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Argentina

Alienating Investors

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.

Forecast Summary

SUMMARY OF 18-MONTH FORECAST

REGIMES & PROBABILITIES Fernández Majority 65% Divided Government 25% Unity Coalition 10%
RISK FACTORS CURRENT
Turmoil Moderate Same SLIGHTLY MORE SLIGHTLY MORE
Investment
  Equity Moderate SLIGHTLY MORE SLIGHTLY MORE Same
  Operations High SLIGHTLY MORE Same SLIGHTLY LESS
  Taxation Moderate SLIGHTLY MORE Same SLIGHTLY MORE
  Repatriation Moderate Same Same Same
  Exchange Moderate SLIGHTLY MORE SLIGHTLY MORE Same
Trade
  Tariffs Moderate SLIGHTLY MORE SLIGHTLY MORE Same
  Other Barriers High SLIGHTLY MORE SLIGHTLY MORE Same
  Payment Delays Moderate SLIGHTLY MORE SLIGHTLY MORE SLIGHTLY MORE
Economic Policy
  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%
RISK FACTORS BASE  
Turmoil Moderate SLIGHTLY MORE Same SLIGHTLY MORE
Restrictions
   Investment Moderate Same SLIGHTLY MORE Same
   Trade Moderate Same Same SLIGHTLY LESS
Economic Problems
   Domestic Moderate SLIGHTLY MORE MORE SLIGHTLY MORE
   International High SLIGHTLY MORE MORE Same
   * When present, indicates forecast of a new regime

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