Argentina: Then, Now and Next?

by Manatt, Phelps & Phillips, LLP
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Flash back ten years, and Argentina enjoyed an average annual growth of 9%, was the strongest economy in Latin America and considered an impending rival to the up-and-coming BRIC countries. Over the ensuing years, as employment increased and incomes rose, government revenues and spending also increased.

Today, economic turbulence, accelerating inflation, and ad hoc economic interventions characterize Argentina. Since January 2013, the value of the U.S. dollar has skyrocketed 29% and the unofficial exchange rate is almost double the official rate. Double-digit inflation is estimated at about two and a half times the official rate, and the prices of Argentine products have nearly tripled. Argentina faces a 2.4% annual growth rate, restrained economic capacity, a censure from the IMF, challenges to recent trade measures in the World Trade Organization (WTO), and social unrest at levels similar to the aftermath of the 2001 economic crisis. To strengthen government coffers, foreign and domestic enterprises have been nationalized.  

As a country with so much potential, so rich in natural resources, culture and history, one can't help but ask: what is happening today in Argentina, what's next, and will Argentina change course? 

The current administration, under President Cristina Fernandez de Kirchner, has intervened in the economy to stem capital flight and protect depleting foreign exchange reserves in ways that are unpredictable and inconsistent. Measures include a series of strict currency controls, such as restrictions on the ability to purchase dollars and the use of debit cards while abroad, and a 20% tax on all foreign transactions, including international flight tickets and payment of foreign services. The consequence has been increased currency transactions in the unofficial market, where the dollar value is now AR$8.50, compared to AR$5.12 in the formal market. To purchase U.S. dollars today, a request for approval must go through the Argentine tax revenue agency. In attempts to preserve the value of their savings, more and more Argentines have turned to buying  gold despite government barriers.

To curb inflation, which according to official statistics is 11.1% but unofficially believed to be above 25%, the government has targeted supermarkets. In addition to a 60-day food price freeze imposed in February and expected to extend through 2013, the government confirmed in early March that talks are under way for a new credit card for exclusive use in supermarkets. The "Supercard" would eliminate the 3% commission on credit card transactions that banks receive. While a positive move for the government and supermarkets, Argentines are particularly dependent on the promotion-based shopping offered by banks. This new "Supercard" could result in huge declines of usage for widely used credit cards such as Visa and MasterCard. In mid-April, the government announced a six-month price freeze on gasoline and diesel prices at service stations.

Internal issues have spilled over into international disputes:

  • IMF Censure: Failure to remedy the inaccuracy and lack of transparency of its economic data made Argentina the first country in the history of the G-20 to be censured by the IMF. The government has until September 20, 2013, to correct its statistics. Failure to comply could result in expulsion.
  • WTO Cases: The U.S., EU, Japan and Mexico stepped up the debate on various trade measures with complaints at the WTO. Challenged measures include trade balancing requirements, nonautomatic import licenses, and overall import tariff levels, among others.
  • Debt Obligations: Disputes over debt obligations from the economic crisis in 2001 have been ongoing. On March 29, Argentina submitted its proposal to a New York court to pay bondholders about one-sixth of $1.3 billion in defaulted bonds. Possible consequences include a technical default on payment; however, that would not likely substantially affect Argentina's peso-based economy.

The Argentine business climate poses challenges to outside investors. Nationalizations have sent a worrisome signal. Besides the expropriation of Aerolineas Argentinas and the YPF from Spain's oil conglomerate, Repsol, nationalizations have included the transfer of private pension assets, which amounted to one-third of GDP and included foreign ownership, to the government's social security agency. Rule of law in practice has not given confidence to many investors. Following a 2011 presidential decree, the government accrued additional voting rights in partially government-owned corporations. This not only gives the government more influence in the private sector, but also increases its influence in some of the biggest corporations in Argentina.

Nonetheless, few predict a major economic collapse. Argentina has relatively large reserves and the banking system continues to function. Commodity prices remain relatively high, and Argentina is a country of vast resources. With almost half of total exports based in soy, soy products, cereals and mining resources, investment in the natural resource and agricultural sector grows steadily. Potential projects include undeveloped mineral resources, such as recoverable shale gas at an estimated $774 trillion cubic feet, and some of the highest grade lithium and potassium mines in the world. The state-owned YPF and Dow Argentina recently announced an MOU to explore for shale gas and cooperate on developing Argentina's petrochemicals industry. France's Total acquired four exploratory shale gas licenses in 2012. Also in 2012, Lithium Americas announced it would invest $816.75 million in the Caucharí-Olaroz mining project, expecting annual exports between $164 million and $252 million. Some niche opportunities are attractive - film production and entertainment, tourism, and IT solutions, among others. And some states have their own investment and development programs and interests.

Going forward, political stakes are high with important midterm elections this October. The constitution prohibits President Kirchner's reelection in 2015. Success in the midterm elections, coupled with support from a newly enacted measure that lowered the voting age to 16, could lay the groundwork for a constitutional change allowing reelection. However, social unrest grows in opposition to the President, especially among the middle and upper classes. Social media organized events have surged.

Conclusion

This isn't the first time that Argentina has faced exceedingly difficult economic challenges, but what may be different is the potential permanence of the changes. In contrast to previous crises, then often coinciding with similar situations in other Latin American countries, the question is whether the changes driven by the economic challenges have fundamentally altered Argentina's economic expectations and social fabric so that the country may not be able to bounce back as in the past. And even if the internal situation in Argentina eventually corrects itself, will international investors and traders return and, if so, on what terms? Many of Argentina's neighbors (and competitors) have taken different economic paths.

Given its resources and despite its challenges, Argentina today may be an inviting business opportunity for some industries and companies. But careful planning is the watchword, as doing business and exit strategies may be as relevant as market access strategies.

ManattJones, an international business consultancy, is headquartered in Washington, D.C., with U.S. offices in New York and California, and an office in Mexico City. Its established global network of individuals and teams with on-the-ground presence provides experience and long-standing and critical government and business relationships throughout the Americas, Europe, Asia, and the Middle East. ManattJones partners with Global Outcomes, a member of its global network, in Argentina and other countries in the Southern Cone.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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