Argentine `Unpredictability' to Repel Investors After Debt Swap
Economy minister of Argentina Amado Boudou. Photographer: Diego Levy/Bloomberg
Argentina may fail to revive interest from companies seeking to invest in South America’s second-biggest economy even after concluding an $18.3 billion debt restructuring offer.
“The thing investors hate the most is unpredictability,” said Alan Stoga, vice chairman of the Council of the Americas and president of New York-based Zemi Communications LLC, whose clients include Argentine manufacturers and agriculture companies. The government lacks “prudent and predictable” policies, he said in a June 22 phone interview.
Foreign direct investment in Argentina totaled $4.9 billion in 2009, compared with $26 billion in Brazil and $17 billion in Chile, according to the United Nations Economic Commission for Latin America. Brazil is the largest economy in South America followed by Argentina, Venezuela, Colombia and Chile, according to data compiled by Bloomberg.
Caps on utility prices, inflation running above 20 percent and the government’s takeover of private companies and pension funds will deter investment in business, said Banco de la Ciudad de Buenos Aires President Federico Sturzenegger in a June 17 interview in Buenos Aires.
“The government has a very intrusive attitude toward the markets,” said Sturzenegger, who was appointed to run the country’s third-largest state-run bank by opposition leader and Buenos Aires Mayor Mauricio Macri. “There’s a lot of institutional uncertainty.”
2001 Default
Economy Minister Amado Boudou said in an April 14 interview that the debt swap would enable Argentina to tap international credit markets for the first time since a 2001 default on $95 billion of bonds, cut companies’ borrowing costs and draw investment. Ministry spokesman Sergio Poggi declined to comment for this story when contacted by Bloomberg.
Boudou said yesterday that the restructuring, which ended June 22, exceeded the government’s expectations by attracting creditors holding 66 percent of the $18.3 billion of eligible debt left out of a 2005 exchange.
Argentina’s $330 billion economy drew about as much investment in 2009 as Peru, whose gross domestic product is $130 billion, the Santiago-based UN commission said last month. The government expects Argentina’s GDP to grow 5 percent this year.
Repsol YPF SA Chief Executive Officer Antonio Brufau told reporters in April the Madrid-based company, which faces price controls in Argentina, wants to reduce its stake in local unit YPF “sooner rather than later” to expand elsewhere, including Brazil. Metrogas SA, the Argentine natural-gas distributor controlled by BG Group PLC, filed for bankruptcy June 17, saying the rate freeze hurt the company’s finances.
Energy Regulations
BG, the U.K.’s third-largest gas producer, shuttered its Buenos Aires office a year ago. Argentina seized state airline Aerolineas Argentinas SA from Spanish tour operator Grupo Marsans in 2008, the same year it nationalized the $24 billion pension fund industry.
Fernandez, 57, opened the debt swap May 3, five years after her husband offered creditors about 30 cents on the dollar, the harshest restructuring terms since at least World War II, according to Arturo Porzecanski, an international finance professor at American University in Washington.
Since the terms of the swap were announced April 15, the yield investors demand to buy Argentine bonds over U.S. Treasuries has climbed 194 basis points, or 1.94 percentage points, to 7.95 percentage points. The spread for major emerging market economies has climbed 94 basis points to 3.25 percentage points over the same period. Benchmark dollar bonds due in 2015 declined today, as U.S. stocks slid, pushing the yield up 24 basis points to 13.02 percent at 12:03 p.m. New York time. The price dropped 0.75 cent to 79.23 cents on the dollar.
‘What’s Next?’
Argentina’s debt restructuring “would have to be the beginning of a policy shift in order to attract FDI and improve borrowing costs,” said Siobhan Morden, a strategist with RBS Securities in a June 16 interview from Stamford, Connecticut.
“The question now for the Economy Ministry is ‘what’s next?’” said Morden. “What’s going to be done to address the domestic distortions in terms of heavily subsidized sectors and data manipulation?”
A successful swap will allow Pampa Energia SA, the country’s biggest energy holding company, to access capital markets at “reasonable rates,” Chairman Marcelo Mindlin said in a June 14 interview in Buenos Aires.
“We are going to be among the first to be ready to tap the market,” Mindlin said. “When Argentina can go back to the market again and can issue debt at reasonable yields, I think that’s going to be very important for Pampa.”
Volkswagen Investments
To be sure, some companies are moving forward with investment plans. Volkswagen Argentina SA will announce a $150 million investment to boost production of gear boxes for its automobiles in the ‘coming days,’ spokesman Jose Luis Reidy said. The company produces 8 percent of the country’s vehicles.
Annual inflation reached a four-year high of 10.7 percent in May, according to the national statistics institute. Economists and politicians, including former central bank President Alfonso Prat-Gay, say the government is underreporting inflation. Consumer prices may rise 26 percent this year -- the second fastest in the world after Venezuela -- from 15.3 percent in 2009, according to Buenos Aires-based company Ecolatina.
Inflation has led Argentine union leaders to demand the biggest wage increase in more than 15 years, with sugar-cane harvesters grabbing a 43 percent pay raise and telephone workers striking for a 35 percent increase.
Buenos Aires Stock Exchange President Adelmo Gabbi said he expects the government to change rules to help lure more investment.
Capital Controls
Regulations put in place in 2005 require international investors to deposit 30 percent of the funds they bring into Argentina with the central bank for a year. The move prompted MSCI Inc. to remove Argentina from its benchmark emerging-market index in June 2009, assigning it frontier status along with the world’s least developed markets, including Bulgaria and Kenya.
“After the swap, the government will undertake policies to attract foreign capital and the first step should be to lift all barriers,” said Gabbi, 66, in a June 15 interview. “It’s indispensable to clear the road so that international investors begin to look at Argentina again.”
To contact the reporter on this story: Drew Benson in Buenos Aires at abenson9@bloomberg.net
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