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Regarding political risk for miners in Argentina (from IKN386)

At the end of every quarter, a regular feature in The IKN Weekly is the 'Regional Risk Review', where we go round the major and more interesting mining countries in LatAm and take a look at how things are progressing. We also score all countries on a six criteria basis to gauge their relative attractiveness for mining over time. We cover 20 countries, of which 12 are the main focus of attention (the others tend to be long-term unfriendly places to go mining).

By way of an example here's the piece on Argentina in IKN386, out yesterday evening.

Argentina: National Government Miner Friendly up 1 point, Community/Social Miner Friendly down 1 point.
At times this quarter it’s seemed like there is only one country with mining activity in South America, judging at least by the contents of my mail inbox. Everyone wants to know something or other about Argentina mining these days, it seems.

However the most pressing issue today is the state of the country’s macro economy because we’re now in a crucial period that will decide whether the reforms President Macri has pushed and is pushing through will be successful. In effect, what the Macri government is betting on is that the next couple of quarters are the period of max pain for the country economy. The fiscal and monetary reforms now in place are classic orthodox economic pills to swallow (and why the IMF is praising Argentina so effusively): Go through the sharp recession, restrict pay rises and then see inflation drop later, enjoy the benefits of a V shaped drop next year. As things stand today the country in in recession (best fit figure -5% GDP) and this is expected to continue to the end of the year, while inflation has shown signs of dropping in the latest sets of data but is still running at between 35% and 40% per annum. As wages are no longer keeping up with prices, the discontent at street level is rising fast and Macri’s approval ratings have dropped from 60% at the beginning of the year to between 35% and 45% today (depending on which pollster you prefer).

However 2017 does look brighter for the country and the situation was summed up neatly last week in by one of Argentina’s most famous economists (who seems to have been around forever, he was chief economic advisor in the Carlos Men_m years*), Miguel Kiguel in an economics conference. Here’s a quote (14) (translated):

“There’s not much doubt that next year Argentina will grow (i.e. year-over-year GDP expansion), even (Ex-Minister of the economy in the Cristina government Axel) Kicillof agrees. And there’s not much doubt that inflation will drop either. What we see this year in an inflation rate of 40% has a lot to do with the one-time readjustments (e.g. the very large utiliity bill increases, known as  “tarifazos”, as government subsidies were withdrawn). Later we’ll see whether the Central Bank has enough power to drop inflation to 17% in 2017 or maybe it will be a little higher, but nobody’s expecting an inflation rate in 2017 that starts with a 3, the most pessimistic are talking about 23% or 24%, the most optimistic around 17%.”

So there you have the scenario for the next year; pain today, GDP recovery at perhaps 5% next year, with an inflation rate that drops from its current 40% to something around 20% in 2017. The point here is that 2017 will be better, but will it be enough and for two reasons:

1)      Inflation at 20% is better, but it’s still going to hurt the back pockets of José Publico if their salary increases are restricted to below that level and add to the hurt they’re currently feeling. A year is a long time and the dissent is likely to get louder before it calms.
2)      A key point: In October 2017 Argentina has mid-term legislative elections in which 127 of the 257 lower house parliament seats (just under half) and 24 of the 72 upper house senate seats (one third) are up for grabs. This vote will be critically important, as not only might it change the balance of legislative power in Congress but it’s already being framed as the make-or-break moment for the Macri reform package.

Therefore, not only is there a reform period to get through without too much social protest, but there’s a time limit on progress too because if the recovery lags in the country and the rank and file are suffering too deeply come election day, Macri (and I keep reminding people that he only scraped in 52%/48% last year) is going to get a big thumbs down and then everything is up for grabs. And signs today are not good. Not only do we have his dropping approval ratings but as noted last week the largest and most powerful union in the country is now on the brink of calling a one day general strike to protest the measures in place. They want bigger wage increases etc etc, just the type of thing that would feed inflation (15) at the wrong time for the economic turnaround model Macri and his team are trying to implement. The strike still doesn’t have a fixed date and there are formal negotiations that are expected to go on for the next ten days, but a strike if it happens would be a clear negative and may set off further rounds of social protest.

Meanwhile in the mining scene, the government is still trying its hardest to push the Federal “all work together” model in the provinces and try to take executive decision power away from individual governors. That’s going to be a tough sell in places like Chubut and I’ve covered that example (particularly Navidad) closely, as it’s a good test case for the rest of the country. Then on top of all that, Barrick goes and adds insult to injury with another spillage incident at Veladero (see above), which wouldn’t have been any sort of problem if the company hadn’t been stupid enough to try and cover it all up.

Overall, Argentina gets one plus point for the macro and one negative point for the mining scene this quarter, but it’s still a story that’s being way overhyped in the North and the large-scale risks involved in jumping in too early are being ignored by most commentators (and the board of directors of Fortuna Silver).

*it’s bad luck to spell his name out completely