By Nicolás Misculin
BUENOS AIRES (Reuters) - Argentina's opposition-dominated Congress helped center-right President Mauricio Macri pass market-friendly reforms in his first year in office, but legislators are growing more hostile as they gear up for mid-term elections in 2017.
In what could be a preview of next year, the lower house this month dealt the government a rude awakening when it passed an alternate version of the government's income tax proposal and forced Macri's team back to the negotiating table.
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"Lawmakers permitted governability before but now the elections are coming," said analyst Mariel Fornoni of consultancy Management & Fit. "Each lawmaker is going to have to start differentiating themself."
Businesses cheered Macri's election after 12 years of leftist rule but most want assurances the change he represents is sustainable and further reforms can be passed before they commit to investments needed to restore economic growth.
Argentina's best-known political movement, the currently fractured Peronism, and former presidential candidate Sergio Massa's Renewal Front party are the main political camps looking to earn more seats in Congress next October. Both are to the left of Macri on most economic policies.
A spokesman for Macri's Let's Change, or "Cambiemos" coalition in Congress admitted the scenario is concerning.
"It will be very different from this year... it is quite possible that Massa tries to drive the agenda next year," said the spokesman, who declined to be named.
Analysts do not expect Macri's party to gain a majority in either chamber in the 2017 elections, potentially limiting his reform agenda. Investors would like to see Macri's government keep promises for a capital markets reform, labor reform, and a revamping of Argentina's tax code.
"Neither a strong election for Cambiemos nor a thunderous defeat are expected, but either way the government will have to negotiate with the lawmakers," said political analyst Ricardo Rouvier.
'A YEAR TO STOP PENALTIES'
This year, Congress approved a 2017 budget with a lower fiscal deficit than that run by former President Cristina Fernandez. It also signed off on a landmark agreement with holdout creditors that allowed Argentina to return to the bond market for the first time in a decade.
But in what was considered the first major congressional defeat for Macri, the Senate in November rejected an election reform that would have revamped ballots in a way analysts said would have hurt Peronists.
Then, the lower house passed an income tax reform favored by Massa that would have drastically reduced the state's revenue. Furious government officials brought forward a new proposal that would reduce the tax take by some 7 billion pesos ($440 million) from their initial bill. The new proposal is expected to pass the Senate on Wednesday and the House on Thursday.
Followers of Fernandez, who is an ideological opposite of one-time businessman Macri and may run for Congress herself, do not rule out working closer with Massa's party.
"This government is only for the rich. We are going to work to find areas of agreement without abandoning our principals," said Peronist lawmaker Hector Recalde.
Complicating the outlook for Macri is a longer-than-expected recession, inflation that will likely end 2016 at a staggering 40 percent, and politically powerful unions threatening to go on strike for higher wages.
"It's going to be a year to stop penalties, because if you can't score goals at least you can stop the other side from scoring," the Let's Change spokesman said.
(Reporting by Nicolas Misculin; Writing by Caroline Stauffer; Editing by Andrew Hay)