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December 2017 Newsletter

Dear Clients and friends,

In this month’s Newsletter we provide a summary of our personal vision on the state of Argentina after one year under the administration of President Macri and a forecast for the upcoming year 2017. We also provide an overview on the new law on PPP (public-private partnerships), recently approved by our Congress, which is intended to boost long expected investments, mainly in the infrastructure sector.

1. Balance of first year of President Macri in office

While 2016 might be regarded as a year of transition and clean-up of the detrimental policies that President Macri’s pro-business administration inherited from kirchnerist populism, 2017 is expected to bring with it the positive effects of the ample changes in policy, rules and regulations that the current administration put in place with a great dose of success.

In this respect, one year after the new President took office, 52 % of the population believes that the general situation in the country will improve during the next year, in spite of the still stagnant economy, according to a recent study carried out by prestigious polling company, Poliarquía. Hope is the word that keeps raising the moods after a difficult year in which –besides the lack of economic growth- both fiscal deficit and inflation stayed at high levels.

Besides certain criticism to President Macri for trusting alleged neo-Peronism too much the head of the Executive still has a 55% approval rate, not a bad evaluation if one considers that he was elected in November 2015 with a little more than 50% of the votes.

Even if Macri’s administration has received critique from own voters for some harsh (already commented in previous newsletters) measures like the high increase of public / utility services’ rates (one of the received timebombs), or the immediate abolishment of taxes in favor of the mining sector -versus the hold off of income tax lowering on certain vulnerable sectors, it is also certain that a lot of concrete positive measures have also been undertaken, such is the case of exchange controls repealing, the end sovereign default, and the maintenance of state subsidies for the most needing, amounting to more than 30% of Argentina’s population, a reason not to immeasurably celebrate at end-of-year parties. The same is true for the government’s full frontal fight against corruption and rampant drug trade.

For some observers, the government may have made an error in giving the impression that prosperity would arrive fast in spite of Wall Street and IMF warnings on the high fiscal deficit that will need to be somehow financed. In this respect, the Parliamentary elections of October 2017 will be a relevant test on whether the public opinion is to continue accompanying President Macri’s attempt to shake things up, a reason why many expected investors still remain in a wait-and-see attitude till greener pastures show up, and a new congress –up to now dominated by the opposition- becomes more supportive of the many Executive shown initiatives.

For 2017 the unemployment rate is expected to continue approaching to one digit numbers, household consumption to recover, and the industrial sector to follow the farming sector, one of the few that showed profitable numbers in 2016 thanks to the prompt elimination of high tax hurdles. At international level, besides the still delayed recovery of our main trading partner, Brazil, concerns are added by the possibility of an increasingly restrictive credit and commercial policy in the U.S. that might negatively impact our region.

Nonetheless, a lot is to be expected from the real estate and construction sectors, where a 20% growth is expected in the year to come, partly due to what looks to be a very positive outcome of the current tax amnesty, which might show in part that Argentines found a government they can be regarded, both as predictable and rule of law defender. Similar positive numbers are predicted in the infrastructure sector, which is beginning to count on a more stable macroeconomic context, as well as on a new and modern PPP statutory regime, as commented in detail below.

Finally, it is worth highlighting that foreign investment decisions and commitments -most notably at the energy sector- amounted in 2016 to USD 30 billion, which confirm Argentina’s gradual return to the global markets.

2. New Statute on P 3

On November 30, Congress adopted a new legal regimen to govern public-private partnerships (PPP), bringing the Argentine legal framework on par with modern PPP standards, following countries of the region, such is the case of Peru, Chile and Uruguay which count with modern legal frameworks for the association between the state and the private sector as a way of boosting initiatives, services and works in the benefit of society.

The law’s goals are twofold: on one hand, it is intended to solve the problems that the country has had with delayed investments as a consequence of mistrust on the public sector and its changing of the rules of the game; on the other, to combine the experience of the international private sector and the investment resources to which the state has access. On the long run, an emphasis on building a more advanced infrastructure aims to raise the total productivity level of the country and thus its international competitiveness.

PPP flexible contracts now allow private actors to obtain financing and execute a project that is clearly defined in advance and receive from the state (seen as an equal party), or through the project itself, through a Project Finance scheme- reasonable long-term profits in the benefit of relevant sectors of the economy: from construction companies, banking and finance institutions, commodities providers, to SMEs and environmental organizations.

The two classic forms of public contracting that were in place in Argentina before the new PPP regime (the public works contract and the public works concession) often included uneven provisions on risk distribution that made them unattractive for local and international investors, and this in the hand of old fashioned governments was seen as a gate keeper of opportunities for development due to government prerogative to unilaterally modify or terminate contracts without responsibility. This is where the PPP regimen comes in as it can be applied to an endless number of projects that would not be viable under these old public contracting systems. Now, the private party might even suspend its services if the state were in breach of contract and even reclaim to international arbitration tribunals (e.g. ICSID) something resisted by the previous administration.

As examples of planned projects, the 2017 country budget estimates up to USD 40 billion available funds for construction of new roads and prisons that may adopt this new form of agreements.

It is expected that this new legal regime will bring more stability, predictability and confidence to private investors, whether local or foreign.

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We remain at your disposal for any comments and questions and would be happy to provide more information on any of the subjects above, as we keep closely following the developments in the legal and business environments in Argentina.

With kind regards, wishing you a Merry Xmas and all the best in the Year to come