Photo: Mariano Pernicone via Flickr
Argentina’s YPF nationalization has won president Cristina Fernandez de Kirchner populist support at home, but has angered some of the country’s biggest foreign investors.The expropriation of Repsol’s stake in YPF is just one in a string of many policy actions that the Argentine president has been criticised for.
Following her expropriation bill, S&P downwardly revised Argentina’s outlook to negative, saying:
“In our view, the recent government policies could increase risks to Argentina’s macroeconomic framework, squeeze its external liquidity, and hinder medium-term growth prospects.”
Fernandez’s handling of Argentina’s debt problem
Before we dive into some of president Fernandez’s decisions, it is important to remember that Argentina has struggled to return to the credit markets after its spectacular 2001 default, and it is still struggling to meet its debt obligations.
Back in 2008, in an effort to settle Argentina’s colossal debt problems Fernandez sent a bill to Congress that would see the state take over $30 billion in private pension funds.
At the time Fernandez 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.
Then, in 2010, Fernandez forced then central bank chief Martin Redrado out of his position because he refused to set aside central bank reserves that the government hoped to use to repay it’s debt. From Bloomberg:
“The decree yesterday ordered legal proceedings to be brought against Redrado, saying his failure to carry out Fernandez’s Dec. 15 instructions to set aside the reserves created “a kind of anarchy.”
The government is seeking to tap the reserves as it faces borrowing requirement of about $11.4 billion this year, according to Credit Suisse Group AG.
Fernandez said in a speech today that the government is helping guarantee the payment of debt and “defending” the reserves. The debt plan “was not just a mere order from the executive branch, but the use of an exceptional tool” that the central bank is required to carry out, yesterday’s decree said.”
If that wasn’t bad enough, in March this year, the Argentine Senate approved a measure, launched by Fernandez, that would allow the government unlimited access to central bank reserves.
Photo: AP Images
The energy crisis
Fernandez has claimed that the nationalization came after repeated warnings that Repsol-YPF failed to invest in local oil fields and was in large part responsible for a 110 per cent increase in oil imports.
But many argue that Argentine policies are behind its energy deficit which is expected to rise to $7 billion this year. Its decision to keep domestic oil, natural gas, and electricity prices lower than international prices and sometimes below production costs has deterred foreign companies from investing there and seen consumption increase.
UBS economist Javier Kulesz sums this up saying Fernandez’s administration, which has been in power for nine years, has failed to recognise the basic economic principle that “this energy consumption- promoting / production-discouraging price policy is largely behind Argentina’s growing energy problems.”
Energy imported at international prices but sold cheap has driven up its energy subsidy bill in recent years. If growth and inflation are being fuelled by an aggressive expansionary policy stance, and energy prices don’t change, its import and subsidy bills will surge posing a massive problem for a country like with limited access to international markets.
Kulesz’s problem is not with the nationalization itself but with the way in which it was done:
“The government adopted a very unilateral and hostile stance. Going into the announcement, it carried out a quite successful plan to drive YPF stock prices sharply lower. Later, it decided to delegate responsibilities for YPF valuation to the local National Appraisal Tribunal (we don’t know the variables the Tribunal will be using in its valuation models, but we can say with a high degree of conviction that they will set a very low price). A more market based approach would have saved Argentina of the many legal and economic headaches that it will likely face once this operation is completed.”
Some like John Gapper of the Financial Times think alienating Repsol leaves Argentina without a major western company that has the capital or know-how to develop its huge shale gas discovery at Vaca Muerta.
A huge criticism leveled against Fernandez is that she constantly resorts to populist measures to boost her ratings instead of acting in national interest. Back in 2010, when Argentina and the UK fell out over Britain drilling for oil off the coast of the long disputed Falkland Islands many thought it was another ploy for Kirchner to boost support at home ahead of the elections.
Photo: AP Images
Restrictive policies and interventionThe YPF expropriation is only the latest in a string of protectionist measures launched by Kirchner.
Her government enacted import controls as the country’s 2011 trade surplus declined year-over-year, hit by economic growth and a strong peso. At the time, Argentina arbitrarily increased the range of products that would be liable to import taxes.
This was also followed by a measure that forced companies in the extractive sector – those that are responsible for providing raw materials like oil, gas, metals, minerals that are extracted from the Earth – to repatriate their export revenues.These measures came at a time when capital flight began to be perceived as a huge risk.
The inflation mess
Higher commodity prices and Argentina’s expansionary policies have helped its economy grow but also caused a rise in inflation that the government has tried unsuccessfully to keep in check through heavy subsidies.
Inflation is currently over 20 per cent, and it is widely claimed that the country misrepresents its inflation data. Remember, the Fernandez was trying to silence any unofficial inflation numbers in the country and the state even tried to file criminal charges against economists at MyS Consultores for allegedly publishing false information about the country’s inflation numbers.
Kulesz warns that Argentina is looking at stagflation:
“In the absence of policy adjustments, we think Argentina is headed to stagflation pretty much like past and present populist experiments in Latin America. YPF nationalization can only reinforce the view of this one-liner. If we are right, the long term will arrive for Argentina, and when it does, reality will bite irrespective of any short term popularity boost.”