Overview of Argentina's current financial climate
Carlos E Alfaro
Alfaro Abogados
Buenos Aires
Carlos E Alfaro (Bio)
In October 2011 Argentina will hold presidential elections, renew part of the Senate and of the Chamber of Representatives and the majority of the provincial governors and city majors. In a national election year most countries investment and commercial decisions get postponed; financial markets become very conservative and a run for safety becomes a trait of the stock trading. None of the above is happening to Argentina. Much to the contrary, the international community is now paying more attention to Argentina as an option for new investments and business in comparison to previous years.
This change in attitude has been caused by various factors:
i) the services for the payment of Argentina's foreign bond debt during the next five years represents only 0.9% of its GDP;
ii) while the net debt in 2002 was equivalent to 160% of the GDP, today it only represents 26%;
iii) according to private economic advisors independent from the government Argentina will grow 7.8% this year;
iv) there is no need for international financing this year or in 2012 to sustain growth; and
v) production is slowly catching up with the demand, which will gradually reduce inflation expectations.
Argentina has been growing for the past decade at an average annual rate of more than 7% and this has led to the incorporation of millions of argentines into the market. This in turn has a positive impact in consumption and indirectly in industries such as energy, oil and gas, or agro-business. These sectors have already attracted a lot of attention from China in 2010 primarily in energy and mining (CNOOC and Sinopec acquiring shares of oil and gas companies and gas concessions, respectively) and will continue to attract other investors that are looking for promising returns.
As long as the international market price of commodities continues to sustain high prices, Argentina will generate a substantial income from exports of agricultural products, primarily soy beans. Another fact to be considered in this equation is the growth of Brazil. The country has become the main trade partner of Argentina in the industrial sector (mainly automobiles), so as long as Brazil continues to grow Argentina will benefit.
The positive results mentioned above have been obtained without neglecting social concerns. Much to the contrary, unemployment has been dramatically reduced; the level of salaries for an average worker in dollar value in Argentina is the highest of Latin America as is its purchasing power. The unemployment rate came down from 25% in 2002 to 6.5% and families with underage children and pregnant women receive the equivalent of one monthly minimum salary.
The internal market has benefited from the above circumstances. Strength in this area of the economy, where the national industry becomes the driving force, has been a priority of the government. It has also become a catalyst for luring foreign investments and the creation of new local entrepreneurs.
The economy revisited
For the past decade Argentina has had an outstanding economic track record. The numbers prove that the country has pulled out of the 2001 crisis and is ready to reap all the benefits that stem from the attention that Latin America as a region is getting. For example, Argentina has sustained a fiscal and trade surplus for the last seven years. The level of production of automobiles and spare-parts has increased exponentially since 2003. Consumption has been growing at 9% per year. Salaries have appreciated in pesos and unemployment rate has been decreasing, even amidst of the world economic crisis of 2009.
The same can be said of the real-estate market and the banking system which have remained solid during and after the crisis. This is because real estate in Argentina is mainly a cash market with fewer people relying on mortgages to purchase real estate. In addition the banks did not participate in the derivative and structured products markets before the global crisis and were not loaded with the toxic mortgage products that were the main cause.
Construction is booming all across the country among the middle class and the Government has also embarked in an ambitious plan to provide housing for the poor.
The Administration is also seeking funds for 13 projects ranging from rehabilitating the country's railways to the South America's tallest telecommunications tower.
The navy and railroad sectors top the list, with $2.18 billion to buy railroad and naval equipment from China and other countries, and $615 million to fund railroad-related projects. Chinese banks have promised loans of $9.5 billion to buy railroad equipment to upgrade Argentina's rail system. Argentina would receive 19-year loans carrying an interest rate of the London interbank offered rate plus 600 basis points.
In the energy sector, the government wants to borrow a) $1.22 billion to build four hydroelectric projects in southern Argentina, b) $700 million for the works on the country's third nuclear power plant Atucha III, c) $349.7 million for the Gasoducto del Noreste Argentino natural gas pipeline, d) $130 million for a plant to re-gasify liquid natural gas, e) $50 million for work on the Yacyreta hydroelectric dam that Argentina shares with Paraguay and f) $42.5 million for a second gas pipeline.
Other projects include:
(i) $780 million to expand and improve the coverage of water and waste utility AySA;
(ii) $650 million to build five aqueducts; and
(iii) $300 million to buy aircraft.
In telecommunications, the government wants to spend $390 million on fiber optic cabling and satellites as part of the Administration's plan to expand Internet and public television throughout the country, and $195 million to build a 360-meter tall telecommunications tower.
In 2010 investments represented 22.7% of the GDP: 17 points of which were private investment and 5.7 of public works divided into 7 points construction, 10 points equipment, 2.7 points in transportation equipment and 3 points machinery.
The highest value reached in the 1990's was of 21.1% in 1998.
The objective of the government in the medium term is to maintain the level of investments in public works without financing it with monetary emission and increase the level of private investment.
Foreign investment
After the 2001 crisis Argentina was faced with many hard decisions to make, many of which were really not even an option for the government in power. But the crisis had struck hard and unattractive policies needed to be implemented.
Some of these policies gained a bad reputation for Argentina within the international investment community. However today, both economically and politically speaking, foreign investors are making the decision to trust Argentina once again.
This trust could be seen when China National Offshore Oil Corporation (CNOOC) purchased 50% of Pan American Energy from British Petroleum (BP). The same year, another Chinese oil company, SINOPEC, purchased all of Occidental Petroleum's Concessions in Argentina. "This speaks to the value proposition of investing in the petroleum industry in Argentina... investment by the Chinese and others will continue in 2011, particularly as exploration and development efforts ramp up in the country,'' according to Kevin Shaw, Calgary Energy Sector analyst.
Gas will be target of many investments for years to come. Argentina boasts the world's third largest recoverable shale gas resource. According to the US Energy Information Administration (EIA), Argentina is host to shale resources with 774 trillion cubic feet of technically recoverable resources.
Other areas of interest for foreign investments in Argentina are:
a) filming (TV series, films, publicity, advertising) where it offers promotional benefits and a very good professional level;
b) wine is a sector in continuous growth and where the price of developing new land is still well below international prices. Furthermore, Argentina has surpassed Chile in wine exports to the United States with its 'malbec' grape as the star;
c) processed food, the government is providing benefits to companies to add value to Argentina's enormous capacity to produce primary products at a very low price;
d) software and information technology. Thanks to a well educated level in its population, Argentina has become a niche for site developments and providers of internet services;
e) call centres and other similar services. In 2002 there were not any call centres in Argentina. Today more than 70,000 employees work in this sector and the business is expanding;
f) mining. Argentina has the lowest tax impact for mining exploration in the developing world. It has vast resources of lithium, copper, silver, gold, phosphate, and other minerals; g) port and roads are needed to take advantage of the increase in international and regional trade. The latter primarily to commercially integrate the Mercosur countries;
h) pharmaceutical industry. The country has a high level of professionals in this field and the production costs are a fraction of world levels.
i) reinsurance. Insurance risks up to $50 million must be reinsured by local reinsurers. All sums exceeding such limit can be reinsured by foreign reinsurers technically admitted as of September 2011. Retrocession contracts are exempted. Investments in this lucrative sector by large international players will follow.
Presidential elections
As mentioned above during 2011 we have seen more interest in Argentina. This interest is shown in conferences, meetings, and even articles in legal and economic magazines that are expressing what many of us have already forecasted in the past but have gone unheard: opportunities abound in Argentina, assets value are low compared to other countries in Latin America and human capital is exceptional. We are seeing private equity funds and strategic investors buying companies in a varied array of sectors at present. As mentioned earlier, sectors involving consumption are highly attractive as are the oil and gas sectors, construction sector and last but not least the transportation sector. Local entrepreneurs are leading the investment spree and many new business groups have grown at the same pace as Argentina's internal market.
Therefore, despite widespread criticism of the governing style of President Cristina Kirchner, the reality shows that Argentina's economy has been performing remarkably well in many fronts. Polls indicate that she has good chances of winning her re-election in October. Furthermore, most of the opposition candidates are dispersed and have not been able to convey a clear message for change. If this scenario does not change, it seems likely she will be re-elected.
Moreover, many investors can see for themselves that nothing will change much after the October elections. If Cristina Kirchner wins the election, we will see four more years of the present political and economic program, that judged by the economic numbers mentioned in this article, is something to look forward to. On the other hand even if she loses the election, the winning party will not make a 180 degree shift in policy.