The IMF Stand-by Arrangement agreed with President Mauricio Macri in June 2018 stipulates that the government can increase social spending by 0.2% of GDP if the economic situation worsens or more people enroll in social programs.

• The government is implementing unpopular austerity measures including subsidies cuts to reduce the primary fiscal deficit to 0% of GDP in 2019, which are likely to affect the most vulnerable sectors of the population.
• Additional funding from the International Monetary Fund and other lenders is likely to be allocated to strengthen social programs such as child benefit, pensions, food, and employment programs.
• The risk of protests and strikes will remain high over the next 12 months as labor unions and social organizations capitalize on the unpopularity of the government ahead of the 2019 general election, increasing the risk of cargo and transport disruption during strikes, and property damage during confrontations between demonstrators and the police.

On 1 November 2018, the World Bank (WB) and the Inter-American Development Bank (IDB) approved two loans for Argentina, totaling USD1.8 billion to strengthen social programs. Argentina has entered economic recession - IHS Markit expects the economy to contract by 2.3% of GDP in 2018 and 1.7% in 2019 - and has set strict fiscal deficit targets in the framework of a June 2018 Stand-by-Arrangement (SBA) with the International Monetary Fund (IMF) - expanded in September -, aiming at reaching primary fiscal balance in 2019, down from the estimated 2.6% of GDP deficit in 2018.

Deep austerity measures, such as removal of subsidies for electricity, gas, and transport, coupled with high inflation, expected by IHS Markit at 42% in 2018, are likely to push vulnerable segments of the population into poverty, undermining President Mauricio Macri's popularity. The poverty rate was 27.3% in October, in official statistics, with the government estimating that at least 800,000 people were pushed below the poverty line over the previous six months, and admitting the number was likely to increase. The additional credit line by the WB and the IDB is being earmarked to finance social programs, such as child benefit (Asignación Universal por Hijo: AUH), reduced public transport fares for the poor, and education, and employment programs.

IMF clause to protect the most vulnerable
The SBA includes a 'safeguard', a guarantee included in IMF-supported programs, to protect social programs and mitigate rising unrest due to the unpopular austerity measures. It allows the government to increase social spending and expand safety net programs by including a floor on federal government spending on social assistance of 1.3% of GDP, as well as an adjustor to priorities additional spending on social programs if economic conditions worsen, or if enrolment in these social program increases. The Ministry of Social Development is the body in charge of monitoring social indicators and assessing further spending needs. Spending can be increased by an additional 0.2% of GDP per calendar year, and is likely to go mainly to the AUH and basic pensions.

The government has already offered bonuses to the 4 million beneficiaries of the AUH, and has strengthened labor and food programs, and set up stricter controls for basic goods prices. The 2019 Budget, currently in Congress, does not include major cuts to social spending; on the contrary, it is estimated to grow by 32%. However, there will be deep cuts in other areas; 23% in education and culture; 48% in infrastructure and roads; 20% in water treatment and sewage, 8% in public health, and 17% in science and technology.

Despite these mitigating measures, Macri is facing pressure, mainly from labor unions and social organizations, against the IMF deal - which brings memories of the 2001 political and economic crisis - and its deep austerity measures. Private estimates quoted in the local media report that there have been 4,927 protests nationwide in January-October 2018, an 18% increase compared with the same period in 2017. Just in October, there were 101 protests in Buenos Aires province, and 80 in Buenos Aires City, while there have been four general strikes during Macri's term so far.

Outlook and implications
The government is likely to resort to the IMF safeguard to contain civil unrest, particularly in the first months of 2019, when they expect poverty rates to peak. This is particularly sensitive as Macri is planning to run for re-election in October 2019. The additional financing allocated to support social programs is likely to help contain strike risks by labor unions more willing to negotiate with the government (such as services and construction workers). However, the risk of protests and strikes will remain high over the coming 12 months, as labor unions, mainly linked to hard-line opposition Peronist faction, Kirchnerism, will capitalize on the unpopularity of the IMF deal and the government's austerity measures to step-up industrial action ahead of the 2019 election. This is likely to be led by the influential truckers' union (Camioneros), which has the capacity to organize disruptive strikes, normally lasting from 24 to 36 hours, likely disrupting supply chains, and delaying cargo to and from major ports, such as the Rosario export hub. These strikes are likely to be joined by all transport unions, paralyzing public transport, mainly in Buenos Aires City, including flight cancellations.

Social organizations, many also linked to Kirchnerism, are likely to organize protests attracting thousands mainly in Buenos Aires City center, near the Presidential Palace Casa Rosada, the Congress building, and 9 de Julio Avenue, causing severe traffic disruption. There is also a risk of violence, with some demonstrators throwing sticks, stones, and other blunt objects at the police and government buildings, with the police using tear gas and water cannons. There is a risk of arson against public infrastructure, such as refuse containers, and parked vehicles belonging to the police. Protests and strike risks will be highest in late November and early December as Buenos Aires will host the G20 Leaders' Summit, an occasion where demonstrators are likely to capitalize on the visibility of the event, which is highly likely to attract activists from abroad to protest against the G20. Controlling civil unrest will influence Macri's chances of re-election in 2019, as his popularity has been severely undermined since the peso started sharp depreciation in May 2018, and although no opposition figure has managed to capitalize yet, some moderate opposition Peronists are likely to become increasingly competitive. He will also seek to convey the message in front of G20 leaders that he is in control, in order to continue to secure the financial support he has been obtaining from the international community. Unemployment and poverty numbers will be indicators of the need to use the IMF safeguard, along with increased protests risks, while further salary increases agreed with unions above inflation will indicate reduced adherence and disruption during strikes.

Posted 09 November 2018 by Carla Selman, Principal Research Analyst, Country Risk, S&P Global Market Intelligence