger than the range of 14 to 15 that he had expected.

Prat-Gay said $45 million was traded in the official currency market, of which $20 million were grain exporters selling greenbacks to buy crops. The central bank didn’t intervene in the currency market and more than $300 million of open bids were left for tomorrow, the monetary authority said in an e-mailed statement. Reserves fell $14 million to $24.1 billion, the smallest decline since Macri took office about a week ago.

The central bank on Tuesday raised yields on its shortest-maturity notes to as high as 38 percent in the first weekly auction overseen by bank President Federico Sturzenegger in a bid to stoke demand for peso assets. A benchmark deposit rate known as Badlar rose to 27.4 percent on Wednesday, the highest since October 2002.

The free float carries risks, with a weaker currency potentially exacerbating inflation already estimated to be running at 25 percent and spurring a backlash from Argentines who see the value of their savings sink in dollar terms.

Morgan Stanley estimates that a quick devaluation of the peso may lead inflation to accelerate by about 10 percentage points to 35 percent in 2016. Economic growth, which has been largely stagnant the past four years, is expected to expand 0.6 percent in 2016 before jumping 3.6 percent the following year, according to the median estimate of 20 economists surveyed by Bloomberg.

Argentine bank stocks rallied while dollar bonds due 2033 rose 1.3 cent to a three-week high of 113.73 cents on the dollar. Three-month non-deliverable forwards weakened 1.4 percent to 14.45 pesos per dollar.

Argentina expects between $15 billion and $25 billion in inflows over the next month to bolster foreign reserves currently at a nine-year low. The government struck an accord with grain exporters to bring in $400 million a day for the next three weeks and expects to raise more than $5 billion in financing from banks who will purchase a central bank note, Prat-Gay said on Wednesday. At the same time, the central bank will convert the equivalent of $3.1 billion of yuan obtained in a currency swap with China into U.S. dollars to boost liquidity in reserves.

Exchange houses in downtown Buenos Aires were calm. Activity on Calle Florida, one of the city’s busiest pedestrian shopping streets and epicenter of street currency trading, was muted. Many exchange houses were still awaiting instructions from the central bank.

Until Thursday, Argentines had to seek tax-agency approval to buy a limited amount of dollars for travel or savings. If those options failed, individuals turned to a black market where the peso traded much weaker than the official rate. The tracking of the black market rate had become an obsession in the country with its value displayed prominently on television news programs and on front pages of the country’s main newspapers.

Macri scrapped taxes on beef, corn and wheat exports while reducing a tax on soybean exports earlier this week. That, along with the devaluation, may prompt farmers to sell as much as $11.4 billion worth of grains that were held back in expectation of a weaker peso.

“It’s a positive start that should help instill a confidence shock and anchor investor expectations, at least on the short term,” said Patrick Esteruelas, a senior sovereign analyst at EMSO Asset Management, which oversees $2.6 billion. “In the medium term, people will be watching to see what’s the inflationary and sociopolitical impact, and whether it will affect this administration’s ability to continue to govern.”

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9. PESO SLUMPS 30% AS MACRI PROPELS ARGENTINA INTO NEW CURRENCY ERA (Bloomberg News)
By Carolina Millan
December 17, 2015

* Currency plunges to 13.95 per dollar in early trading
* Free float seen as key part of Macri’s plan to spur growth

Argentina’s peso tumbled as much as 30 percent as newly inaugurated President Mauricio Macri fulfilled his campaign promise of letting the currency float freely.

Macri’s push for a devaluation was a key part of the economic overhaul he says is needed to lure investment that can jump-start an economy suffering from lackluster growth, inflation estimated at 25 percent and a shortage of dollars. The decline brought the official rate closer in line with where the peso had been trading in unregulated markets.

The move also carries risks, with the plunge potentially leading to skyrocketing consumer prices and a backlash from Argentines who see the value of their savings sink in dollar terms. Finance Minister Alfonso Prat-Gay, in announcing the move to end the central bank’s support for the peso and currency controls that limited the ability of Argentines to buy dollars, said Wednesday that the central bank is ready to intervene should declines in the peso spiral out of control. In addition, Argentina expects between $15 billion and $25 billion in inflows over the next month to bolster reserves.

“It’s a positive start that should help instill a confidence shock and anchor investor expectations, at least on the short term,” said Patrick Esteruelas, a senior sovereign analyst at EMSO Asset Management, which oversees $2.6 billion. “In the medium term, people will be watching to see what’s the inflationary and sociopolitical impact, and whether it will affect this administration’s ability to continue to govern.”

The peso weakened 29 percent to 13.89 per dollar as of 12 p.m. in Buenos Aires on the MAE electronic trading platform. On the black market, which Argentines used to skirt the controls that limited their ability to buy greenbacks, the currency had most recently traded at about 14.6 pesos per dollar. Three-month non-deliverable forwards gained 1.5 percent to 14.87 pesos per dollar.

The Merval benchmark stock index rose 1.8 percent led by banks Banco Macro SA, Grupo Financiero Galicia SA and food maker Molinos Rio de la Plata SA. Dollar bonds due 2033 rose 1.1 cent to 113.54 cents on the dollar while the yield on benchmark 2024 notes fell 4 basis points to 8.28 percent.

“Lifting the currency controls means lifting the hurdles that have been restraining the economy for years,” Prat-Gay told reporters in Buenos Aires. “This is going to kickstart the economy and put it on the path of growth.”

The Argentine government struck an accord with grain exporters to bring in $400 million a day for the next three weeks and expects to raise more than $5 billion in financing from banks who will purchase a central bank note, Prat-Gay said on Wednesday. At the same time, the central bank will convert the equivalent of $3.1 billion of yuan obtained in a currency swap with China into U.S. dollars to boost liquidity in reserves.

Macri took office Dec. 10 in a country with foreign reserves at a nine-year low and a limited ability to borrow overseas because of a legal dispute with creditors who declined offers to restructure bonds left over from the country’s 2001 default. Macri has said he intends to seek talks with the so-called holdouts to regain access to capital markets. Argentina defaulted for a second time in 13 years in 2014 after the government refused to abide by a U.S. court order to repay the bondholders.

Advocates of a free-floating exchange rate have argued that Macri’s best bet to bring dollars into the country would be to devalue the peso, which would encourage farmers to sell hoarded crops that they’ve withheld from markets as they await better prices and also fuel inflows from foreign investors and businesses.

“This is a significant and bold step toward the correction of the main price distortion currently affecting the economy, and more importantly toward the implementation of a sound, sustainable and credible policy framework,” Mauro Roca, a New York-based economist at Goldman Sachs Group Inc., wrote in a report.

On Monday, Macri scrapped taxes on beef, corn and wheat exports and reduced a tax on soybean exports. The country’s farmers are ready to ship an estimated $8 billion in stored crops, according to five farmers, analysts and exporters interviewed by Bloomberg after the election. A devaluation would further help farmers trying to sell abroad.

Morgan Stanley estimates that quick devaluation of the peso may lead inflation to accelerate to 35 percent in 2016. Economic growth, which has been largely stagnant the past four years, is expected to expand 0.6 percent in 2016 before jumping 3.6 percent the following year, according to the median estimate of 20 economists surveyed by Bloomberg.

The central bank on Tuesday raised yields on its shortest-maturity notes to as high as 38 percent in the first weekly auction overseen by bank President Federico Sturzenegger in a bid to stoke demand for peso assets. A benchmark deposit rate known as Badlar rose to 25.8 percent on Tuesday, the highest since April 2014.

“I think there is still room for further ARS weakness ahead, but Macri is making all the right moves to get the nation back on track from a medium-term viewpoint,” Win Thin, head of emerging-market strategy at New York-based Brown Brothers Harriman & Co., said in an e-mail. “Short-term, think there is a lot of pain still to be felt.”

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10. ARGENTINE DEVALUATION TO GET $2.4 BILLION FROM CROPS BY YEAR-END (Bloomberg News)
By Pablo Rosendo Gonzalez and Carolina Millan
December 18, 2015

* Peso plunge prompts exports of hoarded soybeans, corn
* Shipments on pace for $400 million a day under new accord

Grain exports from Argentina, the world’s third-largest shipper of corn and soybeans, will add $2.4 billion to the country’s foreign reserves by year-end after the new administration allowed the biggest one-day peso devaluation in the last 14 years Thursday.


Argentina’s peso tumbled as much as 30 percent on Thursday as newly inaugurated President Mauricio Macri fulfilled his campaign promise of letting the currency float freely. Finance Minister Alfonso Prat-Gay announced the lifting of four years of currency controls Wednesday saying that the government had reached a deal with exporters who pledged to export $400 million a day for a total of $6 billion over three weeks.

“Grain exporters couldn’t sell all the dollars they pledged as there were no buyers in the market,” Prat Gay told reporters at the presidential house. “They sold $20 million and the market traded $45 million on an abnormal day without a futures market.”

As of Thursday, Argentina had shipped $18 billion of grains and oilseed abroad this year, the lowest for the period since 2009, according to the exporters’ group data. The organization predicts exports will rise to $20.4 billion by year-end. The three-week period will carry over into the first week of January because the next two weeks are cut short by four Argentine Yuletide holidays.

Argentine farmers sold $437 million for exports in the last month, the group’s figures show.

On Monday, Macri announced the elimination of export taxes on crops, including corn and wheat, carrying through on a campaign pledge. The soybean tariff was cut by 5 percentage points. Argentine farmers were storing an estimated $11.4 billion of soybeans, corn and wheat to protest export taxes and the difficulty in obtaining export permits. They also were expecting the currency to be devalued.

Argentina expects its reserve to see an inflow of $15 billion to $25 billion over the next month. In addition to the accord with grain exporters, the central bank will convert the equivalent of $3.1 billion of yuan obtained in a currency swap with China into U.S. dollars to boost liquidity in reserves and is negotiating as much as $10 billion in loans from Wall Street banks.

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11. U.S. JUDGE URGES ARGENTINA TO SETTLE BOND LITIGATION (Reuters News)
By Nate Raymond
Dec 17, 2015

A U.S. judge on Thursday urged Argentina to resolve bondholder litigation stemming from its $100 billion default in 2002, in his first remarks on settlement talks following the South American nation’s election of a new president.

At a court hearing in Manhattan, U.S. District Judge Thomas Griesa urged Argentina and creditors suing over defaulted bonds to “make some attempt at that direction” after years of litigation that led the country to default again last year.

Griesa made no reference to the Nov. 22 election that brought to power Argentine President Mauricio Macri, who has it a priority to settle the dispute with creditors who rejected the terms of the country’s 2005 and 2010 bond restructurings a priority.

But Griesa said he wanted to put “some emphasis on the need to work on as prompt a resolution to this litigation as possible,” noting the dispute had been ongoing for “a very long time.”

“It is time to work toward a conclusion,” he said. “It is time.”
His comments came a week after a court-appointed mediator in the dispute, New York lawyer Daniel Pollack, confirmed he had met with Argentina’s new secretary of finance, Luis Caputo, who he said expressed the intention to commence settlement talks “promptly.”

Pollack at the time said he also met a week earlier with representatives of bondholders holding $10 billion in judgments against Argentina. No substantive negotiations to resolve the litigation occurred at either meeting, he said on Dec. 9.
The talks would be aimed at resolving litigation by holdout creditors spurned Argentina past debt restructurings, which resulted in 92 percent of its defaulted debt being swapped and investors being paid less than 30 cents on the dollar.

Argentina defaulted again in July 2014 after refusing to honor court orders to pay $1.33 billion plus interest to holdouts including Elliott Management’s NML Capital Ltd and Aurelius when it paid restructured bond holders.

Griesa, who has long overseen the litigation, in October extended similar relief to holders of several billions of dollars more in defaulted bonds.
The hearing on Wednesday focused on efforts by NML and Aurelius to subpoena three banks including Deutsche Bank AG and JPMorgan Chase & Co for information related to Bonar 2024 bonds the country issued in April.

The bondholders are seeking to determine if those bonds are subject to Griesa’s orders. Griesa made no ruling on the issue.

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12. ARGENTINA LIFTS CONTROLS ON THE PESO (The Economist)
Dec 17, 2015

By floating the currency, the government has moved a step closer to normalising the troubled economy

IN RECENT years el cepo (or “the clamp”) has made life uncomfortable for Argentines. Introduced by Cristina Fernández de Kirchner’s government in November 2011, currency controls made it almost impossible for ordinary Argentines to purchase dollars, preferred by savers to the inflation-prone peso. The measure was designed to protect the government’s stock of foreign reserves. But it resulted in the creation of a parallel foreign-exchange market. Instead of exchanging money through official channels, Argentines sold pesos at the “blue-dollar” rate. This week it was 14.5 pesos to the dollar, compared with an official exchange rate of 9.9.

On December 16th Alfonso Prat-Gay, the finance minister named by Argentina’s new centre-right president, Mauricio Macri, announced that he would lift el cepo immediately, allowing the peso to float freely. He had little choice. Exporters were hobbled by the overvalued peso. Importers could not obtain dollars, which starved factories of supplies. Instead of shoring up foreign-exchange reserves, the clamp forced the central bank to spend them to defend the official exchange rate. “The objective is to get the wheel turning again,” said Mr Prat-Gay as he announced its removal.

But it comes with a risk: an uncontrolled devaluation of the peso that could push inflation much higher. Axel Kicillof, the finance minister in Ms Fernández’s government, denounced the lifting of currency controls as “a blow to the pockets of workers.” In trading following the announcement, the peso fell by 29% to 13.9 per dollar.

The measure marks the beginning of Mr Macri’s programme to normalise the economy after a dozen years of populism under Ms Fernández and her late husband, Néstor Kirchner, who preceded her as president. The new president has inherited inflation running at around 25% a year, a fiscal deficit forecast to reach 7% of GDP by the end of the year and depleted foreign-exchange reserves. “The country was in a situation where it couldn’t continue without a resolution,” says Maximiliano Castillo, director of ACM, an economic consultancy.

The unclamping of foreign exchange will bring immediate benefits. Farmers had been hoarding grain—in sacks 60 metres (200 feet) long—in response to steep tariffs imposed by Ms Fernández’s government and in anticipation of the peso’s devaluation. On December 14th Mr Macri scrapped tariffs on agricultural products such as wheat, beef and corn and reduced from 35% to 30% the tariff on soya, Argentina’s biggest export. The lifting of currency controls will further encourage exports of hoarded grain. Grain exporters assured Mr Prat-Gay that sales will bring in $400m a day over the next few weeks.

Multinationals operating in Argentina will also get relief. In November American Airlines—which flies 27 times a week to Buenos Aires—stopped selling tickets in pesos because it was not allowed to repatriate the earnings. Coca-Cola, Clorox and Telefónica faced the same problem. That should now change. But companies’ current peso holdings will take a hit from the devaluation. Some, such as Prosegur, a Spanish security firm, have tried to protect the value of their peso holdings in recent months by buying property.

When announcing the removal of exchange controls Mr Prat-Gay would not be drawn on how far he thought the peso would depreciate. Economists guess it will fall to close to its blue-dollar rate. Since Mr Macri’s election victory on November 22nd, his finance team has been working behind the scenes to replenish dollar reserves ahead of the devaluation. The government expects to raise $15-25 billion over the next month from international banks and other sources. The central bank has also converted to dollars $3.1 billion-worth of its holdings of yuan, which it obtained in a currency swap with China. The hope is that the fresh supply of dollars will stop the peso from “overshooting” the rate of 15 per dollar.

The economic credibility of Mr Macri and his market-minded ministers will help contain the currency’s decline. If “the devaluation started to unravel more quickly than they were comfortable with then there is substantial goodwill in the market”, says Neil Shearing, chief emerging-markets economist of Capital Economics, a research firm. “Credit lines could be extended. There are ways in which they could probably start to stabilise the currency through swaps.”

But that may not be enough. On December 15th the central bank raised interest rates on short-term fixed deposits by 8 percentage points to 38%. They may have to rise further to stabilise the peso and contain inflation. To show his commitment to such containment, and to reduce upward pressure on interest rates, Mr Macri will soon have to begin cutting the enormous budget deficit. This will hurt economic growth, which is already weak. Tightening the belt may prove more painful than releasing the clamp.

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13. ARGENTINA RISK: RISK OVERVIEW (Economist Intelligence Unit – Risk Briefing)
17 December 2015

RISK RATINGS Current Current Previous Previous
Rating Score Rating Score
Overall assessment C 58 D 64
Security risk C 43 C 43
Political stability risk C 50 C 50
Government effectiveness risk C 46 D 61
Legal & regulatory risk C 52 D 72
Macroeconomic risk E 90 E 100
Foreign trade & payments risk D 61 D 75
Financial risk D 62 D 62
Tax policy risk D 62 D 69
Labour market risk D 64 D 64
Infrastructure risk C 47 C 47
Note: E=most risky; 100=most risky.The risk ratings model is run once a quarter.

OVERALL ASSESSMENT

Argentina’s rating for the 2016-17 outlook period improves from a D to a C, reflecting our assumption that the new centre-right government, led by President Mauricio Macri, moves to address macroeconomic imbalances and restore confidence in policymaking and in the environment for business. In the short term, policy adjustments under a new administration will increase the risk of social unrest, keeping political stability risk high. In the short term, macroeconomic risk and financial risk will also remain high, reflecting high market risk, weak confidence in banks and a recent history of sovereign default. Interventionism in response to economic distortions will decline in the medium term, and legal and regulatory risk will improve as a result, as will foreign trade and payments risk. Strong unions, frequent strikes and inflexible labour rules will heighten labour market risk. Infrastructure will remain a relative strength, although in the short term weak energy output will maintain the risk to this area.

Security risk

Security risk is less of a concern than in much of Latin America, but the perception that the security environment is deteriorating is rising. Crime rose sharply during the 2001 crisis and has not come down since. Despite recent reforms, the police are still regarded as ineffective, or occasionally complicit in some crimes. On the hard left, foreign capital and the banking system are still demonised for the part they played in the historic 2001 crisis. But the risk of direct action against representatives of these groups has faded. The illegal drugs trade generally does not pose a direct threat to businesses but is a growing source of violence and corruption. Argentina’s large Jewish population makes it a potential target of terrorism perpetrated by Islamic extremists.

Political stability risk

Reflecting the scale of economic mismanagement under the previous government, led by Cristina Fernández de Kirchner, which had produced stagflation and strong currency devaluation pressures, the adjustment process set to begin under President Mauricio Macri will be a difficult one, involving politically unpopular austerity measures, including a scaling back of fiscal expenditure. Resistance among Argentina’s powerful unions to austerity, and, in particular, to efforts to rein in nominal wages in bargaining rounds next year, will be strong. The risk of social unrest will therefore remain high in the near term.

Government effectiveness risk

Weak institutions are a shortcoming of the political system. One by-product of a strong presidential system is weak congressional oversight of the executive. There is a long history of political interference with the judiciary, although in a recent positive development, the Supreme Court had ruled a controversial reform-seen as an attempt by the former administration of Cristina Fernández de Kirchner to exert greater control over the court system-unconstitutional. Discretionary transfers have given the administration the upper hand in managing relations with the provinces, although provincial leaders still have the potential to be disruptive in Argentina’s federal political system. The low quality of the bureaucracy is expected to persist, assuming a long-awaited public-sector reform is delayed indefinitely, and could hinder implementation of government policies. Increases in investment spending have been poorly targeted, as political considerations take precedence.

Legal & regulatory risk

Confidence in the rules of the game remains weak after almost a decade of populist policies intended to maximise voter support at the expense of trust in contract rights. The Mauricio Macri administration, which took office in December, will attempt to restore confidence in the rules of the game, but this will take time, and will be complicated by sovereign default, which restricts the government’s ability to make amends with creditors and investors in order to attract fresh inflows of much-needed dollars. The Macri administration will work to dismantle the distortionary controls implemented over the course of recent years, and to reduce the perceived risk of expropriation of foreign assets. Government participation in “strategic” sectors such as energy will persist.

Macroeconomic risk

On balance, we believe that a large devaluation, combined with a steady and substantial easing of controls and fiscal and monetary tightening, remains the most likely scenario in 2016. These adjustments will be politically difficult, will encounter union resistance and, in the short term, will subdue activity. However, this will be rewarded with a boost to investor confidence, assuming that the new government also works to exit default (eliminating the foreign-financing constraint) and strengthen confidence in the rule of law, which has been eroded by years of discretionary policy interventionism under the former president, Cristina Fernández de Kirchner. Together, these policies should set the economy on a more solid long-term footing.

Foreign trade & payments risk

The inauguration of the Mauricio Macri administration marks the start of a shift away from unpredictable and distortionary trade measures as the new government works to promote trade and investment via clear rules of the game. The easing and eventual elimination of controls, however, will depend on an improvement in the underlying balance-of-payments position-which has deteriorated in recent years on the back of an increasingly overvalued peso, persistently low foreign direct investment, negative portfolio flows and high levels of capital flight. Measures to increase competitiveness, boosting the trade balance, and to improve investor confidence, bolstering investment inflows, will take some time to bear fruit. This means that liberalisation measures will be gradual and could be vulnerable to setbacks.

Financial risk

Access to financing remains a weakness, as an history of crisis has reduced confidence in the domestic financial system dramatically, and improvement in the outlook period will be gradual. Regulation and supervision have been strengthened since the 2001-02 crisis, with weaknesses, including a high level of exposure to public-sector debt and a high level of dollar-lending not backed by dollar revenue streams, having been addressed. But this has not produced a recovery in longer-term deposits that would lead to growth in longer-term finance. This is against a background of adverse policy decisions (such as the 2008 nationalisation of the private pension funds), growing political uncertainty and a deterioration of the public finances. The latter makes crowding out by the public sector a likely problem, at least until public-sector external financing constraints are removed via a negotiated settlement with holdout creditors.

Tax policy risk

Tax policy has become increasingly unpredictable and complex, and is also costly and inefficient. According to the World Bank’s latest Doing Business report (for 2016), in Argentina a medium-sized company takes 405 hours per year to prepare, file and pay its taxes, compared with an OECD average of 177 hours, and pays a total tax rate (including labour contributions) of 137% of profits (the OECD average is 41%). Under Mauricio Macri, a reduction and eventual elimination of the most distortionary taxes, such as agricultural export taxes, will be likely. But a broad-and politically difficult-reform to increase the consistency and equity of the system (which has been distorted by a decentralisation of expenditure to the provinces and a centralisation of revenue to the central government) has long been put off and remains extremely unlikely to be addressed in the forecast period. As a result, tax evasion and informality will remain high.

Labour market risk

Argentina’s relatively well-educated, productive and flexible labour force is an asset to the country’s business environment (and makes the labour market Argentina’s highest ranking category in the business environment rankings). However, reflecting the political difficulty of reforms to simplify labour regulations and a highly unionised labour market that produces a high incidence of strikes, its ranking deteriorates for the forecast period. In the short term, difficult economic adjustments that will produce a decline in real wages and a reduction in purchasing power will translate into a high level of strikes (notably in public services such as transport and education), led by politically powerful trade union leaders. President Mauricio Macri faces a tough task in tackling union power, and we expect little progress on reducing the extent of wage and other labour market regulation.

Infrastructure risk

Argentina’s strengths include a well-developed telecommunications and information technology network, and relatively low property rental costs, but physical infrastructure has suffered over the past decade from a lack of investment. This is partly the result of a long-standing failure to adjust a plethora of tariffs frozen during the 2001-02 economic crisis. Although the Fernández government took a more active role in public works, this has proved insufficient to prevent the emergence of bottlenecks, particularly in energy. We currently assume that external financing constraints will ease once a deal with holdout creditors is agreed, allowing Argentina to exit default. Combined with improvements in contract rights and with government incentives this should help to boost investment both in transport infrastructure and in energy. However, such projects will take time to come on stream, raising the risk that infrastructure bottlenecks will become a constraint on growth in the meantime.

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14. ARGENTINA RISK: ALERT – RISK SCENARIO WATCHLIST (Economist Intelligence Unit – Risk Briefing)
17 December 2015

Scenario Category Probability Impact Intensity

Drug-related violence increases Security Moderate Moderate 9

Unrest increases amid difficult economic adjustment measures Political stability High Moderate 12

The Supreme Court becomes politicized after new appointments are made Government effectiveness Moderate High 12

Failure to secure negotiated settlement with holdouts scuppers efforts
to improve relations with investors and creditors Legal & regulatory Moderate High 12

The authorities fail to engineer a smooth transition to a more sustainable growth environment Macroeconomic High Very high 20

New administration’s plans to remove controls rapidly are damaged Foreign trade & payments Moderate High 12

Government fails to make progress on a free-trade agreement (FTA) with the EU Foreign trade & payments Moderate Moderate 9

Dramatic peso overshooting occurs as the authorities attempt
to engineer moderate currency adjustment Financial Very high High 20

Deterioration of provincial finances forces further ad hoc revenue-raising measures Tax policy High Moderate 12

Skills shortages worsen Labour market Moderate Moderate 9

Intensity colour key: 1 to 4 5 to 8 9 to 12 13 to 16 17 to 25
Note: Intensity is a product of the probability and impact ratings, where ‘Very low’ scores 1 and ‘Very high’ scores 5.

SECURITY
Drug-related violence increases
Moderate probability; Moderate impact; Risk intensity = 9
The incoming Mauricio Macri administration has made the reduction of drug-trafficking related violence a priority, but tackling the growing problem will not be easy. Argentina has had a growing role in recent years as a transshipment point for the trafficking of cocaine between other areas of Latin America, including Paraguay, and Europe, and public perceptions of crime are rising. Mr Macri has proposed an increase in security force staffing, and a specific national anti-drugs agency to combat the issue. But efforts to tackle drug-trafficking will also require strenuous efforts to reduce public-sector corruption and strengthen institutions, and this will prove extremely challenging. In this context, and although the Macri administration has put greater emphasis on the problem than his predecessor, there is a risk that drug-related violence continues to increase in the outlook period.

POLITICAL STABILITY
Unrest increases amid difficult economic adjustment measures
High probability; Moderate impact; Risk intensity = 12
Argentina has a long recent history of public protest, and with difficult economic adjustments on the cards in 2016, involving a loss of consumer purchasing power, further unrest is a strong risk in the next year. There are a number of possible triggers for discontent. One of these will be annual wage negotiations, which for the most part take place in the second quarter of each year. The government will be pressing for below-inflation wage rises, but negotiations will be extremely difficult assuming devaluation pushes (already high) inflation up further, towards 40%. Another trigger could be political opposition to efforts to agree a deal with holdout creditors. The issue of negotiating with holdouts, who are called ‘vultures’ in Argentina for buying the country’s defaulted debt at extremely depressed prices and seeking payment in full in the courts, is politically charged. The previous government, led by Ms Fernández, vowed never to give in to the holdouts. However, a deal to repay them is vital for Argentina to exit default and access external credit, and Mr Macri will undoubtedly take a pragmatic stance as he seeks to allow the country to finally resolve the question of default almost 15 years on from the 2001-02 crisis. The matter risks igniting political tensions and could prove an issue for the left to rally around in 2016.

GOVERNMENT EFFECTIVENESS
The Supreme Court becomes politicised after new appointments are made
Moderate probability; High impact; Risk intensity = 12

Carlos Fayt, a Supreme Court judge, stepped down just one day after Mauricio Macri took office in December. Mr Fayt, 97, had been a Supreme Court judge since Argentina’s return to democratic rule in 1983. Earlier in 2015, supporters of Ms Fernández sought to impeach Mr Fayt, accusing him of being mentally and physically incapable of the job. (Judges must retire when they reach 75 or seek legislative approval for a five-year extension. However, Mr Fayt’s situation represented a grey area because he was already 75 when constitutional rule was introduced in 1994.) The attack was largely seen as a manoeuvre to oust Mr Fayt and substitute him for a government-friendly judge, particularly with Ms Fernández seeking to exert influence beyond her presidency. Soon after his appointment, Mr Macri announced that he would appoint a replacement for Mr Fayt’s seat, and fill a second vacant seat on the court, by presidential decree. According to the Macri government, it acted because the seats required filling urgently and Congress was not in session. While not expressing reservations about the judges selected by Mr Macri, politicians from across the political spectrum, including some of Mr Macri’s own allies in the Cambiemos electoral coalition, have expressed unease with the president’s decision to appoint court members by decree, rather than seeking two-thirds approval in the Senate in an extraordinary session. The Senate will have the opportunity to accept or reject the appointments when it reconvenes on March 1st. Nonetheless, Mr Macri’s early use of presidential decrees to push through key appointments highlights the continuing risk that government appointments become politicized.

LEGAL & REGULATORY
Failure to secure negotiated settlement with holdouts scuppers efforts to improve relations with investors and creditors
Moderate probability; High impact; Risk intensity = 12
Argentina’s sovereign default in July 2014 rendered essentially useless recent attempts to resolve a series of disputes in order to access external credit. These efforts included an agreement with the Paris Club in 2014 to restructure outstanding defaulted debt with creditor countries, payment of US$5bn in bonds in compensation to Spain’s Repsol for the expropriation of the company’s share in Yacimientos Petrolíferos Fiscale (YPF) and the resolution of a series of claims involving the World Bank’s International Centre for the Settlement of Investment Disputes. We assume that the Macri administration will work from 2016 to exit default (by arriving at a deal with holdout creditors) and normalise relations with creditor countries. But Mr Macri may have a hard time getting quick approval in the legislature for a deal with holdout creditors. There is a risk therefore that efforts to improve relations with creditors and investors across the board are scuppered.

MACROECONOMIC
The authorities fail to engineer a smooth transition to a more sustainable growth environment
High probability; Very high impact; Risk intensity = 20
Policy tightening, along with peso adjustment, will eventually have a beneficial impact on net exports. We also assume that some efforts will be made by the new government to address the problem of legal and regulatory uncertainty, which should set the stage for renewed strong growth in fixed investment, supporting an acceleration of GDP growth to an annual average of almost 4% in 2018-20. There are large downside risks to this forecast as attempts by the new administration to reduce economic distortions and engineer a relatively smooth adjustment to a lower inflation environment could prove extremely challenging amid an increasingly thin reserves cover. Import cover has been weakened by the use of reserves to shield the peso from currency pressures and to repay external debt, and the authorities have little firepower to defend the peso at present. There is also some upside risk, however, as investment could take off beyond expectations from 2017 onwards if macroeconomic adjustment goes smoothly and President Mauricio Macri takes rapid steps to restore confidence in the rule of law.

FOREIGN TRADE & PAYMENTS
New administration’s plans to remove controls rapidly are damaged
Moderate probability; High impact; Risk intensity = 12
Foreign-exchange controls are comprehensive. Since 2012, tax bureau authorisation has been required for all US dollar purchases; although ostensibly targeting tax evasion, this poses operative obstacles to dollar purchases, with the aim of discouraging dollar demand. In the absence of any policy adjustments to address the underlying problem of peso overvaluation, controls have been unsuccessful in preventing a continued fall in reserves, therefore heightening the risk of a balance-of-payments crisis. They have at the same time crippled the economy by producing bottlenecks and shortages, and by subduing dollar inflows from investors who are concerned that they will not be able to move their profits back out of the country. The Macri administration has committed to removing controls. The president has stated that he would like to remove these immediately (while simultaneously devaluing the peso) on the basis that this would provide clarity, transparency and a strong signal of the government’s commitment to change. However, such a strategy risks prompting a period of dramatic peso overshooting that would hit activity hard in the very short term and, on balance, we believe that a steady but substantial easing of controls is likely.

FOREIGN TRADE & PAYMENTS
Government fails to make progress on a free-trade agreement (FTA) with the EU
Moderate probability; Moderate impact; Risk intensity = 9
Mr Macri is likely to promote trade liberalisation that could speed up progress on the agreement of an FTA between the EU and the Mercado Común del Sur (Mercosur, the Southern Cone customs union). An EU-Mercosur free-trade deal was first mooted 20 years ago, but has made little headway in the face of growing trade protectionism in the past decade, particularly on the part of Argentina under Cristina Fernández de Kirchner. Mr Macri’s election will provide some fresh impetus to talks, which Uruguay, Paraguay and, more recently (in an about-turn from the government’s previous policy), Brazil have shown a strong interest in pursuing. During a visit by Mr Macri to Brazil in early December, strategy towards an EU-Mercosur FTA will have been high on the agenda, as will a generalised improvement of bilateral relations that could help to prop up the struggling automotive sectors in both countries. However, there will remain a number of obstacles to a deal, and Mr Macri may have to expend political capital elsewhere, suggesting strong risks that the FTA fails once again to get off the ground in 2016.

FINANCIAL
Dramatic peso overshooting occurs as the authorities attempt to engineer moderate currency adjustment
Very high probability; High impact; Risk intensity = 20
Underlying fiscal and external imbalances have worsened in 2015, heightening devaluation pressure and setting the stage for currency adjustment under a new government in 2016. The monetary authority has maintained a rate of nominal depreciation of around 1% per month for most of the year to date. We assume that currency adjustment under the heavily managed float will accelerate to around 40% in 2016 as commitment to adjustment improves under a new government. We also project nominal weakening of almost 20% per year in 2017. This will help to reverse the accumulated real appreciation of the peso over the past five years, which has eroded export competitiveness, and bring the real trade-weighted exchange rate close to 2012 levels. There are substantial risks to our exchange rate forecasts in the short term, until the new administration’s currency adjustment strategy becomes clearer. There is some risk that the authorities will shift quickly to a free float, which would be likely to prompt substantial overshooting in the short term. It would have the benefit, however, of rapidly eliminating the black market in foreign exchange, where the premium to the official exchange rate is currently over 50%.

TAX POLICY
Deterioration of provincial finances forces further ad hoc revenue-raising measures
High probability; Moderate impact; Risk intensity = 12
Reforms to the system of revenue-sharing with the provinces are badly needed to secure the stability of the tax system but are a political minefield, and continued delays on a comprehensive reform are in prospect. The opposition tried in 2010 to increase the percentage of revenue from the financial transactions tax that is transferred automatically to the provinces, from 15% to 54% of total, but the bill failed to prosper in a divided Congress. The executive has instead announced a series of rollovers of provincial debt. In December 2013 the government signed an agreement with 18 provinces to refinance Ps75bn (US$11.5bn) in debt, in an attempt to alleviate the tricky financial situation facing most provinces. The latest agreement (signed with all provinces, except Santa Fe, San Luis, La Pampa, Santiago del Estero, Formosa and the city of Buenos Aires—the capital—which do not owe debts to the central government) seeks to roll over debt originated in another restructuring programme, the so-called Programa Federal de Desendeudamiento de las Provincias Argentinas y de Asistencia Financiera, signed in 2010. In 2011 the government modified this programme, granting a longer grace period and scheduling the first debt-service payment for January 2014. The current weakness of the provincial finances would have made it extremely difficult for the provinces to comply with this commitment. The latest restructuring was not unexpected. We expect that the provinces’ weak finances will be another major challenge for the central government in 2015. However, we still do not expect the administration to take up the extremely difficult task of reforming the system of revenue-sharing between the provinces and the central government. This raises concerns that further measures will need to be taken to assist the provinces. Without a more comprehensive reform, weaknesses in the provincial finances will sustain the need for further central government bailouts and thus raise the risk of periodic ad hoc measures at the national level to increase tax revenue.

LABOUR MARKET
Skills shortages worsen
Moderate probability; Moderate impact; Risk intensity = 9
Skills shortages have become more of a problem for business in the past decade, compounded by a lack of effective training programmes in both the public and private sectors. Secondary and tertiary enrolments are very high by regional standards, but educational outcomes are not as strong as would be expected given these rates, and vary widely by province. At the same time, access to job training tends to be unequal and informal. In this context, and given our expectation of a pick-up in investment and employment late in the outlook period, skills shortages risk becoming a serious problem for business.

INFRASTRUCTURE
Despite recent intervention in the electricity sector, power shortages persist
Very high probability; Moderate impact; Risk intensity = 15
The risk of energy shortages will persist in the short term at least, given historical disincentives to investment in the sector and long project completion times. Demand for electricity and gas has soared in the past decade, owing to rapid economic growth and a freeze in tariffs for residential consumers, which will be removed only very gradually. Some major projects have recently been completed, including hydroelectric projects at Yacyretá and Caracoles, and a third nuclear plant, Atucha II. Beyond this, prospects are less certain. Despite Argentina’s vast hydroelectric potential, no further large projects are under way, notwithstanding a US$15bn deal with China announced this year to construct a fourth and fifth nuclear reactor in the country, a deal that is to be reviewed by President Mauricio Macri and sent to Congress for approval. Argentina’s public sector does not currently have the financing capacity to drive forward major projects, and an improvement in the environment for private investment in gas, a key feedstock for the electricity sector, is required. Although we assume that these improvements will be forthcoming, in the form of tariff increases that make production more profitable and a clearer, more stable regulatory environment, production will take time to come on stream, and demand is likely to outstrip supply until the second half of the forecast period, steadily reducing the margin of excess capacity. In the short term at least, this will maintain dependence on imports, and increase exposure to weather-related problems at existing hydropower facilities.
Risk Briefing 17 Dec 2015 (T16:45), Part 2 of 10

15. ARGENTINA’S NEWLY ELECTED PRESIDENT COMMITTED TO PRO-BUSINESS AGENDA, BUT TRANSITION COULD BE SLOWED BY SERIOUS MACROECONOMIC IMBALANCES (IHS Global Insight Daily Analysis)
By Paula Diosquez-Rice, Laurence Allan, Carlos Caicedo
17 December 2015

New Argentine president Mauricio Macri was inaugurated on 10 December, marking a shift towards the beginning of a new cycle in Argentine politics.

IHS perspective

Significance

The new government’s approach departs from the aggressive state interventionism espoused by its predecessor.

Implications

The new administration has moved promptly to remove export taxes and import controls as well as lifting currency controls.

Outlook

Government policy direction is not in doubt, but low foreign reserves and weak representation in Congress will be major hurdles in its ability to deliver.

Argentina’s Minister of Finance Alfonso Prat-Gay announces plans to lift restrictions on buying US dollars: 16 December 2015. PA.25057443
Newly elected President Mauricio Macri has started to unveil a set of policies aimed at re-establishing business confidence in Argentina. The existing distortions caused by the previous government’s aggressive state intervention – price, import, and currency controls – compounded by rapidly depleting foreign reserves, mean that this is far from easy.

Macri has appointed a Cabinet considered well-qualified to deal with the challenges presented. President Macri, lacking a congressional majority, has prioritised a collaborative style of governance in clear contrast with his predecessor. This is evident in his meetings with his two primary rivals in the presidential race, Daniel Scioli and Sergio Massa. Equally important, he is reaching out to many of Argentina’s 24 provincial governors, the majority of whom are politically opposed to him.

Tackling of currency controls key to unlocking pro-business agenda

Although market sentiment has improved on the back of Macri’s clear pro-business stance, his ability to deliver remains in question. The most immediate priority is how to remove currency controls (cepo cambiario). On this front the government has acted drastically; on 16 December, Minister of Finance Alfonso Prat-Gay announced the total removal of currency and capital controls, stating that Argentines and the corporate sector will be granted unrestricted access to US dollars. The decision was delayed by a week in order to secure additional foreign reserves of about USD15 billion. Prat-Gay said that the additional inflows will accrue in the next four weeks through: first, an agreement with the agro-exporting sector to liquidate retained stock and bring into the central bank coffers some USD2 billion a week for the next few weeks; and second, an agreement with China to exchange some USD3.1 billion (from yuan to US dollars) in part of a currency swap deal. To this will include a USD5 billion credit line derived from a group of international banks in the next 10 days (central-bank assets will serve as a warranty). The authorities said that they will apply a dirty float system, whereby the price of the US dollar will range from ARS14–16; Prat-Gay hinted that they expected a devaluation of about 40%.However, there are significant concerns about the effect that such a sharp devaluation would have on inflation, already one of the highest in the region

Government delivering on removing export taxes and import controls

One area in which the government acted promptly was on its promise to phase out export taxes and remove trade controls. Export taxes on wheat, corn, beef, and manufacturing goods were removed. There was also reduction in the tax applied to soybeans (from 35% to 30%) and soy by-products (from 32% to 27%).

Import controls are also being addressed, as the new authorities begin removing stringent administrative measures used by the previous government to slow imports. Importers will no longer have to disclose information on their cost structure and price-setting mechanisms in order to be able to import intermediate goods, while the most onerous import procedure, the special import affidavit (Declaración Jurada Anticipada de Importación: DJAI), will be eliminated by the end of 2015, according to statements made by Minister of Production Francisco Cabrera on 14 December.

High inflation and its effect on wage demands will dictate level of unrest

Argentina’s labour unions remain among the strongest and most well-organised in Latin America. Accordingly, Macri will need to get some support from key union leaders – notably Hugo Moyano and Pablo Micheli. A surge in inflation will almost certainly affect wage negotiations with labour unions, as will the willingness of the new government to fulfil workers’ demands for an increase in the income tax threshold (Impuesto a las ganancias). The government is trying to mitigate inflationary pressures by pledging to maintain the previous government’s price agreements with retailers. Also, the new secretary of labour has announced that the government will not set a wage adjustment ceiling for the 2016 wage negotiations with trade unions, but rather that they will have to adjust according to economic activity growth. Minister of Energy Juan José Aranguren announced on 14 December that prices for domestic gas and electricity will rise from early January. “Necessary subsidies” supporting the poorest consumers will remain, but Aranguren was explicit that the government does not want to subsidise the entire market, though the detail of what level of subsidies will remain in place has yet to be confirmed. Any or all of those issues are high risk drivers for strikes and protests. The agreement with retailers to maintain stable prices is not binding and peso devaluation is certain to effect prices for consumers. This would prove problematic for wage negotiations with unions, increasing the risk of industrial action, particularly by transport and oil workers as well as public employees.

Foreign investors set to benefit from announced policies

The removal of import and currency controls will prove beneficial for mining, energy, and the car industry; they have long demanded a removal of these controls to facilitate further investment. However, given low global oil and mineral commodities prices, those two potential areas of investor interest will have to compete against a wide range of foreign competitors. The new minister of energy has vowed to respect the spirit of the new oil law, which offers good incentives for foreign investors. Devaluation would in principle make Argentine exports more competitive, so the agro and beef sectors, and potentially chemicals and automobiles, should benefit from increased foreign direct investment, as would less capital intensive but significant regional economies such as wine. Likewise, devaluation would provide a boost for the thriving tourism sector.

Outlook and implications

Significant challenges remain: chiefly the resolution to the dispute with the “holdouts”, holders of defaulted debt, who refused to join the debt restructuring implemented by the previous government. A final agreement on this issue will be a game changer, as it will open access for Argentina to foreign capital markets. However, legally this is a highly complex issue and IHS expects it to take months rather than weeks to come to a final conclusion. Nonetheless, early signals are guardedly positive. A few days before his 10 December inauguration, Macri sent his secretary of finance-elect, Luis Caputo, to New York to meet with Daniel Pollack, the New York court-designated mediator. According to Pollack, Caputo communicated to him Macri’s desire to open negotiations over the issue as soon as possible, although no substantive moves have as yet occurred.

Building a working relation with dissident Peronists in Congress will also be crucial to securing governance. On that front initial indications appears reassuring; Sergio Massa, the main challenger to Kirchnerism, appears willing to work with Macri. Equally important is a good rapport with provincial governors; there is scope for common ground there as most provinces are struggling with serious fiscal deficits and will need support from the federal government.

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16. MOODY’S: ARGENTINA’S RAPID POLICY CHANGES ARE CREDIT POSITIVE; BUT WILL BRING NEAR-TERM CHALLENGES (Moody’s Investors Service Press Release)
17 December 2015

The initiatives that Argentina’s (Caa1 positive) President Mauricio Macri announced this week to reduce the country’s economic distortions, should boost the economy in the long run. However, some sectors will face near-term challenges, says Moody’s Investors Service.

Most notably, the government lifted capital controls and allowed the Argentinian peso to float freely. Initially, this has prompted a sharp depreciation of the currency, but in the longer-run it should attract increased overseas investment and help stabilize the country’s foreign exchange reserves.

“The pace of the measures shows that the new administration wants to quickly move to a more market-friendly framework,” said Gabriel Torres, a Vice President and Senior Credit analysts at Moody’s. “The announcements are broadly credit positive for the sovereign and for some companies, but the adjustment period will likely be challenging.”

The weaker peso will lead to faster inflation over the coming months, putting negative pressure on corporate margins and further eroding consumer demand, particularly for consumer durables goods such as electronics and automobiles. Importers will see a sharp rise in the cost of imported inputs, forcing them to raise prices for their end products, also reducing demand, according to the report, “Cross Sector – Argentina; Rapid Pace of Policy Change is Credit Positive, But Raises Short-Term Challenges.”

Select utility companies, such as Metrogas S.A. (Caa1 negative) and Empresa Distribuidora de Electricidad Salta (Caa1 positive), face strains because they have significant dollar-denominated debt, while relying exclusively on local currency revenues.

Sub-sovereigns should get some relief resulting from improved coordination with the federal government, as the new administration has indicated it will improve dialogue and policy coordination with provincial governments. However, in the near-term, those with foreign currency debt will see increased leverage ratios and declining liquidity as a result of the weaker peso.

A plan to eliminate export taxes on beef and other products, combined with the weaker currency, should boost agricultural exporters. The change will be credit positive for agricultural goods producers such as Asociacion de Cooperativas Argentinas Coop. (B3 stable) and Quickfood S.A. (Caa1 stable), a subsidiary of Brazilian food conglomerate BRF S.A. (Baa2 review for downgrade).

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17. ARGENTINE PESO DEVALUATION SEEN SPURRING SOYBEAN EXPORT INCREASE (Reuters News)
By Hugh Bronstein
17 December 2015

BUENOS AIRES, Dec 17 (Reuters) – The currency devaluation set to kick off in Argentina on Thursday is expected to pump millions of tonnes of pent up soybean supply into the international market at a time when the world is already seeing record stockpiles.

Starting on Thursday Argentines will have full access to U.S. dollars. The exchange rate will be allowed to float after years of strict central bank control, prompting what is expected to be a 30 percent devaluation of the peso.

This would make exporting more profitable for farmers, who get paid for their grains in dollars.

Mauricio Macri was inaugurated last week promising to revitalize the Pampas farm belt with free market policies. His grains production push is happening as global stocks of corn, soybeans and wheat are already projected by the U.S. Department of Agriculture to be the highest ever this season.

“Growers were sitting on close to 13 million tonnes of soybeans, waiting for this devaluation,” said Ernesto Ambrosetti, chief economist at the SRA, Argentine Rural Society, which represents the country’s biggest farms.

“We expect those 13 million tonnes to be sold between now and the next harvest in April and May,” Ambrosetti said.

Macri also eliminated corn and wheat export taxes and says he will ditch corn and wheat export curbs. Previous President Cristina Fernandez said the export curbs ensured ample domestic food supplies. Farmers complained the policy killed profits.

The new wheat and corn policies are expected to induce wider planting next year, increasing crop rotation after years of over planting soybeans.

This season’s corn is nearly all planted. Wheat goes into the ground in May-July. Argentina has exported about 4.5 million tonnes of 2015/16 wheat. That figure is expected by local analysts to zoom to 7.4 million tonnes next season.

Argentina, the world’s No. 3 soybean exporter and top supplier of soymeal livestock feed, is also out to reclaim its place as a top supplier of beef under Macri. He has eliminated the 15 percent tax that had been put on beef exports.

Fernandez had feuded with the country’s growers since protests over her tax policies paralyzed the agriculture sector and rocked her government in 2008.

The government estimates the country’s grains production will grow to 130 million tonnes per year during Macri’s first term, ending in 2019, up from the current 100 million tonnes .

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18. ARGENTINA LAUNCHES 3 NEW IXPS (Business News Americas)
17 December 2015

Argentina’s internet association Cabase has inaugurated three new Internet Exchange Points (IXPs), bringing the country’s total to 16 nodes through which most internet traffic connects.

The new IXPs are located in Junín, San Luis and Tucumán. The other IXPs are located in Buenos Aires, Rosario, Neuquén, Bahía Blanca, Mendoza, Santa Fe, La Costa, Córdoba, La Plata, Mar del Plata, Posadas, Bariloche and Puerto Madryn.

More than 12.5mn internet users in Argentina interconnect through the 16 IXPs, generating average traffic of 65Gbps with peaks of 80Gbps.

The primary purpose of an IXP is to allow networks to interconnect directly, via the exchange, rather than through one or more third-party networks (often routed through the US). The primary advantages are improved cost, latency and bandwidth availability, given that the content is brought closer to the user.

IXPs are said to encourage the development of local content and internet use in general because access to content is faster.

“The national NAP/IXP enables internet providers to run 65% of their traffic over that network, improving speed and availability of the service for the end user,” said Ariel Graizer, president of Cabase.

Cabase plans to extend the network in 2016, adding more IXPs in Buenos Aires, Rio Negro and Chubut provinces.

The current installed infrastructure can support capacity of over 210Gbps, capacity that will be increased with the deployment of new content delivery networks (CDN) next year.

CDNs are a distributed system of servers deployed in multiple data centers that provide content to end-users with high availability and high performance.

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