Argentina's Messy Politics And Economy Are Being Laid Bare With Its Latest High Drama Nationalization

Cristina FernandezArgentinian president Cristina Elisabet Fernández de Kirchner

Photo: AP Images

Argentinian president Cristina Elisabet Fernández de Kirchner’s decision to nationalize YPF, by expropriating 51 per cent of Repsol’s 57.43 per cent stake in YPF, has again kicked-off the debate about Argentina’s worth as an investment destination.Many suspect that this reinforces the worst stereotypes about Argentina. From Maplecroft:

“Although Argentina’s action was widely anticipated, the measure has nonetheless confirmed many investors’ worst fears over Argentina: that the country was an unstable investment destination whose leaders remained dangerously susceptible to unpredictable bouts of populism and economic nationalism.”

A History Of Nationalizing

But this isn’t the first time Fernandez has expropriated private property, which is what’s truly worrying investors. Back in 2008 Fernandez sent a bill to Congress that would see the state take over $30 billion in funds in its private pension system. At the time Fernandez had argued that she was acting to shelter pensions from the global financial crisis but critics said it was to help the government cover its shortfall as it was coming up on repaying its debt.

A few months later the government nationalized Aerolineas. At the time Spain’s Grupo Marsans which owned Aerolineas took the case to the World Bank’s International Centre for Settlement of Investment Disputes. Marsans had agreed to sell a majority stake in the company, but was disagreed with Congress over the value of the airline. And when her husband was president, Nestor Kirchner nationalized the country’s largest water utility and the national postal service.

While Fernandez has said she is seizing the stake in the interest of the Argentine people, many suspect otherwise. Fernandez’s move comes at a time when she’s losing political support at home and when the country’s domestic economic crisis is growing. Citi’s Joaquin Cottani says:

“We expect, however, that the initiative will be politically popular and that Cristina Fernandez de Kirchner will likely witness an uptick in her approval ratings. The initiative is likely to be a politically profitable one at a time when the economy is slowing down markedly.”


Photo: AP Images

Argentinian PoliticsFernandez’s YPF takeover also seems to be coinciding with renewed calls for sovereignty of the Falklands Islands in Argentina. From The Guardian:

“Renationalisation is aligned in the minds of Fernández supporters with the renewed demand for sovereignty over the Falkland Islands in the South Atlantic claimed by Argentina as “Las Malvinas”.

“The Malvinas are Argentine, so is YPF,” say posters around the country and a T-shirt that artists who support Fernández have started wearing on internet campaigns in favour of the takeover. “This ends five centuries of white Spanish domination,” said a supporter. Argentina was ruled by Spain until  its independence in 1816.”

Is It Just A Distraction From The Economic Mess?

Argentina’s economy is in shambles and some argue that such dramatic takeovers only serve as a respite for Fernandez’s administration from the real problem at hand. The country is in the process of unwinding macro imbalances brought about over the past few years from a hostile international environment following its default in 2001.

Inflation is currently over 20 per cent and it is widely claimed that the country misrepresents its inflation data. Remember the state was trying to file criminal charges against economists at MyS Consultores for allegedly publishing false information about the country’s data. But one way or another high inflation means the country is likely to see subsidies cut, a blow to consumers.

Real GDP growth is expected to fall to 3 per cent year-over-year (YoY) in 2012, from 8 per cent in 2011, according to Nomura’s Boris Segura:

“Rampant portfolio dollarization and a shrinking trade surplus are putting pressure on international reserves.

Growth in government primary spending is likely to slow because of the overhaul of subsidies to utilities and public transportation. Interest rates are likely to remain high, and become less negative in real terms.”

While Argentina is facing growing international criticism, it is unclear what the real implications of such a move will be. More significantly though, the lack of expertise of a Western oil company will hurt the government’s efforts to boost oil production. It is as John Gapper of the Financial Times writes:

“The best time to squeeze foreign companies is when the hard work of investment and exploration is over and a state-owned oil company can reap the benefits. It is not when your country has deep fiscal problems, no access to international capital markets and a looming investment challenge.”

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