Political Risk Take On Argentina

By Sebastián Pérez-Ferreiro

Right-wing libertarian outsider Javier Milei, who rode a wave of anti-government sentiment by vowing to "exterminate all of the political caste" and wielding a chainsaw as a metaphor to cut down Argentina's bloated State, ultimately needed the blessing of at least part of the establishment to ascend to the presidency.?

But even before being sworn in on December 10, there are signs that the raging anti-establishment lion has been at least partly tamed by Mauricio Macri, the former president turned opposition kingmaker.?

With around 30% of the vote in the general election – behind the ruling coalition candidate Sergio Massa, who as economy minister doled out enough stimulus packages to surge in the first round – Milei had a clear game plan for the runoff: win the endorsement of the first round's clear loser, Patricia Bullrich, the right-wing hawk backed by Macri who underperformed with about 24% of the first round vote.

With Macri and Bullrich's support, plus voters from other candidacies that fell short, such as anti-Kirchnerist Peronist governor Juan Schiaretti, Milei secured a 12-percentage point victory in the runoff. But soon after, the chickens of Milei's deal with Macri came home to roost.?

The president-elect, who railed against entrenched politicians like Bullrich, whom he called a "terrorist" during the early campaign, picked her as his security minister, the same post she held during Macri's 2015-19 administration.?

Another Macri-era official, former central bank governor and finance minister Luis Caputo, was chosen to head the economy ministry, thereby casting doubt on whether Milei would go ahead with his radical proposals to dollarize the economy and shut down the central bank.?

"Closing the central bank is a non-negotiable issue," said Milei to contain the disillusionment among his ranks at his early cabinet picks and the general sense that Macri was now calling the shots.

For both Milei and Macri, the alliance goes beyond winning the election. While the former president gets cabinet picks and policy influence, the president-elect receives much-needed support in congress, where his Libertad Avanza party will have less than 15% of the seats in the lower house and less than 10% in the senate. Macri's PRO party will give him an additional 42 lower house lawmakers and nine senators. While not sufficient for a majority, it will strengthen Milei's hand when he attempts to approve many of his radical reforms in the legislative branch. ?

His shock therapy for an economy on life support – with annual inflation at over 140%, capital controls, import restrictions and 40% of the population living below the poverty line – includes privatizing national oil company YPF, national airline Aerolíneas Argentinas and the railroad system, as well as concessioning public works out to the private sector.

"There's no money," the president-elect told a local radio station. "If we don't cut fiscal spending, we're headed for hyperinflation and we'll have 95% of people below the poverty line."?

Milei has said he'll need 18 to 24 months to stabilize the economy, but he may not have that long if his plan to downsize the State immediately and eliminate consumer subsidies leads to higher unemployment and a growing poverty rate.?

The late former president Néstor Kirchner and his wife Cristina Kirchner stabilized the country after the 2001 economic and financial crisis by expanding the State, which became the economy's main employer. Today, including all provincial governments, it is believed to employ around 3.5mn workers, whose unions are ready to do battle with the self-described "anarcho-capitalist" who takes office next month.

"We're becoming concerned about some issues around wages and bonuses. We believe this government needs to honor the contracts with the citizenry," said Héctor Daer, one of the leaders of CGT, the country's main labor union, which has been known to bring Buenos Aires traffic to a standstill by blocking main thoroughfares to protest.

“If they go on the offensive against workers’ rights or unions with cuts… CGT will take action, no doubt about it,” he told daily La Nación.

Milei won 56% of the vote in the runoff, as the electorate could not fathom giving four more years to an administration that mismanaged the coronavirus pandemic, created the worst economic conditions since the hyperinflation of the 1980s and was periodically rocked by corruption scandals. But as bad as the Alberto Fernández-Cristina Fernández government was, Argentina has not seen widespread social unrest since the 2001 crisis, in part because of the State’s safety net.

Unlike Macri, who intended to implement gradual changes when he came into power in 2015, Milei has promised no such gradualism. The danger is that workers without a job or subsidies from one day to the next appeal to their worst instincts.

Hence, there will be no honeymoon period for Milei, who will have to attract foreign investment quickly to create the same jobs that will vanish under the cutting teeth of his chainsaw. ? ??

Milei campaigning with his chainsaw. Credit: AFP

SECTOR RISKS

MACRO ●?

Activity:?The economy grew 0% in September from the previous month, and shrank 0.7% year-on-year. Through the first nine months of the year, the economy contracted 1.5%, according to statistics office Indec.

"In the upcoming months, we expect a bigger economic decline, whose magnitude will depend on how orderly the political power transition is conducted," said consultancy Orlando Ferreres & Asociados in a note to clients.

IMF FORECAST FOR 2023 GDP GROWTH: -2.5%

MINING ●?

FX controls: The mining industry in Argentina is expected to?grow but it faces a scenario marked by runaway inflation, the volatility of the peso, increasing costs, difficulties in importing and declining gold and silver production.

"The dollar must be competitive so exploration, investment and developing projects is attractive. Currently, companies are not getting the dollars they sell, but a lower dollar," said CAEM mining chamber president Roberto Cacciola.?

"This undermines the incentive for investments and the useful life of projects. Many economic resources that were previously set at a certain exchange rate are today uneconomic because costs exceed income. A competitive dollar would allow projects to continue and stimulate new ones."

Lithium infrastructure: Argentina’s expectation to be the world’s third-biggest lithium producer requires perfect logistics across the value chain with work that must also benefit other industrial sectors, according to a World Bank study.

Overall, 22 lithium projects are in advanced development stages and investments have been announced for 37 in the northwestern provinces of Catamarca, Salta and Jujuy. The projects are expected to lead to production of 260,000t of lithium carbonate in 2026, compared to 37,500t in 2022.

Key to facilitating this growth are roads and rail lines, the most used cargo transport modes in northwest Argentina. The most common route to transport lithium inputs connects the port of Campana in Buenos Aires province and Perico city in Jujuy, with links to national routes 34 and 66.

ENERGY ●?

Vaca Muerta:?Argentina will need to build the second phase of the Vaca Muerta gas pipeline in order to replace imports of Bolivian gas year-round, energy firm Pampa Energía said. ? ?

State energy company Energía Argentina has built the first phase of the Vaca Muerta duct – designed to ease a dispatch bottleneck in the Neuquén basin – and the second phase of a flow-reversal project, targeting transporter TGN’s north-south infrastructure, is due to be completed around the middle of 2024. Energía Argentina has launched a tender for the second phase of the Vaca Muerta project. ?

Transmission capacity: A lack of spare transmission capacity continues to hamper growth of the country’s Mater term market.?

Generators looking to participate can request authorization, as part of transmission priority dispatch auctions, to carry out grid expansion work but interest appeared relatively muted based on offers submitted in the last auction process, where only a portion of requested priority dispatch capacity was awarded?

The government has also asked private companies to submit expressions of interest in carrying out high-voltage work.?

ICT ●?

Mounting challenges: Argentina's ICT sector is concerned that the situation in the telecom sector is becoming critical, especially among small and medium-sized players who are least able to withstand falling average revenue per user (ARPU), competitive pressures and the national macroeconomic crisis.

“What I see as dangerous and that affects us all is that the average value of what we sell is being destroyed and that impacts us all equally,” Ariel Graizer, president of Argentine internet chamber Cabase,?said during?the opening panel of the annual meeting of SME cable operators?chamber Cappi.

Graizer maintains that there is fierce competition in the sector that exerts downward pressure on prices, focusing them too low.?

Even with APRU falling, a study carried out by Cabase and released in September indicates that 50% of those surveyed do not contract a faster internet service due to the high cost. Per month, fixed internet costs average 5,612 pesos (US$15), or about 3% of household income.

INFRASTRUCTURE ●?

Goodbye to public works:?In one of his first interviews as president-elect, Milei said his administration would adopt the Chilean model of public works, favoring private initiatives. “We don’t have money. Those works can be completed by the private sector,” he told popular YouTube host Alejandro Fantino.

Transport subsidies:?Milei has also promised to do away with subsidies in order to balance the fiscal budget. Just in September, the federal government spent over US$240mn on transport subsidies, which allow Argentines – especially residents of capital Buenos Aires – to pay relatively low bus and metro fares, and much less at the fuel pump than consumers in neighboring countries. Rolling back these subsidies, one expert warned, could lead to social unrest. ?