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Argentina has been haunted by inflation since it defaulted on its external debt at the beginning of 2002. This year was no different....

Argentina has been haunted by inflation since it defaulted on its external debt at the beginning of 2002. This year was no different. "I would argue that the banking market is very depressed," says one attorney, noting that the banking industry in Argentina "has changed dramatically" since the crisis. Additionally, in 2008, President Cristina Fernandez de Kirchner nationalised the country's pension funds, which at the time, were the largest institutional investors in Argentina. The move still contributes to a sluggish investment environment according to the legal market.

"I am not really happy with what's been going on since 2008," says one attorney, but adds: "I am optimistic". The Argentine government restructured some defaulted debt, an action one partner in the market calls "the main event" of 2010. "Argentine issuers can now access the market," he says. Furthermore, high commodity prices and increased export opportunities, gained from the low value of Argentina's currency, helped to deliver robust GDP growth rates last year. GDP is forecasted to grow by nearly 6-8% this year.

"The local companies are really doing great," says one attorney, noting that the Argentine stock market has had a strong year. "The conditions are right . . . with foreign investment this would explode." Overseas investment in South America's second-largest economy remains lower than it is in Brazil, Chile, Peru, and Colombia, according to the UN Economic Commission for Latin America. "Argentina is a rollercoaster, we've been at the very top and the very bottom," says one attorney.

However, Argentina continues to flirt with inflationary pressures. The government raised a few eyebrows when it fined private economic consultants who had published contradicting inflation data. Private analysts claimed Argentine inflation through 2010 was between 25 and 30%, nearly 20 percentage points higher than the government's rate of 10%. The official estimate was still amongst the highest in the region.

President Kirchner's stewardship of the economy has not garnered fans in legal circles. "Banking and financial regulations change all the time in Argentina," says one attorney, adding that it creates uncertainty. "We are pretty confident that with a little switch in the politics better things are to come," says another.

As the country gears up for elections in October, most attorneys are confident that the President will win a second term. "Many people say it is highly likely the current administration will stay," says a partner. It seems likely that the current administration will continue its pro-growth, high inflationary policies if re-elected in October, a path that some in the legal community question. "As a result of the inflation, businesses are selling more," says one attorney. "The question is whether it is artificial or real growth. It is unsustainable in the long term."

Argentina's taste for mid-sized mergers continued this year, while larger transactions were sprinkled about. "M&A will have a lot of work," predicts one attorney....

Argentina's taste for mid-sized mergers continued this year, while larger transactions were sprinkled about. "M&A will have a lot of work," predicts one attorney. "Profiles of buyers are different: before it was hedge funds, now it is strategic buyers." Another partner laments the scarcity of big transactions, despite a greater volume of deals. "The values of the transactions are very low," he says. "You can count on your hand the number of big deals."

The October 2011 elections have added some uncertainty, but ominous inflationary issues, rather than elections, may have more to do with any slow-down in M&A activity at the year's close. "There is a perception that nobody knows what will happen next year because of the inflationary pressures," says one attorney. With inflation at anywhere from 10-30% and a government that has ramped up spending due to a commodities boom, many in the market are wondering how the economy will fare. In January 2010, the Central Bank of Argentina hired Brazil's state-owned mint to print three billion pesos, as Argentine banks struggled to meet demand for 100-peso notes.

The Government has also ventured further into the private market. In April, it eliminated a limit on shareholder voting rights for nationally-owned pension funds, potentially increasing the role of government in corporate decisions. "It is an issue for a few very large companies," says one attorney. "It will not affect the revenue of those companies for the time being."

Despite the political situation Argentina's GDP has been growing. Current assessments put it at 6.5 to 8%, which many sources attributed to high commodity prices. "As long as there is a big flow of dollars into commodities - no reason to believe it will stop in next two to three years - there shouldn't be any problems," notes one partner.

Of particular interest is how the energy-hungry Bric countries have turned their attention on Argentina's oil and gas resources. The year saw an impressive influx of Chinese investment into the hydrocarbon sector. At the beginning of last year, CNOOC, China's largest producer of crude and natural gas, purchased a 50% stake in a subsidiary of Argentina-based Bridas Energy Holdings for $3.1 billion and to close the year, Sinopec's acquired Occidental Petroleum's Argentine oil and gas business for $2.45 billion.