Argentina

Politics:

• Analysis

  Argentina politics: Quick View - The government presses for judicial reform

  Event

  In her annual speech at the opening of Congress on March 1st, president Cristina Fernández de Kirchner announced controversial proposals for judicial reform.

  Analysis

  Ms Fernández presented the reform as a step towards the "democratisation" of the judicial system, but the proposal comes after a series of battles between the executive and the judiciary in recent months, heightening the perception in some quarters that the government's proposals are in fact intended to increase executive influence over the judicial branch.

  The proposal has not yet been presented in Congress, but key elements of the reform have been outlined by the president. Most controversial is a proposal to allow members of the Consejo de la Magistratura (the magistrates' council, which appoints and disciplines judges) to be elected by popular vote. It seems likely that the government will at the same time increase the number of council members, to include members from outside the legal profession (and, potentially, government supporters).

  Another major proposed reform would limit the use of injunctions in legal challenges against the Argentinian state. Last year, despite severe government pressure on the judiciary, legal injunctions were granted preventing the government from going ahead with the divestment of assets of Clarín (Argentina's dominant media group and a major opponent of the government) under the terms of the 2009 media law (which was presented as anti-monopoly legislation but is perceived to have been aimed at weakening government critics in the media).

  The reform also includes much-needed measures to speed up the court system and to increase transparency in judicial appointments. In fact, reform of a judicial system perceived as inefficient and open to outside influence is generally considered long overdue. Ms Fernández's proposals have, therefore, been cautiously welcomed by some in the opposition, although others have accused the government's plans as populist. The reforms still face a potentially difficult passage in the legislature; some elements of the reform, including plans to elect magistrates' council members directly, could also be considered unconstitutional. But the government seems unlikely to back down, and a difficult battle between the government, the opposition and the judiciary is now likely.

  March 05, 2013

• Background

  Argentina: Political and institutional effectiveness

  Relations between government and opposition will remain fraught at least until the presidential election in late 2011. Until recently, political tensions have not been an obstacle to policymaking, given a centralisation of power under the Kirchner government and its majority position in Congress, but the quality of policymaking has been poor. Government decision-making has lacked transparency and predictability and there has been a tendency to rule by decree, as the Kirchners extended the extraordinary powers that were introduced to expedite policymaking after the economic crisis of 2001-02. The government's recent reversal of political fortunes will, at least in the short term, produce more problems: in the finely balanced Senate, the opposition has a slim majority and will attempt to circumscribe the use of executive decrees and discretionary transfers to the provinces (which the government uses to secure political support).

  For her part, the president will resort to her veto powers to block major opposition legislation. The result is likely to be legislative deadlock and frequent policy reversals in the run-up to the presidential election. Beyond 2011, and on the assumption of a more market friendly administration, greater transparency and predictability should help improve the policymaking environment. There should also be a continued shift away from the use of executive decrees, although the presidential bias of the system will remain. There is also a possibility of a shift to a more consensual approach to policymaking, although this is not guaranteed given the likely continued fragmentation of Congress.

  It is even less likely that the new government will have the political will or solid congressional majority required to undertake new reforms that successfully address long-standing institutional weaknesses. Similarly, attempts to strengthen the bureaucracy are likely to founder on political resistance. The permanent state bureaucracy is made up mostly of low-paid clerical jobs. The professionals responsible for designing and implementing policy are appointed on short-term contracts, which are renewed with each change of government (or even minister) along clientelist lines.

  Flawed electoral and media reforms could face reversals

  The Kirchner government has undertaken long-overdue reforms of the outdated media law and electoral system in the past year, but these bills were rushed through in the weeks before the government lost its congressional majority, are widely considered to be politically motivated, and face likely revisions when the new government comes to power. The new media will allow the government to establish mandatory content in radio and television; give the new regulatory body considerable discretion in granting and removing licences; and force sales of licences, which is likely to lead to an increase in state-run media or the emergence of private media groups more sympathetic to the government than the currently-dominant, private Clarín group. Meanwhile, the electoral reform appears to have been designed to pave the way for Mr Kirchner to run for president again in 2011. The reform will enforce greater party discipline, in part through the introduction of primary elections to select candidates (although this is an improvement on the prior system, which lacked transparency and was dominated by local party bosses). The reform will also impose strict minimum registration requirements on smaller parties, which could hurt some potential presidential candidates in 2011 who have good opinion poll ratings but lack the backing of a strong, nationally based party.

  Further reforms are required to improve the corrupt and inefficient legal system, but this will prove a lengthy and difficult task, and the current government's commitment to the independence of the judiciary is increasingly questionable. Reforms to the Supreme Court undertaken at mid-decade by Mr Kirchner (who came to power on a reforming ticket) reduced politicisation in the Supreme Court. But more recently the government has had a difficult relationship with the courts, which have been forced into the role of arbiter between government and opposition in recent months and have come under pressure to side with the government as a result. Under these circumstances, a pending reform of the Magistrate's Council, which oversees judicial appointments, is proving controversial and seems likely to be postponed until after the presidential election. Without a strengthening of the legal system, it will be difficult to address the problem of corruption, which permeates all levels of government.

  May 19, 2010

• Structure

  Argentina: Political structure

  Official name

  Republic of Argentina

  Form of state

  Federal republic

  The executive

  The president is head of state and commander in chief of the armed forces; elected for a four-year term; can be re-elected for one consecutive term; the president appoints a cabinet and a chief of cabinet, who can be removed by a majority vote in each chamber

  National legislature

  Bicameral Congress: 257-member Chamber of Deputies (the lower house), directly elected for a four-year term; one-half of the lower house stands for re-election every two years; 72-member Senate (the upper house); directly elected for a six-year term; three senators are elected per state, two from the leading party and one from the runner-up; one-third of the upper house stands for re-election every two years

  Regional legislatures

  Twenty-three states and an autonomous federal district

  Legal system

  Federal judges appointed by a Council of the Magistracy; Supreme Court system both nationally and in the provinces; national Supreme Court members require the endorsement of two-thirds of the upper house

  National elections

  October 23rd 2011 (presidential and legislative). Next congressional election to be held in October 2013 for one-half of the lower house and one-third of the upper house. Next presidential election will be held in October 2015

  National government

  The president is Cristina Fernández de Kirchner. She was elected to a first term on October 28th 2007 and re-elected on October 23rd 2011. She took office for a second term on December 10th 2011

  Main political organisations

  Government: Frente Para la Victoria (FV). The FV is formally a faction of the Partido Justicialista (PJ, the Peronist party). The Kirchners built the FV into a cross-party alliance, including some Unión Cívica Radical (UCR) members, although some of these figures have recently distanced themselves from the government

  Main opposition: Coalición Cívica (CC); UCR; Unión Peronista and other PJ dissidents; Propuesta Republicana (Pro; Afirmación para una República Igualitaria (ARI); Frente Amplio Progresista (FAP), which includes the Partido Socialista (PS) and a number of other small left-wing parties

  Key ministers

  President: Cristina Fernández de Kirchner

  Vice-president: Amado Boudou

  Cabinet chief: Juan Manuel Abal Medina

  Defence: Arturo Puricelli

  Economy & public finances: Hernán Lorenzino

  Education: Juan Carlos Tedesco

  Energy: Daniel Cameron

  Foreign affairs & worship: Héctor Timerman

  Interior: Aníbal Florencio Randazzo

  Justice: Julio Alak

  Labour: Carlos Tomada

  Planning: Julio de Vido

  Production: Débora Georgi

  Security: Nilda Garré

  Central Bank president

  Mercedes Marcó del Pont

  March 26, 2013

• Outlook

  Argentina: Key developments

  Outlook for 2013-17

  • Ms Fernández's opinion poll ratings are weakening and social unrest is rising. In Argentina's clientelist political system, supporters could soon begin to desert the president and start jockeying to succeed her at the 2015 election.
  • The government is increasingly reliant on heterodox interventionist policies implemented on an ad hoc basis, but far from solving underlying structural problems, these policies will further impair the economic outlook.
  • After a hard landing in 2012, GDP growth should pick up in 2013 on the back of a bumper agricultural harvest. But in the rest of the Fernández administration, distortions and interventionism will continue to deter investment.
  • Weaker domestic demand should produce very modest disinflation over the forecast period, but with fiscal policy still expansionary and supply-side pressures persisting, inflation will remain stubbornly high.
  • A rapid managed nominal depreciation of the peso against the US dollar in 2013, of 15%, is expected. But in a high-inflation environment, real peso appreciation will continue, increasing the risk of a sudden, sharp adjustment.
  • Having been in surplus ever since the 2002 maxi-devaluation, the current account will swing into deficit during the forecast period, despite trade, foreign-exchange and capital controls.

  Review

  • The government, frustrated by the use of legal injunctions by its opponents, has presented new judicial reform proposals to unblock the court system. But the proposals have been criticised as populist and passage will prove tricky.
  • The latest round in the battle between the Argentinian government and holdouts took place on February 27th, when all parties presented oral arguments to the New York appeals court. A ruling is expected in the coming months.
  • Battles over wages continued as teachers went on strike at the end of February. The teachers are demanding a wage rise of 30% amid rampant inflation. Many provinces will have difficulty financing large wage increases.
  • December was the third consecutive month of positive but modest economic growth, suggesting that economic recovery is under way. The December figure pushed fourth-quarter growth up to 1.5% quarter on quarter.
  • Data for Buenos Aires show transactions in the property market falling to their lowest on record in 2012, below previous troughs in 2009 and 2001 (the year of Argentina's historic currency and financial crisis).
  • The trade surplus halved in January despite controls. Competitiveness problems and a persistent energy deficit are hitting the external sector.

  March 26, 2013

Economy:

• Background

  Argentina: Country fact sheet

  Fact sheet

  Annual data	2012a	Historical averages (%)	2008-12
  Population (m)	41.3	Population growth	1.0
  GDP (US$ bn; market exchange rate)	491.1b	Real GDP growth	5.5
  GDP (US$ bn; purchasing power parity)	746.2b	Real domestic demand growth	6.1
  GDP per head (US$; market exchange rate)	11,896	Inflation	9.0
  GDP per head (US$; purchasing power parity)	18,077	Current-account balance (% of GDP)	1.3
  Exchange rate (av) Ps:US$	4.5b	FDI inflows (% of GDP)	1.9
  a Economist Intelligence Unit estimates. b Actual.

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  Background: Economic liberalisation in the 1990s under the administrations of Carlos Menem (1989-99) of the Partido Justicialista (PJ, Peronists) resulted in rapid growth, but an inflexible exchange-rate mechanism and failure to deepen structural reform left the economy vulnerable to shocks, which contributed to default and the collapse in 2001 of Fernando de la Rúa's centre-left government. Eduardo Duhalde, of the PJ, led an interim government until Néstor Kirchner (also of the PJ) began a term in 2003. He presided over an economic rebound, which enabled his wife, Cristina Fernández de Kirchner, to win the 2007 presidential poll. Firm GDP growth and a wave of public sympathy in the wake of Mr Kirchner's death in late 2010 set the stage for Ms Fernández's re-election in October 2011.

  Political structure: Democracy was restored to Argentina in 1983 after 50 years of instability and military regimes. A strong presidential system is in theory checked by a bicameral Congress, comprising a 257-member Chamber of Deputies (the lower house) and a 72-member Senate (the upper house), but in practice the presidency dominates. The presidential term is four years. There are 23 provinces and the Buenos Aires federal district, each with its own government.

  Policy issues: The pursuit of procyclical expansionary policies over most of the past decade contributed to GDP growth of an annual average 7.6% in 2005-11. However, extremely expansionary macroeconomic policy has also produced major imbalances in the economy, in the form of double-digit inflation, real peso appreciation and a deterioration of the current-account surplus (a key pillar of macroeconomic stability given the sovereign's restricted access to international capital). The government has made limited fiscal adjustments in response, but has also resorted to foreign-exchange and capital controls, and reliance on ad hoc interventionism to the detriment of the business environment is likely to persist.

  Taxation: The value-added tax (VAT) rate is 21%. Corporate income tax is levied at 35% and personal income tax at progressive rates between 9% and 35%. A tax on financial transactions was instituted in 2001 and has been levied at 0.4% on deposits and 0.6% on withdrawals since 2004. Taxes on exports were reintroduced in 2002, having been abolished a decade earlier, and have since been expanded to account for around 20% of total revenue.

  Foreign trade: The current-account surplus narrowed sharply in recent years, from US$11bn in 2009 to US$2.8bn in 2010, before shifting to a deficit of US$421m in 2011. In 2011 the trade surplus narrowed by 5%, to US$13bn.

  Major exports 2011	% of total	Major imports 2011	% of total
  Processed agricultural products	33.6	Intermediate goods	32.7
  Manufactures	35.0	Capital goods	21.8
  Primary	24.4	Consumer goods	12.0
  Fuels & energy	7.3	Fuels	14.1
  Leading markets 2011	% of total	Leading suppliers 2011	% of total
  Brazil	20.1	Brazil	37.4
  China	6.8	US	16.3
  Chile	5.1	China	14.0

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  March 25, 2013

• Structure

  Argentina: Economic structure

  Data and charts: Annual trends charts

  
  

  

  March 26, 2013

• Outlook

  Argentina: Country outlook

  Argentina: Country outlook

  FROM THE ECONOMIST INTELLIGENCE UNIT

  POLITICAL STABILITY: Political tensions will remain high in the run-up to the legislative election in October 2013, and probably beyond. The government has had a bumpy few months, replete with strikes, demonstrations and a wave of rioting and looting in a number of cities just before Christmas. The rise in demonstrations is partly a response to economic difficulties in 2012, which suggests that social unrest could be less of a problem in 2013, assuming that economic recovery gathers pace. However, there are other issues at play. The government has in the past year alienated almost all of the country's most influential groups, including the Partido Justicialista (PJ, the Peronist party, which dominates nationwide politics), the unions, the media, the judiciary and the Catholic Church. The president, Cristina Fernández de Kirchner, has also taken an uncompromising stance against any criticism, claiming, for example, that huge recent public protests were the work of right-wing elements trying to undermine democracy. At the same time, the opposition parties remain weak and disorganised, so that discontent with the government tends to play out in the streets rather than in Congress. In these circumstances, tensions seem likely to remain high.

  ELECTION WATCH: Mid-term legislative elections are due in October 2013. In Argentina's clientelist political system, where political loyalties are notoriously fickle, the result will depend on the economy and the government's ability to distribute political favours to governors. Assuming that it cannot, The Economist Intelligence Unit expects support to slip away from the ruling Frente para la Victoria (FV, a leftist faction of the PJ). But despite the likelihood that the FV will suffer losses amid a still-sluggish economy, the government will fight the elections hard. Ms Fernández has a particular motive to achieve a strong result: she needs a two-thirds congressional majority in order to push ahead with a constitutional reform for the so-called "re-re-election" proposal, which would allow her to run for a third term of office in 2015. We believe that Ms Fernández's efforts will ultimately be unsuccessful. She remains unlikely to win a two-thirds majority at the mid-terms, and on top of this cannot count on public support or judicial backing for constitutional reform. Nonetheless, political and economic policy decisions will be made this year with the mid-terms in mind.

  INTERNATIONAL RELATIONS: The potential for diplomatic and trade disputes will remain high. The government has repeatedly shown itself willing to provoke disputes with key trade partners in pursuit of its policy goals, and we do not expect this to change. Relations with Spain and the EU have been badly damaged by the nationalisation in 2012 of YPF, an energy company formerly majority owned by Spain's Repsol. Comprehensive import controls have also damaged Argentina's relations with its partners in the Mercado Común del Sur (Mercosur). There are, moreover, continuing tensions with multilaterals and with the US government over Argentina's lack of compliance with the World Bank's International Centre for the Settlement of Investment Disputes (ICSID) and with the IMF's articles of agreement. A breakdown of relations with the IMF and with the US and Europe would scupper efforts to agree a debt workout with Paris Club creditors and further complicate access to investment guarantees and to much-needed multilateral lending. Meanwhile, continued failure to agree a debt workout with the "holdouts" (creditors who did not participate in the 2005 or 2010 restructuring) will leave Argentina exposed to the risk of attachment of its assets held externally. A ruling is expected later this year on a legal challenge brought by some holdout creditors against Argentina in US courts. This could finally provide Argentina with a unique opportunity to move on from the 2001 default by coming up with an offer to holdouts that satisfies the US courts. Just as likely, however, is a negative ruling that pushes the sovereign into technical default.

  POLICY TRENDS: Far from solving the underlying competitiveness problems that are weakening the external sector and increasing the country's vulnerability to a new currency crisis, the government's heterodox, interventionist economic policies are instead impairing investment and growth. Policymaking problems stem from the expansionary fiscal and monetary policies of recent years, which have exerted upward pressure on inflation and wages and eroded currency and labour-market competitiveness. This has resulted in the deterioration of the current-account surplus, which, combined with still-restricted access to international capital markets and chronic capital flight, has heightened speculation of peso devaluation. In response, the government has increasingly resorted to foreign-exchange, trade and capital controls--as well as unpredictable interventionism--in its efforts to keep economic distortions in check. The problem is that these efforts are undermining confidence in the economy while failing to address the underlying problem of an increasingly overvalued peso. The effectiveness of controls has therefore been mixed. While a small current-account surplus has been maintained owing to controls, weak confidence has continued to drag down activity and led to periodic bouts of pressure on the exchange rate. Under our benign baseline forecast, relatively muted demand, strict controls, supportive global soft commodity prices and a strong rebound of agricultural export production will help to prevent balance-of-payments problems from turning into crisis this year. However, there will be a persistent risk of currency volatility, particularly if soft commodities prices were unexpectedly to fall substantially. Ultimately, the risk that macroeconomic policy mismanagement leads to spiralling inflation, renewed recession, devaluation and payments problems at some point in the medium term cannot be discounted.

  ECONOMIC GROWTH: After last year's hard landing and amid continued concerns over the economic policy framework, consumer and business confidence remains weak, and growth remains modest in early 2013. In this context, we see some downside risks to our GDP growth forecast for this year of 3.5%. The forecast remains unchanged for now nonetheless, on the expectation of a pick-up in activity in the second half of the year. This should be driven by stronger global and Brazilian activity and by a sharp rebound in the important agriculture sector, which will bring in much-needed dollars, reducing currency pressures and providing a boost to investment. However, growth is projected to weaken again in 2014-15 as underlying competitiveness problems remain unaddressed. Combined with continued recourse to heterodox and interventionist economic policies, which will sustain uncertainty over tariffs, controls, and the legal and regulatory environment, this will increasingly impair confidence, investment, employment and purchasing power.

  INFLATION: The government will remain reluctant to take the difficult steps needed to tackle the chronic inflation problem. Even according to official data, consumer price inflation remains among the highest in emerging markets, at 11.1% in January 2013. But the official data are discredited and inflation is thought in fact to stand at over 25% (based on private surveys and provincial data). This is a result of extremely loose macroeconomic policy and persistent supply constraints (government intervention has resulted in falling production of key foodstuffs and tighter access to cheap consumer goods). With fiscal and monetary policy remaining expansionary, import controls hindering access to cheap consumer goods, and the government unlikely to be able to contain nominal salary growth (the unions are pressing for an increase of around 30% in upcoming negotiations), inflationary pressures are likely to continue to rise this year despite relatively weak domestic demand. Even assuming that weaker domestic demand gradually produces some modest disinflation later in the forecast period, inflation will remain high. Meanwhile, the difficulty of gauging the real rate of inflation is likely to remain a major source of concern among investors.

  EXCHANGE RATES: We currently expect the pace of controlled nominal depreciation to accelerate from under 10% in 2012 to 15% in 2013. However, with inflation over 25% (according to unofficial estimates), there will still be substantial real peso appreciation this year. In this scenario, supportive soya prices and a good soya crop will be crucial to the currency. If they materialise as expected, the authorities may even be able to loosen controls slightly (although they will not be dismantled). If they do not, pressures for a currency devaluation in 2013 and beyond will increase despite controls.

  EXTERNAL SECTOR: The host of recently imposed controls is having some impact at the margin and, combined with the prospect of a record agriculture export crop next year, should keep the current account just in surplus in 2013. We forecast a shift into deficit thereafter, reflecting a weakening of the trade and services balances owing to real currency appreciation. By 2017 we expect a current-account deficit of 1.4% of GDP. Portfolio and foreign direct investment (FDI) inflows will, meanwhile, be deterred by a weak legal framework and speculation of peso devaluation (we expect continued capital flight despite controls). Reserves coverage will be weakened by the use of reserves to shield the peso and repay external debt.

  March 28, 2013

• Forecast

  Argentina: Country forecast summary

  Country forecast overview: Highlights

  • The political environment is deteriorating rapidly for the president, Cristina Fernández de Kirchner, just over a year after she was re-elected to a second term of office by a record margin. A sharp deceleration in economic activity, combined with the shock to confidence produced by increasingly tight controls on US-dollar purchases, has sparked a series of protests and rioting. It is also reinvigorating government opponents, such as farmers, who had been severely weakened by Ms Fernández's re-election.
  • Political loyalties are notoriously weak in Argentina's clientelist political system, and political supporters could soon begin to desert Ms Fernández (as in 2007-08, when there was a slew of defections from the government bench) and begin jockeying to succeed her at the 2015 election.
  • The government has increasingly turned to heterodox, interventionist economic policies, implemented on an ad hoc basis, in its efforts to solve the competitiveness problem that is weakening the export sector and increasing the country's vulnerability to a fresh currency crisis. Far from solving underlying structural problems, these policies are further clouding the outlook for investment and growth.
  • In its efforts to keep economic distortions in check, the government will continue to resort to foreign-exchange, trade and capital controls-as well as unpredictable interventionism. In this context, the environment for doing business will continue to deteriorate as the rule of law and contract rights are eroded. Under The Economist Intelligence Unit's benign baseline forecast, a combination of fiscal tightening and controls will help to prevent devaluation. However, there will be a persistent risk of financial and foreign-exchange market volatility.
  • Stronger exports on the back of a robust agricultural harvest should produce a moderate rebound in GDP growth in 2013 of 3.5%. Growth is projected to weaken in 2014-15 as underlying competitiveness problems remain unaddressed. Combined with continued recourse to heterodox and interventionist economic policies, this will increasingly have an impact on confidence, investment, employment and consumer purchasing power.
  • Economic performance in the later years of the forecast period will be highly dependent on the political environment. Our forecasts are based on the most likely scenario of a change to a more pragmatic, business-friendly government, which would engender confidence in the rules of the game and work to eliminate economic distortions, albeit gradually. Under these assumptions, we expect investment growth to accelerate and for GDP growth to rise above 4%.

  Country forecast overview: Key indicators

  Key indicators	2012	2013	2014	2015	2016	2017
  Real GDP growth (%)	2.0	3.5	3.3	3.2	4.1	4.5
  Consumer price inflation (av; %)	10.0	11.0	9.5	8.8	8.2	8.1
  Budget balance (% of GDP)	-2.8	-2.4	-2.3	-1.8	-1.4	-1.4
  Current-account balance (% of GDP)	0.4	0.6	-0.4	-0.4	-0.9	-1.4
  Lending rate (av; %)	14.1	14.6	14.3	13.3	13.0	13.0
  Exchange rate Ps:US$ (av)	4.5	5.3	5.9	6.0	6.2	6.3

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  March 25, 2013

View detailed map

Country Briefing

Land area

2,737,000 sq km

Population

40.1m (2010 census)

Main towns

Population (m; 2010):

 Federal district & Buenos Aires province: 18.5

 Córdoba: 3.3

 Santa Fe: 3.2

 Mendoza: 1.7

 Tucumán: 1.4

Climate

Varies from subtropical in the north to sub-arctic in the south

Weather in Buenos Aires (altitude 27 metres)

Hottest month, January, 17-29°C (average daily minimum and maximum); coldest month, June, 5-14°C; driest month, July, 56 mm average rainfall; wettest month, March, 109 mm average rainfall

Language

Spanish

Measures

Metric system. Among other measures in use are: fanega = 3.77 bushels; quintal = 100 kg

Currency

Argentinian peso (Ps). Average exchange rates in 2011: Ps4.11:US$1; Ps5.72:€1

Fiscal year

January-December

Time

3 hours behind GMT

Public holidays

January 1st; Good Friday; May 1st and 25th; June 10th and 20th; July 9th (Independence Day); August 17th; October 12th; December 8th and 25th

January 14, 2013