Cambiemos win to facilitate Argentina's economic liberalisation agenda

Since taking office in December 2015 President Mauricio Macri has implemented sweeping reforms to improve the Argentine economy, incentivise private sector development and increase investor confidence. However, after 15 years of interventionist policies some lawmakers and segments of the population have protested these efforts. The landmark win of President Macri’s Cambiemos (Let’s Change) coalition in the October 2017 elections has turned the majority of the legislature – previously dominated by the opposition party – to liberal lawmakers, thus augmenting the executive branch’s ability to achieve its policy goals and change the regulatory framework.

Quick Wins

One of the administration’s first moves after taking office was to lift currency controls that kept the exchange rate artificially high. Mandatory one-year deposits in foreign currency applied to encaje (capital inflows) into local financial institutions were eliminated, enabling natural and legal persons to purchase up to $2m of foreign currency, which could be held in a foreign or local account. This permitted the free circulation of capital, which had previously been tightly controlled, and resulted in much lower capital outflows than expected. The 35% tax on the purchase of products abroad through the use of credit or debit cards was also lifted.

The liberalisation of the exchange rate and capital movements – coupled with the removal of export tariffs and import controls – were well received by private operators, particularly those who rely on exports and imports (see Trade & Investment chapter). Farmers sold their stockpiles, and local manufacturers began importing much-needed goods for local production. Meanwhile, several foreign companies took this opportunity to repatriate part of their capital on more favourable terms. In this context, and given the economic downturn during 2016, foreign direct investment dropped by more than 50% that year. Companies previously shielded from imports also came under pressure, as years of protectionism prevented them from becoming globally competitive.

Financial Framework

Further contributing to its efforts to augment global trade, the government rolled back several interventionist policies in the financial sector. Banks saw the elimination of interest rate caps, thresholds on banking fees and requisites to lend a portion of their portfolios at lower-than-market rates (see Banking chapter).

Furthermore, the conclusion of negotiations on the repayment of the country’s outstanding debt with holdout creditors in November 2016 resulted in regained access to international capital markets. This re-entrance saw a record $16.5bn bond issued in April 2016, the first after 15 years of isolation. The country then issued a smaller, yet perhaps more ambitious, $2.75bn, 100-year bond in June 2017. Having attracted $9.75bn in orders from investors, this could point to greater stability in a country that once defaulted on $100bn worth of bonds.

Since 2015 efforts have been under way to restructure financial services, with reforms to the central bank, stock exchange and capital markets regulator. The goal of these measures has been to reintegrate the financial sector into the economy while also boosting its growth potential.

Subsidies

According to the IMF, energy subsidies – which were introduced following the 2001 financial crisis – represented 3.25% of GDP in 2015, or $17.5bn. Meanwhile, transport received subsidies equivalent to 1.4% of GDP, with public transport accounting for 70% of this. A rising fiscal deficit, worth 5.4% of GDP in 2015, and a lack of investment in new production capacity resulted in state efforts to normalise prices at the beginning of President Macri’s leadership.

The first price hike was introduced in 2016, when the government aimed to cut electricity subsidies by $4bn, but it was nullified for the residential segment, as the government did not hold public hearings. Contrary to public goals, this caused subsidies to increase to 3.6% of GDP in 2016. Towards the end of 2016 the authorities enacted a pricing scheme that would phase out energy subsidies over the period leading up to 2022 (see Energy chapter). However, anticipated widespread popular opposition prevented the government from putting transport subsidies on the chopping block by mid-2018.

Fiscal Reform

A landmark tax reform was passed in December 2017, reducing the corporate income tax rate from 35% to 25% and establishing a dividend withholding tax rate to promote the reinvestment of profits. Further alterations were made to personal income, excise, fuel and value-added taxes, as well as social security contributions, to be gradually implemented in the lead-up to 2022. Luciano Laspina, president of the legislature’s Budget and Finance Committee, announced that these reforms should reduce citizens’ tax contribution by 1.5% of GDP, thus serving to stimulate investment and job creation. The government is implementing tax reform to boost revenue and hit ambitious targets to reduce the fiscal deficit from 3.9% of GDP in 2017 to 2.7% in 2018 and 2.2% in 2019.

The government has also been working to expand the tax base, tackle cases of non-compliance and open communication channels with taxpayers. The Federal Administration of Public Revenues (Administración Federal de Ingresos Públicos, AFIP) is being restructured, with an overhaul of its staff, new instruments and technology to collect information. As part of this, the AFIP began requiring tax returns to be filed online.

Social Security

The legislature also passed a new social security framework in December 2017. While this will have fewer repercussions on the business environment than other reforms, it was met with much more popular resistance. It altered the calculation of pensions, now growing 70% in step with inflation and 30% with formal salary rises (see Insurance chapter). This resulted in a 6% increase in benefits in March 2018 – much lower than the 15% anticipated under the previous calculation system.

Meanwhile, planned labour reforms were postponed due to growing opposition. The proposed bill aimed to lower costs for employers across various metrics and provide a clear path to the formalisation of unregistered workers. However, in a country where labour unions hold significant sway over the economy, passing this will be no easy feat.

New Structure

Structural reforms are under way to improve the efficiency and transparency of administrative bodies. The first step towards this was the creation of the Ministry of Modernisation in late 2015. This body serves to improve public sector functions by revising processes, identifying administrative hurdles, integrating technologies across departments and coordinating with the provinces to ensure that policies are properly implemented at the federal level.

President Macri’s government also moved to re-establish the credibility of the National Institute of Statistics and Census (Instituto Nacional de Estadística y Censos, INDEC). Trust in the body had been lost both locally and internationally, as the former administration was believed to have tampered with any data that did not conform to the government’s targets, including inflation, GDP growth and poverty. While the IMF deemed INDEC credible once again in November 2016, deliberations are ongoing on how to further this and change its legal structure.

Public tender processes also saw an overhaul, with projects now required to be posted online, as is the case for company submissions. These changes will increase accountability and transparency in public procurement contracts, as well as mitigate the risk of cartels or oligopolies forming. Law No. 27.275, passed in September 2016 and effective as of September 2017, represents another step towards transparency and accountability of public bodies through the establishment of the Access to Information Agency and an online portal. It also establishes an independent monitoring entity for each power of the state.

Private Players

In a bid to fulfil its infrastructure programme and boost private sector participation, the government passed the Public-Private Partnership (PPP) Law in November 2016, effectively repealing the 2005 regulation (see Trade & Investment chapter). The law has brought mechanisms for conflict resolution between public and private stakeholders through expert panels and arbitration. It also offers incentives for PPPs, such as temporary tariff-free imports, tax exemptions and the ability to use a PPP contract as a guarantee for loan applications. The Ministry of Finance highlighted 52 projects it aims to develop through PPPs, collectively worth an estimated $21bn.

The 2018 draft budget reported that 10 projects should be delivered by 2020, with another 10 to be at least two-thirds completed by that year. Among the largest PPPs are plans to construct 2800 km of highways and 4000 km of roads, improve freight railway lines, build and renovate prisons and hospitals, develop the energy network and construct housing units.