The nationalization of YPF has boosted President Cristina Fernández’s popular support, but the international reaction has been decidedly less positive, with foreign political and business leaders decrying the move as state thievery, and government officials in Madrid pressing its EU allies to impose sanctions in order to force Buenos Aires to cough up $10.5 billion in compensation to Repsol for its expropriated 51% share of the company.
The longer-term economic (and, by extension, political) implications of the move would seem to be largely negative. Independent estimates suggest that developing the recently discovered Vaca Muerta shale gas reserves and boosting oil and gas production at existing facilities will require investment of up to $40 billion. The government cannot possibly put up the capital on its own, and the seizure of YPF will make it very difficult to attract foreign partners.
Complaints about Argentina’s treatment of foreign investors and trade partners are nothing new. The EU has reportedly agreed to file a formal complaint over Argentina’s import rules with the WTO, and other blocs and countries may follow suit. But the simple fact is that the actions of the Argentine government have benefited Argentina, and to the extent that those actions have been penalized, the benefits have outweighed the negative impact of the punishment. As long as that remains the case, there is little reason to expect that the government will change its ways.
The big question is how long that can or will remain the case. Thus far, import controls are working, as Argentina’s trade surplus has been growing in recent months. However, retaliatory moves by trade partners (for example, the suspension of preferential access for Argentine goods to US markets) will hamper the growth of exports as weaker global demand heightens competition, and the current account balance is forecast to move into deficit this year, putting pressure on central bank reserves.
Less immediately, the government’s actions are likely to cost Argentina incalculably in terms of foregone investment. Already, Argentina’s neighbors, most of whom have long complained of Buenos Aires’ heavy-handed treatment of foreign partners, are exploiting the YPF incident to remind investors that they, unlike Argentina, welcome foreign investors and are willing to treat them fairly.
SUMMARY OF 18-MONTH FORECAST
|REGIMES & PROBABILITIES||Fernández Majority 65%||Divided Government 25%||Unity Coalition 10%|
|Turmoil||Moderate||Same||SLIGHTLY MORE||SLIGHTLY MORE|
|Equity||Moderate||SLIGHTLY MORE||SLIGHTLY MORE||Same|
|Operations||High||SLIGHTLY MORE||Same||SLIGHTLY LESS|
|Taxation||Moderate||SLIGHTLY MORE||Same||SLIGHTLY MORE|
|Exchange||Moderate||SLIGHTLY MORE||SLIGHTLY MORE||Same|
|Tariffs||Moderate||SLIGHTLY MORE||SLIGHTLY MORE||Same|
|Other Barriers||High||SLIGHTLY MORE||SLIGHTLY MORE||Same|
|Payment Delays||Moderate||SLIGHTLY MORE||SLIGHTLY MORE||SLIGHTLY MORE|
|Expansion||Moderate||SLIGHTLY MORE||SLIGHTLY MORE||Same|
|Labor Costs||Moderate||SLIGHTLY MORE||SLIGHTLY MORE||Same|
|Foreign Debt||Very High||Same||SLIGHTLY MORE||SLIGHTLY LESS|
SUMMARY OF FIVE-YEAR FORECAST
|REGIMES & PROBABILITIES||*Divided Government 50%||FPV-led Coalition 35%||Unity Coalition 15%|
|Turmoil||Moderate||SLIGHTLY MORE||Same||SLIGHTLY MORE|
|Domestic||Moderate||SLIGHTLY MORE||MORE||SLIGHTLY MORE|
|* When present, indicates forecast of a new regime|
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