APLA ’16: Argentina GDP looks to rebound next year

The nation’s economy is expected to rebound next year, fuelled by the business-friendly reforms of new President Mauricio Macri. His policies should boost the petrochemical industry in the future. Above, the old harbour Puerto Madero at night in Buenos Aires. (Florian Kopp / imageBROKER/REX/Shutterstock)

Focus article by Al Greenwood

BUENOS AIRES, Argentina (ICIS)–Argentina’s economy is expected to rebound next year, fuelled by the reforms introduced by the country’s new president, Mauricio Macri.

By next year, Argentina’s economy should grow by 2.7%, after shrinking by 1.8% this year, according to the International Monetary Fund (IMF).

It released its latest economic forecasts shortly before Sunday’s start of the annual meeting of the Latin American Petrochemical Association (APLA).

Until recently, Argentina has been locked out of foreign debt markets, limiting the government’s ability to borrow. This lock-out stemmed from a dispute with creditors who held bonds on which Argentina defaulted, following its financial crisis at the start of the millennium.

As a result of this dispute and lock-out, the government could not issue foreign debt.

Macri has since reached an agreement with most of the creditors, allowing Argentina to return to foreign markets to raise debt. Earlier this year, Argentina sold $16.5bn of debt.

The administration has also started removing the distortionary economic policies of previous President Cristina Fernandez de Kirchner. Among the first reforms was allowing the peso to float. While this caused a massive depreciation, it freed the government from spending its scarce foreign reserves on propping up the value of the peso.

The government also removed restrictions on foreign exchange. This allowed the petrochemical and plastic industries to import much-needed feedstock and equipment.

The removal of these restrictions should also encourage energy investment, since it will make it easier for companies to import equipment and repatriate pesos into their home currencies.

These reforms were necessary, but they came at a cost. The peso plunged in value once the administration removed support.

The devaluation caused prices to increase, with food and beverages rising by more than 50%, said Martin Redrado, chairman of Fundacion Capital, a macroeconomic advisory firm based in Buenos Aires.

Real wages fell by 10%, he said. Construction also stalled. Meanwhile, Argentina’s main trading partner, Brazil, is in a deep recession.

The combination of these factors led to a recession in Argentina.

Still, inflation will likely start declining, allowing consumption to stabilise, Redrado said. From there, Argentina should start a gradual recovery. Public expenditures should also rise, giving the economy another boost.

More reforms are on the way. Chief for the petrochemical industry is the removal of price caps and subsidies on energy.

These cost controls discouraged companies from developing new gas wells, since they could not recover the costs of their investments.

The earlier regime of subsidies and price caps has been damaging to the country’s energy industry. Argentina, once a gas exporter, now imports the fuel. During the coldest days of the winter, the previous administration would curtail gas shipments to petrochemical companies and other industrial users so residents would have enough fuel to heat their homes.

These policies were especially damaging because Argentina has some of the world’s largest reserves of unconventional natural gas. Many of these are in the country’s Neuquen province, which already has the pipelines and infrastructure in place to exploit these reserves.

Argentina’s crackers in Bahia Blanca use gas-based ethane as a feedstock. In all, the energy policies of the previous administration could well have prevented Argentina’s petrochemical industry from experiencing a renaissance similar to that in the US.

The subsidy reforms are caught up in the courts, so only a portion has been realised. As the subsidies work their way through the courts, companies are watching the country’s next move.

Andrew Liveris, the CEO of Dow Chemical, has said that Argentina represents one of the world’s biggest opportunities.

Dow owns gas crackers and polyethylene (PE) plants in Bahia Blanca, and it is developing gas fields with state-energy producer YPF.

The pace of exploration and production has been slowed by the decline in oil prices, said Jorge Buhler-Vidal, director of Polyolefins Consulting. Nonetheless, production is rising, although it will take a long time for it to reach the levels of previous years.

Buhler-Vidal has said that Argentina would be the most likely country to build Latin America’s next major petrochemical expansion.

Already, the country has a deficit of PE, and if Argentina’s economy grows as forecasted, then it should import even more of the resin. At the least, new PE plants could reduce this deficit.

There is even the possibility that Argentina could build a propane dehydrogenation (PDH) plant to produce feedstock for a new polypropylene (PP) plant, Buhler-Vidal said.

But before Argentina gets these new plants, companies need assurance that the country will have enough feedstock to sustain the new plants.

They also need assurance that the business-friendly policies introduced by Macri will not end when he leaves office.

Buhler-Vidal estimates that if all goes well, there could be a formal petrochemical announcement in the later part of the decade.

APLA runs through Tuesday.

SMALL IMAGE: Argentine President Mauricio Macri visits China in September 2016. (Xinhua News Agency/REX/Shutterstock)

INSET IMAGE: A pump jack in Neuquen province, Argentina. (Majority World/REX/Shutterstock)