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

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

By Jonathan Gilbert
Feb. 1, 2016

BUENOS AIRES — For more than two decades, an investigation into the suicide bombing of a Jewish center here in 1994 that killed 85 people has faced setbacks and controversy. It caused an intractable rift between Argentina and Iran. A former president has been put on trial, accused of orchestrating a cover-up. And a prosecutor involved in the case died last year in murky circumstances.

But now, Argentina’s new government is pledging to finally get to the bottom of a case that cost the country about $3.5 million last year alone, and that took on a life of its own, swallowing up many who touched it.

President Mauricio Macri, who took office in December, has revamped the government department assigned to the bombing investigation and has vowed to introduce legislation that would allow for the trial of suspects in absentia.

The question is whether those efforts, which face considerable legal hurdles and political opposition, will translate into lasting results in the long-running case.

The president wants to “re-establish the commitment of the Argentine state” to solving the attack, said Mario Cimadevilla, who has been appointed to head the investigative department

The unit was created in 2000 to lend support from the executive branch to prosecutors leading the inquiry, for instance by collating evidence from government agencies. In recent years, it had largely been sidelined.

Mr. Cimadevilla has new powers that include the ability to propose legislation and furnish information to investigators working on the death last year of Alberto Nisman, the prosecutor overseeing the case, which may shed new light on the bombing. In 2006, Mr. Nisman blamed the bombing on the Iranian government.

Mr. Cimadevilla’s first task has been drafting a bill to try defendants in absentia, which the government expects to send to Congress when it reconvenes in March. If approved, it would allow suspects abroad who refuse to cooperate with the bombing investigation to be tried in Argentina’s courts.

“We don’t want trials to be halted because the defendant isn’t there,” Mr. Cimadevilla said. “That is denying justice.”

Mr. Macri’s opponents have accused him of trying to score political points by seeking to close the case with the swift convictions of eight former officials in Iran whom Mr. Nisman suspected of masterminding the bombing.

Sergio Burstein, whose estranged wife died in the attack, said the government was acting prematurely by drafting the bill when the prosecutors who replaced Mr. Nisman seem far from concluding their investigation and are still trying to glean evidence from a trial involving a former president, Carlos Saúl Menem. Mr. Menem is accused of conspiring to conceal a possible Syrian connection to the bombing.

Alejandro Rúa, a lawyer for Active Memory, a group of victims’ relatives, said Mr. Macri’s administration wanted a verdict. “We don’t want a verdict,” Mr. Rúa said. “We want the truth, and to get to it you have to investigate.”

Others say Mr. Macri’s efforts are designed to endear him to Jewish leaders with whom his party is perceived as having close ties.

The chief Jewish umbrella organization here, known by its acronym, DAIA, supports the idea of a trial in absentia. It presented a similar bill in 2014, and Mr. Cimadevilla said the government’s proposal would draw on that document.

“There needs to be a close to the case; if not, the dead are never going to rest in peace,” Ariel Cohen Sabban, the president of DAIA, said at a recent gathering in a plaza here to commemorate a year since Mr. Nisman’s death.

Mr. Macri does not have a majority in Congress, so he will need to negotiate with lawmakers from other blocs to pass the legislation. He could get some cross-party support, but it is unclear how much political capital he will want to invest in the bill when he is also trying to push through other important measures, said Juan Cruz Díaz, a director at the Cefeidas Group, a political risk analysis firm.

Mr. Nisman, the lead prosecutor on the investigation from 2005 until his mysterious death a year ago from a gunshot to the head, accused the former Iranian officials of authorizing the bombing of the Jewish center and Hezbollah, the Lebanese Shiite movement, of executing it.

Other unproven theories point to Syrian involvement or a so-called local connection, which once involved a former chief of Argentina’s intelligence agency and a group of police officers. These suspects were among 22 people acquitted in 2004, but the ex-intelligence chief, Hugo Alfredo Anzorreguy, is back in court together with Mr. Menem. (At least one fact has been established: Carlos Alberto Telleldín, an Argentine car salesman, was the last known registered owner of the Renault van that was loaded with explosives and driven into the Jewish center headquarters.)

Former President Cristina Fernández de Kirchner signed a contentious bilateral pact with Iran in 2013 so a jointly appointed commission could interrogate the Iranian suspects in Tehran. It was unclear how any subsequent trial would have proceeded.

Mrs. Kirchner said the agreement was the only way of enticing Iran to collaborate in the investigation. But Jewish leaders here, some victims’ relatives and the political opposition criticized the arrangement, saying it would be too easy for the Iranians to absolve themselves of a crime committed in Argentina if the investigation was shifted to their own country.

The pact was approved by lawmakers, but it was declared unconstitutional in 2014 by a two-judge panel that ruled it was an overreach of the executive branch into a judicial investigation. The new government recently dropped an appeal by Mrs. Kirchner’s administration of that ruling.

Even if passed, a bill allowing trials in absentia would — like the pact with Iran — face challenges in the courts, experts say. Trials in absentia are not explicitly addressed in Argentina’s Constitution, but they would violate its provisions for due process, said Raúl Gustavo Ferreyra, a professor of constitutional law at the University of Buenos Aires.

However, when the two-judge panel ruled against the pact with Iran, one of them highlighted how the Inter-American Commission on Human Rights once approved the extradition of a defendant from Costa Rica after he was convicted in absentia in France; he was given the right to appeal and a new trial. The Constitution has a provision to incorporate this type of international precedent.

“If you guarantee there can be a full review of the ruling, that would give it constitutional validity,” said Francisco Castex, a professor of criminal law here.

Even if trials eventually proceed, experts note that it is unlikely Iran would turn over citizens convicted in the case.

“It’s inconsequential,” Carlos Escudé, an Argentine political scientist who has written about the bombing investigation, said of the bill. “It’s as if the government is saying, ‘The show must go on.’ But the Iranians would never give themselves up.”

By Benedict Mander
1 February 2016

Argentina will resume debt talks with a group of US hedge funds on Monday after securing a $5bn loan from Wall Street banks last week that will strengthen its hand in negotiations to end a decade-long legal dispute.

Finance secretary Luis Caputo, a former JPMorgan executive, is due to present an offer to the so-called holdout creditors, who rejected restructuring deals after Argentina’s 2001 default and won a legal victory in the US in 2012 that ruled that they should be repaid in full.

The bridge loan to Argentina’s central bank, which confirmed on Friday that foreign exchange reserves had jumped to more than $30bn, is another sign of investor confidence in the new market-friendly government of Mauricio Macri. HSBC, JPMorgan and Santander contributed $1bn each, while Deutsche Bank, BBVA, Citibank and UBS all lent $500m at an interest rate of about 6 points above the Libor rate.

The dispute with the holdouts is preventing Argentina’s return to the international capital markets. Reaching an agreement with the creditors led by US billionaire Paul Singer’s Elliott Management would put an end to Argentina’s second default this century in 2014, when the holdouts’ legal victory in the US prevented Argentina from continuing to service debt to holders of restructured debt.

An agreement could lead to upgrades by credit rating agencies and Argentina’s inclusion in emerging market bond indices. JPMorgan last week removed South America’s second-largest economy from its “frontier” market index.

Mr Macri, who attracted huge interest from investors at the World Economic Forum in Davos last month, has made solving the legal dispute a central part of his economic reforms, which included a 30 per cent devaluation in the overvalued peso in December after lifting strict capital controls in place since 2011.

Last week, the centre-right government also began removing costly electricity subsidies, with prices for consumers set to multiply by more than six times.

The previous populist government of Cristina Fernández de Kirchner presided over some of the cheapest electricity prices in the world, pushing the fiscal deficit last year to almost 8 per cent of gross domestic product. Nearly 3 per cent of GDP has been ploughed into subsidising domestic energy consumption, with electricity bills for many households costing as little as $3 a month.

Any agreement with the holdouts will then have to be approved by the opposition-dominated congress, with delicate negotiations with the divided Peronist movement expected to follow. Despite his tough economic reform programme, Mr Macri, who was previously mayor of the city of Buenos Aires, enjoys approval ratings of 71 per cent after his first month in office, according to Poliarquia, a local pollster.

The holdouts’ own bonds had a face value of around $6bn in 2001, but accumulated interest means that the value of Argentina’s holdout claims is now estimated to be more than $20bn.

By Walter Bianchi and Sarah Marsh
29 January 2016

* Argentina gets $5 bln loan from int’l banks to bolster reserves
* Deal strengthens negotiating hand as goes into debt talks

BUENOS AIRES, Jan 29 (Reuters) – Argentina’s central bank said on Friday it had sealed a deal for a $5 billion, one-year loan from international private banks, bolstering its low foreign reserves as the country heads into talks with creditors suing over unpaid debt.

The South American country is virtually shut out of global credit markets because of its long-running legal dispute in U.S. courts with creditors over debt it defaulted on in 2002.

President Mauricio Macri, who took office last month, has said he hopes to reach an agreement early this year, enabling Argentina to re-gain access to capital markets. In the meantime, his government has secured alternative financing.

This commercial bank loan “facilitates the central bank’s capacity to confront external shocks and thereby avoid disruption in the local market,” the regulator said in a statement.

The loan will be backed by Bonar 2022, Bonar 2025 and Bonar 2027 notes in the central bank’s portfolio, it added.

Argentina’s foreign reserves rose to $30.071 billion on Friday from $25.241 billion the previous day, the central bank said in a separate statement after the local markets’ close.

The interest rate on the commercial bank loan will be the Libor rate plus 6.15 points, said a source at a bank involved in the deal who asked not to be identified.

The banks HSBC, JPMorgan Chase & Co. and Santander will contribute $1 billion each, while Deutsche Bank, BBVA, Citibank and UBS will lend 500 million each, the source said.

Argentina has said it will present a proposal to settle its legal debt battle next week to the U.S. court-appointed mediator Daniel Pollack.

Finance Secretary Luis Caputo, a former Deutsche Bank executive, has already traveled to the United States to meet with Pollack next week, the Finance Ministry said on Friday.

“There will be informal meetings on Monday and Tuesday with Pollack and possibly with the holdouts,” the ministry said. “We do not know yet when the proposal will be presented. These meetings will be held without lawyers present.”

Argentina originally hoped the talks would take place the week of Jan. 25 but the holdouts asked for them to be postponed a week due to “logistical difficulties”.

29 January 2016

BUENOS AIRES, Jan 29 (Reuters) – Argentina’s energy minister on Friday announced new power rates on the back of subsidy cuts that could see the bills of some consumers jump six-fold, saying that a near total freeze on tariffs in parts of the country had left the power grid “on the brink of collapse.”

Minister Juan Jose Aranguren said the government of newly-elected Mauricio Macri targeted reducing subsidies by $4 billion this year as part of a drive to reduce a gaping deficit that widened sharply under the government of former President Cristina Fernandez.

“The subsidies for the generation of electricity in 2015 was around $10 billion, which is just under 2 points of gross domestic product,” Aranguren told a news conference. “With our new tariff policy…we aim to save $4 billion.”

The federal government only controls rates in the capital and its suburbs. Provincial governments outside of Buenos Aires set their own rates.

Aranguren said the old subsidy system had favoured residents of the capital Buenos Aires, who typically pay rates five times lower than in other provinces because rates there have been largely frozen for more than 13 years.

He said that a household in the capital which consumed 180 kilowatts per month would see its bill rise to 150 pesos ($10.74) from 25 pesos – a price the minister noted was roughly the same as a cup of coffee.

There will be cost-saving incentives for consumers who reduce their consumption from last year.

Leading utility firms Edenor and Edesur, which distribute power to metropolitan Buenos Aires have posted losses in four of the past five fully reported financial years as power rates stayed rock bottom even as inflation surged.

The new rate structure comes after the government set new wholesale prices for electricity that will apply nationwide from Monday.

Aranguren said that the rates would be reviewed again in six months time.

Argentina has spent $51 billion on power subsidies since 2003, Aranguren said.

29 January 2016

NEW YORK–(BUSINESS WIRE)–January 29, 2016– Counsel representing classes of certain holders of defaulted Argentine sovereign bonds have announced that the federal court in New York City has asked class members to identify themselves to class counsel as part of the process for the court to determine the total amount of damages owed to the classes. Class members can identify themselves by requesting and sending in a Proof of Claim, as discussed below.

In 2001, the Republic of Argentina defaulted on multiple series of Global Notes and Bonds. Argentina has since failed to pay the principal and interest due on those bonds.

Today’s announcement concerns the nine series of defaulted bonds identified in the chart below. Lawsuits are pending before the United States District Court for the Southern District of New York (Judge Griesa) concerning each of these series of bonds.

The Court has certified each lawsuit as a class action. The members of each class are beneficial holders of any amounts of the bonds who held the bonds as of the relevant starting date listed below (or earlier), and continuously hold at least some amount of that original holding through today.

Description ISIN Number Starting Date of Holding
—————————- ———— ————————
1. Republic of Argentina 11% US040114AN02 January 16, 2004
Global Notes due October 9,
—————————- ———— ————————
2. Republic of Argentina 7% US040114GF14 January 16, 2004
Global Notes due December
19, 2008
—————————- ———— ————————
3. Republic of Argentina 9.75% US040114AV28 January 22, 2004
Global Notes Due September
19, 2027
—————————- ———— ————————
4. Republic of Argentina 11.75% US040114GA27 February 4, 2004
Global Notes Due June 15,
—————————- ———— ————————
5. Republic of Argentina 11% US040114AZ32 February 4, 2004
Global Notes Due December 5,
—————————- ———— ————————
6. Republic of Argentina 8.375% US040114AH34 February 10, 2004
Global Notes Due December
20, 2003
—————————- ———— ————————
7. Republic of Argentina US040114GD65 March 17, 2004
12.375% Global Notes Due
February 21, 2012
—————————- ———— ————————
8. Republic of Argentina XS0043120582 March 17, 2004
Floating Rate L+0.8125
Global Notes Due March 2005
—————————- ———— ————————
9. Republic of Argentina XSO113833510 December 19, 2006
European Medium Term Note
Bond, 9.25% Due July 20,
—————————- ———— ————————

The court has already found that Argentina is liable to class members for unpaid principal and interest. The court now seeks to identify the individual class members as part of the process to calculate the amount of damages for each class.

All beneficial holders of any bonds in any of the classes who have held any amount of bonds continuously from the “start date” through today are requested immediately to contact Class Counsel to obtain the Proof of Claim form that they can use to identify themselves and the amount of their class holdings. The deadline to send in Proof of Claim forms is February 29, 2016.

Individuals or institutions holding bonds in series 1-8 in the above chart should contact Class Counsel Marta Colomar Garcia at, 00-1-305-375-9220.

Individuals or institutions holding bonds in series 9 in the above chart should contact Jason A Zweig at or 00-1-708-628-4958. Mr. Zweig’s firm has been appointed by the Court to represent the class with respect to the bonds in series 9 above. Holders of interests in series 9, can also obtain a claim form at

Bondholders who submitted “opt-out” notices or who have filed individual lawsuits or arbitrations should not submit a Proof of Claims form.

Information provided will be used only for this litigation and will not be filed in the public court records. The court may also request additional information at a later time.

Current bondholders who wish to remain in the classes and eventually be eligible to claim a share of any class recovery should not sell or transfer their bonds. Bonds that are sold or transferred will not be part of the classes.

Bondholders should not call or write to the court with questions about the Proof of Claim process.

6. ARGENTINA RISK: RISK OVERVIEW (Economist Intelligence Unit – Risk Briefing)
29 January 2016

RISK RATINGS Current Current Previous Previous
Rating Score Rating Score
Overall assessment C 56 C 58
Security risk C 43 C 43
Political stability risk C 50 C 50
Government effectiveness risk C 46 C 46
Legal & regulatory risk C 52 C 52
Macroeconomic risk E 90 E 90
Foreign trade & payments risk C 50 D 61
Financial risk C 58 D 62
Tax policy risk D 62 D 62
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.


Argentina’s rating remains at C, following recent improvements reflecting moves by the new president, Mauricio Macri, 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 taking place 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 president, Mauricio Macri, who took office in December, will attempt to restore confidence in the framework for doing business, 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

The Macri administration has begun the process of macroeconomic adjustment required to reduce inflation, improve external competitiveness and avoid an eventual balance-of-payments crisis. After only a week in office, the new government began to remove foreign-exchange controls, allowing the peso to devalue by around 30% in mid-December. This rapid adjustment is intended to provide clarity, transparency and a strong signal of the government’s commitment to change. But economic adjustments, which will also include monetary and fiscal tightening, will be politically difficult and, in the short term, will subdue activity. This will, however, 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. Together, these policies should set the economy on a more solid long-term footing.

Foreign trade & payments risk

President Mauricio Macri’s government 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. Controls are being eliminated quickly. However, there are some external sector risks stemming from a still-weak balance-of-payments position. The balance of payments 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 could be vulnerable to setbacks if pressure on the peso increases above expectations, for example if the authorities fail to secure a quick settlement with holdout creditors.

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) 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 President 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 has deteriorated 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.

7. ARGENTINA RISK: ALERT – RISK SCENARIO WATCHLIST (Economist Intelligence Unit – Risk Briefing)
29 January 2016

Drug-related violence increases
Moderate probability; Moderate impact; Risk intensity = 9

The 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 major 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. President Mauricio Macri has proposed an increase in security force staffing and a specific national anti-drugs agency to combat the issue. But measures 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.

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.

The legislature seeks to limit presidential power to rule by decree, creating the possibility of legislative gridlock and a stalled reform agenda
Moderate probability; High impact; Risk intensity = 12

The executive has substantial powers to rule by decree in Argentina. Extraordinary decree powers were first given to the executive during the deep economic crisis of 2001-02, and have been extended by a pro-government legislature dominated by the various factions of the Peronist party ever since. Ms Kirchner frequently made use of her decree powers. They have also been used during long congressional recesses (Congress is, for example, typically in recess from mid-December until March). The election of a president from outside the dominant Peronist party raises the risk that decree powers will be eliminated at some point in 2016-17. President Mauricio Macri has already issued some controversial decrees. The first was an attempt to appoint two Supreme Court justices by decree in January. Mr Macri noted that the Chief Justice had requested the rapid filling of the two vacant seats to avoid judicial paralysis, and stated that Congress would have the opportunity to approve the temporary appointments once it returned to work in March. The use of the decree for key judicial appointments nonetheless was criticised by many influential legislators. Mr Macri also modified by decree the Media Law, one of the more controversial reforms passed by the Fernandez administration. The law had placed a number of restrictions on media holdings, which Mr Macri has overturned. The president also removed political appointees to the telecommunications and media regulatory bodies by decree. These moves were criticised by Ms Fernandez’s Frente para la Victoria (a faction of the Peronist party), which has a large presence in both houses of Congress. Mr Macri continues to emphasise that immediate action is necessary in a host of areas to reform weak and politicised institutions, and that Congress will have the opportunity to approve or reject reforms when it returns in March. However, his methods leave him open to criticism that he does not respect Congress. This raises the risk that Congress moves to eliminate presidential decree powers. Amid heightened tensions with Congress, it also raises the risk that the reform agenda becomes stalled in the legislature.

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 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. Legislative approval is required to overturn the so-called lock law, which forbade the government from offering better terms to creditors than those presented during the 2005 and 2010 restructurings. There is a risk therefore that efforts to improve relations with creditors and investors across the board are scuppered.

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.

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.

Peso overshooting occurs as the authorities attempt to engineer moderate currency adjustment
High probability; High impact; Risk intensity = 16

Currency adjustment under a new government has always been on the cards, and began in earnest in mid-December, when the authorities removed foreign-exchange controls and allowed the peso to devalue by 30% in one day on December 17th, to Ps13.8:US$1. The authorities are hoping that the rapid removal of controls will engender confidence in the transparency of policymaking, limiting US dollar outflows and eventually attracting new capital. However, the success of this strategy in coming weeks will require the build-up of a stronger reserves cushion to defend the peso from overshooting as the shift to a dirty float proceeds. The government states that it is expecting up to US$25bn in dollar inflows in the coming months with which to bolster the reserves. Sources of US dollars include a deal with farmers to liquidate hoarded soybean stocks, moves to convert renminbi to dollars under a currency swap agreement with China, and a proposed US$5bn loan from foreign banks. Despite these projected inflows, the rapid elimination of controls introduces risks of foreign-exchange market volatility in 2016, given the scale of pent-up demand for dollars to pay for imports to remit profits and for savings, and given the fact that current-account dynamics will remain poor for some time. However, our baseline forecast assumes a relatively orderly currency adjustment, with further gradual weakening over the course of the year, bringing the peso to Ps17.3:US$1 by the end of 2016. This adjustment should help to reverse the accumulated real appreciation of the peso over the past five years, which has eroded external competitiveness, and bring the real trade-weighted exchange rate close to 2012 levels.

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.

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 enrolment is 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.

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 in 2015 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.

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