Fernández Makes First Moves in Argentina

In its first week in office Argentina’s new Peronist government, led by President Alberto Fernández, has begun making its opening moves. The economy, the justice system, and foreign relations have all figured prominently.

One of the big questions facing the new administration is whether it can steer the country out of the economic mess it has been in for most of the last two years. Ultimately, its political fate depends on achieving that economic turn-around, ideally in time for the mid-term congressional elections due in late 2021. First indications point to a combination of big emergency tax hikes and increased social welfare measures designed to cushion the impact of austerity. Getting some kind of balance between the two may be difficult.

President Fernández has presented a wide-ranging bill to the federal congress seeking emergency powers. The bill is known as the Ley de Solidaridad y Reactivación Productiva (‘solidarity and productive recovery law’). It would give the new government special powers to legislate by decree until 31 December 2020 by declaring an economic, financial, fiscal, administrative, social security, and energy emergency.

Among other things the bill sent to congress allows soya export taxes of up to 33%; increased taxes on foreign travel; a six-month freeze on electricity and gas tariffs; and short-term government bond issues as part of a wider debt rescheduling. The bill was being debated in congress as this issue went to press (the new government has a majority in the senate, but not in the lower chamber). The bill attracted an initial round of criticism from political opposition parties, who questioned the extent of the emergency powers. Deputy Luis Pastori of the Unión Cívica Radical (UCR), one of the three parties in the centre-right opposition coalition Cambiemos, asked if a massive tax increase (‘impuestazo’) might not contradict efforts to boost economic recovery. 

Prominent amongst the first measures has been a sharp increase in agricultural export taxes, known as ‘retenciones’. For years, retenciones have been at the centre of political controversy. Argentina’s new Vice-President Cristina Fernández found herself immersed in a major crisis back in 2008, near the start of the first of her two terms in office (2007-2015), when she imposed higher export taxes on the country’s top farmers, a group often described as part of the country’s ruling establishment.

It is noteworthy that the government was divided back then over how far and how radically to press on with the tax; amid the dispute the then-cabinet chief Alberto Fernández, who identified with a more conciliatory stance, resigned. Now president, Fernández is seeking what he hopes will be a more unified approach within his party.

The government of former president Mauricio Macri (2015-2019) had eliminated most retenciones in 2015 but was forced to re-impose them in September last year, as a result of the foreign currency crisis. The new government has pushed them up further. Soya export taxes have been raised to around 33% (from about 25% previously), with taxes on maize and wheat exports jumping to 12% (from 7%), and those on beef rising to 9% (from 7%).

Given the country’s debt crisis a rise was perhaps inevitable. But the powerful farming unions are unhappy, saying the incoming government dropped earlier promises to consult them before making big changes. President Fernández said he had no choice but to adjust the tax rates and sought to justify them on the grounds that the peso has lost significant value against the US dollar to the benefit of farmers under the previous tax-collection method. He said the export tax had been fixed when the peso stood at Ar$36/US$1 and now it was Ar$63/US$1.

Another big revenue-raising measure is a 30% tax on all US dollar-denominated overseas credit card purchases, which also applies to services paid in foreign currency (such as subscriptions to Netflix and Spotify). These taxes will hit Argentina’s middle and upper classes, particularly as they come at the start of the summer season when many Argentines travel to Uruguay and Brazil for their holidays.

These taxes also triggered another bout of foreign currency turbulence of the type that troubled the previous government. The ‘blue’ or informal dollar exchange rate jumped 9% on 16 December to Ar$72.50/US$1, above the official rate of Ar$63/US$1. Repeated runs on the peso dramatically eroded Macri’s authority; now that Fernández is in the hot seat he will have to try and avoid a repeat performance.

Ramping up spending and controls

The new government is seeking to stabilise the social situation through some extra spending and tough new controls on the private sector. The most important of the latter is an emergency decree doubling legally required compensation payments if any workers are laid off in the next 180 days. Some business leaders have accepted the move as necessary, while others have said it is counterproductive, promoting informal, rather than formal employment. On the extra spending side, Fernández has announced an extra bonus for low-income pensioners, and an extra end-of-year payment for those in receipt of child benefit. More measures are expected. 

The team under the economy minister, Martín Guzmán, appears to be focused on reducing both fiscal and current affairs deficits as a means to renegotiating both the existing Stand-By Arrangement (SBA) with the International Monetary Fund (IMF) and the country’s wider foreign debt. There have been suggestions that Guzmán is looking for a two-year extension of debt maturities to give the domestic Argentine economy some breathing space.

Guzmán has been careful to signal he is not seeking a return to radical Kirchnerismo which ran a large fiscal deficit and printed money to cover it. But while there is clearly room for negotiation, the creditors say a comprehensive economic plan is still lacking; some speak of “lingering uncertainty” over how Argentina intends to resolve its payments crisis.

Judicial reform

One early point of scrutiny will be the new government’s approach to the judiciary. President Fernández has supported the claim by his Vice-President Cristina that she has been the victim of political persecution through the courts, implying that the multiple corruption cases against her lack substance. He has promised judicial reform, saying in his inaugural speech that “without an independent judiciary there can be no democracy”, and promising to put an end to the political manipulation of the courts. However, at this stage it is not clear whether he favours genuine independence or simply to change the direction of influence.

A potentially worrying early sign was the rapid release from prison of two Kirchneristas held on corruption charges, Julio de Vido and Roberto Baratta. De Vido, a former planning minister and Baratta, a senior official in the ministry, are on trial in the Cuadernos bribes-for-public-works case; de Vido is also serving a five-year and eight-month sentence for his role in the Once railway tragedy in 2012 in which 52 people died. Only three days after the change in government, a judge moved both men to house arrest. Anti-corruption campaigners will be seeking to establish whether this was simply a one-off or the beginning of a pattern.

Those who worry about a new politicisation of the judiciary point out that Marcela Losardo, the new justice minister, is a close friend of 30 years’ standing of the vice-president. Her deputy minister, Juan Martin Mena, sat with Cristina when she testified in court in one of the corruption cases against her on 2 December. Carlos Zannini, the new attorney general, is also a long-standing ally of Cristina’s. He was legal and technical secretary to the presidency from 2003-2015 and was himself imprisoned for three months last year for allegedly covering up Iranian involvement in the bomb attack on the Jewish community centre (Amia) in Buenos Aires in 1994.

The government is proposing Daniel Rafecas for the position of prosecutor general. This appointment requires senate confirmation with a two-thirds majority. As a judge Rafecas handled some sensitive cases against Peronist officials, including the 2015 charge that the government had covered up the Amia bombing. That case was brought by prosecutor Alberto Nisman, who was shortly thereafter found dead in his apartment in Buenos Aires under suspicious and still unexplained circumstances. Rafecas eventually dismissed the case – a decision ratified by higher courts – although it was later re-opened under a different judge in 2016.

In terms of foreign policy, the new government is showing a carefully calibrated shift to the Left. One interesting hypothesis is that, aware that it will have to compromise and make tough choices on economic policy, retaining a degree of unpopular domestic fiscal tightness, the Alberto Fernández administration is prepared to accommodate its Kirchnerista wing by being a little more radical in its international positioning – up to a point.

Radical signals have included granting political asylum to deposed Bolivian president Evo Morales and getting closer to the Nicolás Maduro administration in Venezuela (Jorge Rodríguez, Venezuela’s communications minister, attended Fernández’s inauguration in Buenos Aires, as did Cuba’s President Miguel Díaz-Canel). But the shift is limited. The new president was also quick to meet US Assistant Secretary of State Michael Kozak, who promised Washington’s support in negotiations with the IMF.

The new foreign minister, Felipe Solá, tried to strike a middle position on Venezuela saying his government was “unhappy” with Maduro, but also equally unhappy with Venezuela’s anti-Maduro opposition. He added that Argentina would remain a member of the Lima Group, the 12-country hemispheric contact group that seeks a political solution to the Venezuelan crisis, from which the Fernández administration was widely expected to withdraw.

Economic contraction

The economy minister, Martín Guzmán, said the proposed new taxes were essential to address “a very deep social and economic crisis”. The new bill was sent to congress just as the national statistics institute (Indec) published data showing that GDP contracted by 1.7% year-on-year in the third quarter, although it did register a 0.9% expansion on the second quarter.

Wider reform

Other proposals contained within the bill presented by President Alberto Fernández would see electricity and gas tariffs frozen for 180 days, while a new tariff scheme is drawn up, and the declaration of a public health emergency. President Fernández said the health budget had fallen by 45% under the Macri administration. Noting that there had been a growing outbreak of measles, Fernández said that certain vaccinations would become obligatory. He has scaled back the section of the bill most widely rejected by the opposition which would have allowed his government to carry out sweeping administrative reforms of decentralised institutions.