President Mauricio Macri continues to make gradual progress on economic reform, implementing tax and pension reform in late 2017. Business-friendly reforms will generate an uptick in private investment, supporting the growth outlook. Labour reform will be a priority in 2018, although Macri will need opposition support to pass legislation.
President Mauricio Macri’s economic reform agenda continues to drive frequent protests in Argentina. On 18 December 2017, thousands of people demonstrated in Buenos Aires against government proposed pension reforms, leading to clashes with police. Demonstrators threw Molotov cocktails and stones, whilst the security forces responded with tear gas and rubber bullets. There were reports of protestors damaging nearby properties, looting shops and setting motorbikes on fire.
In the 12-month outlook, there will continue to be an elevated risk of property damage during protests, as Congress discusses labour reform. The relationship between unions and the government deteriorated in the wake of December 2017’s protests, and this will exacerbate the risk of civil unrest. Protests are likely to be located in Buenos Aires and other major cities. Local police forces are likely to be supported by the Federal Police, who will respond with more hard-line tactics, elevating the risk of property damage, death and/or injury.
Since assuming the presidency in December 2015, Macri has gradually implemented wide-ranging macroeconomic reforms. In December 2017, following the strong performance of ruling Cambiemos coalition in October 2017’s midterm elections, Macri secured the passage of tax and pension reforms. Corporate tax rates will be cut from 35% to 30% from 2019-2020.
Provinces will also receive financial compensation if they reduce gross revenue tax for companies to between 3 and 5%. Pro-business reforms will support an uptick in private investment, which will be the principal driver of growth in 2018. Gross fixed capital formation expanded by 13.9% y-o-y in Q3 2017, and is expected to continue on a positive trajectory in 2018. As a result, real GDP growth is forecasted at 3.3% in 2018.
Macri’s success in the mid-term elections will also reassure investors of stable economic policy making in 2018. Policy stability will be supported in the medium-term by the expiration of the economic emergency law in January 2018. In place since 2002, the law allowed the executive to set currency exchange rates and renegotiate contracts with private companies. Macri allowed the law to lapse, signalling a reduction in executive interference in economic legislation and greater policy predictability.
Despite positive economic momentum, Argentina’s fiscal deficit remains elevated and is forecasted at 4.9% of GDP in 2018. The government has taken some steps to cut spending on subsidies, raising public utility tariffs by 27% to 43% for households. However, the subsidy system remains extensive and continues to place strain on the fiscal position. In 2017, Argentina financed its elevated spending levels through the issuance of USD 13.4 billion in bonds on foreign markets, pushing up central government debt to 55.8% in 2018, from 49.0% in 2016. As a result, sovereign credit risks will remain a concern in Argentina, although the risk of a government default has fallen significantly since 2015.
Macri continues to push for measures that would improve the investment environment for foreign investors. In November 2016, a public-private partnership (PPP) law was approved by Congress, opening up public infrastructure projects to private investment.
The bill also allows foreign investors to seek international arbitration and allows for the tax-free import of machinery to be used during projects. In 2018, Macri’s focus will shift to labour reform, as he looks to reduce costs and enhance contract flexibility for employers. Discussions on labour laws are scheduled to begin in March 2018, with measures to bring informal workers into the formal workforce likely to be tackled first.
More controversial matters, such as increased contract flexibility, will be addressed later in the year. However, Macri may find it difficult to pass labour reform. Cambiemos does not have a majority in either house in Congress, making it reliant on moderate Peronists in the opposition to pass legislation. These lawmakers have stated that their support for labour reform is conditional on union agreement to the changes, and this may slow the pace of reform in 2018.
** Pricing could be subject to upwards pressure in the near future due to significant capacity constraints
In this month's Risk Outlook, we also provide a detailed forward looking assessment of developments within the security, trading and investment environments for Turkey, Russia, Argentina and Iraq all of which have been the subject of recent enquiries from JLT's client base.
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