Uncertainty in Argentina

Uncertainty in Argentina
If the first two months of 2013 are any indication, Argentina has a difficult year ahead. On 1 February, the International Monetary Fund (IMF) censured Argentina for failing to bring official inflation numbers in line with reality – a move that no member of the G20 has faced before. Afterwards, Cristina Fernández de Kirchner, Argentina’s president, dutifully denounced the international financial players that, she claims, have it in for her country – namely, the IMF and bond holdouts, which she labels ‘vulture funds’, that refuse to accept a debt restructuring agreement reached after the country’s 2001 financial crisis. Nevertheless, the very next business day, her administration took a limited step to address the country’s spiralling real inflation rate. On 4 February, interior commerce minister Guillermo Moreno announced he had reached an agreement to freeze prices for two months on all goods in Argentina’s major supermarkets. The price freeze is aimed at controlling inflation rates that some analysts put at up to 30 percent, over twice that of current official government figures. Argentina’s inflation woes are just the latest in a series of international headlines the country has made over the past year. But the country’s international prominence has nothing to do with international investor enthusiasm. In contrast to financial news headlines about other leading Latin American economies (the ‘Aztec tiger’, Mexico, or the huge growth in FDI flows into Colombia, for example), stories about YPF’s nationalisation and the on-going dispute with the UK over the Falkland Islands point to a country where political caprice triumphs over a stable investor environment. Indeed, Argentina today is a country where it is increasingly hard to get business done. The challenges facing businesses in Argentina are manifold. Historically, corruption has been a primary concern for companies active in the country. Argentina ranks 102nd of 174 countries in the Transparency International Corruption Perceptions Index, and has consistently ranked in the bottom half of the list since it was created. Additionally, there have been at least three FCPA enforcement actions in the past two years for bribes paid in Argentina and there is a widely-held view in the business community in the country that corruption is systemic. Indeed, businesses have always had to be vigilant of bribery and other impropriety in a jurisdiction, such as Argentina, with a slow and opaque bureaucracy that provides a fertile breeding ground for bribery and graft. Yet, the greatest challenge for businesses in Argentina currently is not corruption per se, but commercial uncertainty. Nowhere is this uncertainty more apparent than in the Kirchner administration’s attitude to commercial contracts. Recent events appear to indicate that contracts with the government can be revoked to suit political necessity. Repsol, for example, had its majority stake in YPF nationalised last April after Kirchner accused the company of low levels of investment and production that she blamed for leading Argentina to have to start importing oil in 2010. The government has also attempted to appropriate lucrative broadcasting licences held by Grupo Clarín, a large media group that has been critical of the Kirchner administration, in a supposed bid against monopolistic practices. It has been reported locally that as part of Moreno’s two-month price freeze deal, the supermarkets are banned from advertising prices, specifically in publications hostile to the administration like Clarín’s; meanwhile, media outlets more amenable to the current administration have seen revenues from government advertising steadily rise over the last few years. Thus, it has become clear that not only is contract enforcement subject to the vagaries of politics, but so is the granting itself of lucrative government contracts. For the companies willing to play by the rules (and not criticise the government), Argentina can still have its rewards. A good contract with the government may be an opportunity to temper current uncertainty. As one government lawyer we spoke to on a recent assignment put it, ‘as long as your partner is the government, you’re covered’. For those without secure government contracts, though, the business environment this uncertainty breeds makes doing business in Argentina more and more difficult. International companies are beginning to leave Argentina. Luxury brands such as Ralph Lauren and Cartier made public exits from the Argentine market last year after tight import restrictions and currency controls were instituted. Indeed, FDI in Argentina, although still positive, pales in comparison to that of its neighbours, Chile and Brazil, according to recent estimates by the United Nations Conference on Trade & Investment. Added to rising calls from local entrepreneurs for more consistent government policies, virtually all business sectors in Argentina are facing an increasingly gloomy commercial future. It is not just the large corporations that are leaving; smaller companies are also feeling the effects of government policies. A local entrepreneur we spoke to recently, who is also preparing to leave Argentina, told us that the country’s inflation makes it impossible to plan investments as ‘the uncertainty makes people with capital hold out for higher exchange rates’. It also has knock-on effects that affect small businesses particularly hard, he told us, such as consumers spending less. One notable exception, for now, is the oil and gas industry. Since the nationalisation of YPF almost a year ago, Argentina has been courting international oil companies to help develop the country’s vast shale gas reserves, which are considered to be the second largest in the world. Exploiting the shale gas will need expertise beyond that of YPF. Chevron has, however, expressed interest in investing in the Argentine project, although the lengthy on-going negotiations may suggest reluctance on the company’s part to commit. Repsol’s vow to sue any company that works with YPF before Repsol receives compensation for its nationalisation may play a part in this delay. Whatever the case, in deals this big, it appears that expertise may protect some companies against government capriciousness. Because the country needs its experience, Chevron, and any other qualified international oil and gas company willing to entertain the idea, has leverage in negotiations. The company may not only be in a position to negotiate favourable contractual terms, but by working in a consortium it would also be able to spread the risk of uncertainty that is damaging other economic sectors. It seems, therefore, that there are opportunities in Argentina’s mainland oil and gas sector for international companies, as long as they play by Kirchner’s rules – and as long as she continues to view potential profits from the sector as her best chance for future government funding. Kirchner’s political agenda is primarily a nationalist one. Because her focus is internal, international proceedings, such as the recent IMF censure, only matter to her administration in so much as they fit into the national political narrative. Even so, the worsening domestic economic situation, and correlated social problems such as petty violence, has also alienated large numbers of her constituents at home. Unionised workers, long-time political allies of Kirchner, are demanding significant salary increases in line with real inflation, while many middle-class citizens are frustrated by the inability to get dollars and growing insecurity. Buenos Aires’ large Jewish population has recently been disaffected by the government approaching Iran to help investigate the 1994 bombings of the Israeli Embassy and a Jewish cultural centre, of which Iran is widely seen as the chief suspect. Nevertheless, Kirchner has shown no signs of reversing course, even if her administration may now have begun to recognise the danger posed by inflation. Whether October’s national legislative elections will provide any change in tack is yet to be seen, although our contacts expressed doubt that they will, given the lack of a serious or unified opposition. Analysts we spoke to also believe Kirchner will certainly attempt to change the country’s constitution to allow her to run for another term in office in 2015. The future for international business in Argentina remains unpredictable. While Kirchner may be focusing her attention nationally, she will not be able to escape the consequences of international and financial pressures forever. Continued inability to access international capital, perhaps aggravated by a pending follow-up IMF ruling scheduled for 29 September, may eventually take their toll on her politically – especially if current economic uncertainty leads to yet another financial crisis. By Allison Everhardt Associate, Business Intelligence, London Image:PA
Published: 5th March 2013