Argentina remains risky investment despite $5bn Repsol, YPF deal

25 February 2014 22:50 Source:ICIS News

Argentina Repsol YPF(adds paragraphs 13-18)

By Al Greenwood

HOUSTON (ICIS)--Despite its vast energy reserves, Argentina will remain a risky investment for foreign companies despite a proposed $5bn deal that would compensate Spanish energy producer Repsol for the 2012 expropriation of its 51% stake in YPF, a professor said on Tuesday.

The agreement still needs to be approved by Repsol's shareholders and the Argentine Congress.

While Repsol could receive something in return for its expropriated stake in YPF, it would still be far below the $10.5bn it requested.

Still, Repsol's losses would be relatively small when compared with past instances of expropriation in Argentina, sad Steve Hanke, an applied economist at Johns Hopkins University in Baltimore, Maryland. In the 1990s, he was president of Toronto Trust Argentina in Buenos Aires.

Hanke pointed to the country's massive default and the collapse of the peso in the early 2000s. During the currency's collapse, the government broke the peso's mandated peg to the US dollar.

"They really have a serial disrespect for property rights and contracts," he said.

But even without the threat of expropriation, a great deal of risk persists in Argentina for those companies wishing to develop the country's substantial shale gas reserves, estimated as the second largest in the world.

Foreign investors could face high taxes or labour unrest, Hanke said.

Argentina has adopted currency controls, which make it difficult for foreign companies to convert pesos to dollars, he said.

"You might be making good pesos, but you can't convert them," he said.

This could be troubling if the Argentine peso loses value as it did earlier this year, when it fell 12% in two days.

Meanwhile, Argentine inflation remains high, which makes shale gas operations expensive. Moreover, companies face numerous impediments to importing the equipment necessary for production.

Nonetheless, the deal with Repsol is a step in the right direction, since it helps reduce the risk in investing in the country, said Mark Jones, Joseph D Jamail Chair in Latin American Studies at Rice University in Houston. 

As long as the Repsol remained a pending issue, Argentina would have a difficult time attracting foreign investment, he said.

And if the country can attract foreign investment, then it could avoid making cuts in public spending, Jones said. Not only would those cuts be unpopular, they could also push the country into recession.

Jones sees the Repsol agreement as part of a broader strategy of making Argentina more attractive to foreign investors.

Those eager to get an early foothold in Argentina may be willing to invest now and bet that a more investor-friendly administration gains power, he said.

While such investors could be taking on a good deal of risk, Jones added, "Entrepreneurs make money by taking risk."

For now, Argentina is in a difficult position. The country needs to develop its domestic energy reserves so that it can reduce imports.

These imports are one of the reasons behind Argentina's dwindling trade surplus, which fell to $9.0bn in 2013, down more than 27% from $12.4bn in 2012, according to INDEC, the country's statistical institute.

Imports have also put increasing strain on the country's financial health, since it buys imported natural gas in dollars and sells it at subsidised rates.

Meanwhile, the country's petrochemical industry suffers from natural gas cutbacks every winter, as the government diverts the fuel to home owners.

By Al Greenwood