Peronists Return to Power in Argentina

The Argentinian political situations continues to remain a concern amid the return of a Peronist government to power last month. Alberto Fernandez, the newly elected president, comes into office facing huge problems. Inflation, currently at 50% on an annualized basis, has made it difficult for many Argentinians to afford even basic goods. Wages have failed to keep pace, up just over 40% over the period. The Peso has devalued rapidly, lower 42% against the Dollar since primary elections in July.

The state also faces questions around debt restructuring. The Peronist government intends to renegotiate payment terms on some $105 bn (not including IMF loans). New economy minister Martin Guzman will be the man tasked with such an effort. Bondholders are betting on a near halving off the face value of government bonds, hardly a growth inducing move. Argentina also owes $46 bn to the IMF, a sum that could eventually force the government into a fiscal surplus to please external policymakers.

The concern in commodity markets is whether Argentina might implement further taxes on exporters to fill government coffers. Under the Kirchner administration, such taxes dampened grain exports as the cost to sell abroad grew more expensive. Macri slowly began re-implementing export taxes ($4/unit on ag products) in early-2018 in a bid to narrow the budget deficit. The fear is that these taxes might be ramped higher under a Peronist regime interested in boosting government spending on domestic social services. Mr. Fernandes’ opposition to a new trade agreement between Mercosur and the European Union adds additional uncertainty.

Grain Exports Yet to Decline

Despite political uncertainty, grain exports finished on a strong note. Departures on the month managed a near two year high 7.42 Mt, surpassing recent high levels managed through the summer (6.05 Mt). There was initially evidence of some export weakness in the intervening period (Aug – Oct) with departures pushing lower by some 1.12 Mt, but this downward trend was indeed reversed through November. On a y/y basis, loadings are also higher 3.9 Mt following improvements in weather and harvest yields.

Looking forward, interruptions to grain exports would have an outsized influence on China (76 Mt YTD) and northern Africa (17 Mt YTD). Indeed, China is especially vulnerable given the uncertainty around U.S. trade relations, albeit the East-Asian state has actively shifted towards sourcing larger grain volumes from Russia, Ukraine and others along the Eurasian Steppe. Over the course of 2019, Argentina held a dominant market share position, with seaborne arrivals accounting for 25% of all offtakes into China.