Argentina recently made the headlines because its recent move towards settling its severe debt-repayment crisis has given it a long-lost and most welcome access to international capital markets. But what does it mean in terms of business environment, investment climate and international affairs for risk-averse investors?
Considering that Argentina had lost the ability to finance its development through debt and bonds following a crisis which back in 2001 hurt its economy and impacted its relations with worldwide investors, the news is important.
One, it provides public authorities with new policy development means.
Two, it also sends the signal that somehow the international financial community might start to trust Argentina’s government again after years of nationalist and protectionist policymaking.
At the same time, high yield expectations pushed sovereign bond investors to ignore that many factors impacting the country’s political environment and the region’s political economy remain worrying… Businesses, watch out.
Argentina, international capital markets and foreign investors: a complex relationship
Argentina’s troubles with international capital markets – or international capital markets’ concerns towards Argentina, depending on the perspective – have been a permanent discussion topic over the last fifteen years.
Prior to this, during the 1990’s, the country however undertook to open its economy to foreign capitals, foreign investors and international trade. The public authorities at the time considered promoting development by privatizing state-owned enterprises in the energies and transportation industries, negotiated a variety of economic partnership agreements with other countries around the world. Long-term licences and tariffs have been negotiated to reduce regulatory uncertainty for foreign capital-owners wary of political and regulatory risks. Argentina also worked on economic reforms, introduced the possibility to convert its currency (the Argentine Peso) in US Dollars, and set up a wide adjustment programme to ensure sustainability over time. Simply put, Argentina made important efforts to improve its business climate and make its economy more competitive and capital-friendly so as to become a safe investment platform.
Some complications nonetheless occurred. In particular, an economic crisis hit the country in the years 2000, inflicting significant pressure on its’ economic landscape and financial stability. This forced the public authorities to react, one way or another, and led to various measures taken in an emergency context which for instance involved (forcefully) renegotiating public utility contracts entered into with foreign investors. The right to calculate tariffs in U.S. dollars was abolished, the Peso was devalued and the convertibility adjustment system disappeared. The government also implemented a set of tax-related policies and measures aimed at imposing stricter financial requirements whilst reducing tax-evasion. Adding a layer of complexity, the country finally defaulted on its debt – about $100 billion in government bonds – in 2002.
Argentina, as a result, has since then faced numerous claims introduced either by foreign investors questioning policies which allegedly mistreated their contractual rights under international law, by countries – particularly Panama – which brought claims before the World Trade Organization’s dispute settlement organs for trade standard violations in relation to financial services regulation, as well as by bondholders which over the past fifteen years have sued Argentina to obtain the repayment of their debts.
Negative business & investment climate impacts
Tensions have been managed through different forums. Disputes over contract renegotiation have been settled through specific courts mandated to deal with specific investor-state disputes, trade arguments were managed at the WTO level, and debt-repayment disagreements have been the object of endless procedures before US tribunals. These numerous claims however had a largely negative impact in terms of business climate because they have sent the message that Argentina and its’ political leaders could not be trusted whilst the investment environment is not safe.
The national policies conducted in 2001 were criticised for expropriating foreign investors without which Argentina would not have been able to develop its infrastructure in the first place, for distorting international markets and competition, whilst sending the message that Argentina could not be trusted in paying its debts. On top of this, the Government of President Cristina Fernández de Kirchner eventually conducted nationalist public policies over the last years, leading for instance to the expropriation of YPF – a branch of the Spanish oil company Repsol in 2012 on national sovereignty grounds – thus suggesting that foreign investors were not welcome. Meanwhile, Argentina lost access to global capital markets.
Debt-repayment disputes also meant no access to international capital markets
Argentina debt repayment, capital markets and business climate – The Political Economy CircleArgentina debt repayment, capital markets and business climate – The Political Economy Circle
The inability of Argentina to repay its debts had more consequences than merely harming Argentina’s business and investment climate, though. It also cut the country’s access to international capital markets, thereby preventing it from obtaining the cash necessary to its development.
The proceedings have lasted for over 15 years. On the one hand, Argentina renegotiated its debt-repayment obligations in 2005 and 2010. These so-called ‘bond swaps’, simply put, then consisted in Argentina committing to repay its due in exchange for a significant debt reduction agreement (around 70 per cent), a proposal which in fact was accepted by more than 90% of the creditors. On the other hand, the remaining creditors – essentially US hedge funds known as the ‘holdouts’ – which had acquired debt at a depreciated price on secondary markets after the crisis refused the transaction and requested that Argentina paid the remaining $9 billion owed to them, in full. Former President Kirchner however rejected this idea, considering that all investors including ‘vulture’ capitalists – which were not part of the original bond deals but rather purchased problematic bonds at a lower price for speculation purposes – had to support Argentina’s financial reconstruction efforts, and therefore refused to settle. The holdouts, in turn, initiated proceedings to obtain payment whilst ensuring that Argentina’s access to further international debt would be impossible until payment was arranged.
In 2012 a US Court ordered that Argentina repaid the holdouts in full and forbid Argentina to repay settled debts in priority whilst preventing recourse to markets in the meantime. The public authorities however persisted in refusing to pay the bondholders. Among the arguments, in fact, was the idea that paying the debt in full would be unfair to the holders which had already settled and would drastically impoverish foreign reserves (about $30 billion – Forbes 04/08/2014). Hence, Argentina eventually defaulted a second time in 2014 when the Court decided that the country was not able to pay its debts.
The 2016 settlement, a new departure for Argentina?
On the positive side of things, various types of concerns are being solved.
The investment tribunals which had to deal with Argentina’s alleged violations of international law towards foreign investors are being settled and although conflicting decision have been rendered as to whether or not the public authorities’ decisions were acceptable, it has been admitted that Argentina then had some margin of appreciation to react in times of economic turmoil. The dispute opposing Argentina to Panama under the rules of the World Trade Organization has also been settled with the idea that Argentina was entitled to regulate cross-border financial services to preserve its tax system as well as its financial stability…
The bonds situation has also evolved with the arrival of President Mauricio Macri to power in November 2015. Indeed, Macri presented the debt settlement issue as a political priority and thus decided to move on despite the dispute not being settled yet. In February, Argentina attempted to show its goodwill towards settling the debt repayment situation and communicated on its decision to allocate more than $6 billion to this purpose. Later on, the approval of a $4.65 billion debt-repayment settlement agreement (on the remaining $9 billion government bonds) by the main holdout creditors was eventually announced together with the decision that Argentina would furthermore issue new bonds on international markets in the range of $15 billion to finance, among other expenses, the settlement (Reuter 29/02/2016). Two months later, the financial press described the actual bond operation as ‘a record number for emerging markets’ with approximately $69 billion offered (Bloomberg 25/04/16). About $16.5 billion of new debt ($10 billion of which is to be used for repayment purposes) will thus be issued ranging from 3 to 30 years at significant yield rates ranging from approximately 6% to 8%.
Capital market trends not applicable to risk-averse investors
So what is the impact of the recent capital market trends in terms of international affairs, then? There are several ways to look at the issue.
One way is to look at the immediate contribution of recent bond developments to the improvement of Argentina’s business environment and investment climate at large. From an ‘institutional’ point of view, in other words, recent changes could be interpreted as sending a signal of slightly regained trust, both in terms of debt-repayment commitment and in terms of the new government’s capacity to move the country onward or to start liberalization reforms. As Standards & Poors noted, President Macri over the last months indeed departed from previous policy moves by making some progress in relation to exchange rates, capital controls and export tax reduction while obtaining the Congress’ backup on the debt repayment deal despite previous policies. Doing business in Argentina, in other words, might become easier as time goes by and the settlement of long-lasting debt and capital market issues means that Argentina’s investment climate and business environment might improve as investment-fueling policies will increasingly be made possible.
Problematically, however, the recent capital market trends do not apply to risk-averse investors. For those, the conclusions are far less optimistic. In fact, concluding that the massive demand for Argentina’s government bonds shows increased trust in President Macri’s agenda would be naïve. Considering that government bonds currently yield very low on international capital markets (sometimes even negatively), the high-interest rates attached to the bonds (6% to 8%) largely outweigh institutional and policy considerations. In fact, rating agencies such as Standard & Poor’s or Moody’s have formulated skeptical views on the recent bond evolutions (Argentina is rated B-), so that some expert commentators have concluded that Argentina’s debt is ‘still junk’.
Impact on international affairs: risks remain high
Apart from high yields benefiting essentially to risk-taking investors, Argentina’s recent bond developments rime with strategic non-sense and risk-averse investors considering Argentina as a re-emerging opportunity following the capital markets’ signals should be careful of not underestimating the regional political context.
Economically speaking, the events which have occurred over the last fifteen years have generated important disruptions. As mentioned previously, the country’s reserves are a matter of concern and Argentina’s inability to rely on international capital markets has forced public authorities to ‘print’ new money, thus depreciating the Peso’s value and increasing inflation throughout (in the range of 25% to 40% depending on the sources). Combined with an already announced recession, the point adds up to existing social tensions.
Politically speaking, the public authorities’ reactions to the 2001 crisis furthermore impacted the foreign investors’ trust in the system, but YPF’s nationalization by President Kirchner’s government made the situation even worth. The YPF / Repsol expropriation in 2012 has been settled ($5.3 billion compensation) but Kirchner nonetheless sent the message that the public authorities would act on a protectionist and ‘national interest first’ basis (The Economist 27/07/2013) and would never hesitate to take measures against foreign businesses, despite international rules on the matter.
Issues also remain in terms of policy transparency. The country’s foreign investment policies, in particular, are still questioned by the US Trade Department which, on top of the various debt-related disputes, warns US investors against the risk of policies being decided and implemented without industry consultation and raises concerns as to the lack of profit repatriation possibilities. The difficulty to use US dollars in a free manner – particularly because of demanding capital control measures – is also pointed at as one of the various factors capable of making business in Argentina more difficult. In its assessment of Argentina, the credit insurer Euler Hermes similarly emphasizes that important risks are still to be taken into consideration in terms of economic, financial, commercial and business environments.
The risk of underestimating the regional political context
The regional political context finally is to be considered as a major risk factor because South America has long been known for acting as a rogue player on the international scene. Simply put, while liberal policymakers worldwide have long tried to establish minimum standards of treatment for the protection (whether physical or legal) of foreign investors, South American leaders have historically played the ‘national interest first’ card, thus sending the world the message that the region would operate on a stand-alone basis.
In Argentina’s case, the country defaulted twice on its debts over the last fifteen years. The first time because of an unforeseen period of economic turmoil which forced it to renegotiate its debts repayment, the second time because the government simply refused to pay the bondholders thus creating and entertaining a frontal opposition with US diplomacy. Not to mention YPF’s nationalization in 2012 which added another layer of complexity to regional stability.
Yet, despite this severely uncertain past, the two-thirds of the recent bond buyers were U.S. based (Bloomberg 19/04/16), which suggests that – while money and the potentially high yields in this case matter far more than the pro-liberal signals sent by President Macri’s government – bond investors have a short memory. No surprise here, though: the nationalist ideologies prevailing in the region and the related business uncertainty never deterred the most determined investors because large economic and infrastructural needs, as well as important natural resource availability, have always given risk-takers reasons to come back, whatever the impact of political waves in the region.
Still, ‘national interest first’ was the excuse when Argentina’s defaulted for the second time or when it nationalized Repsol’s YPF branch and called it a victory for energy sovereignty. Thus, although President Macri’s Argentina is now trying to move away from Kirchner’s nationalist policies, elsewhere in the region countries such as Bolivia, Ecuador or Venezuela rule their world in line with historical doctrines so as to protect themselves from the rest of the international (business and political) community and this regional dynamic might therefore repeat itself in the future and nothing guarantees that President Macri’s efforts to improve Argentina’s business and investment climate will remain immunised against regional politics in the medium and long-term.
Regional politics operate in circles with liberal ideologies and nationalist convictions regularly replacing one another as time goes by, depending on the populations’ political fears and expectations moving from one extreme to another. The risk, obviously, is that Macri’s policy moves of today might not last, in which case the Argentina business series will provide the global business community with a new round of surprises.
Insights by Dr Antoine Martin
Dr Antoine Martin is the Head of Insights of The Asia-Pacific Circle, which he co-founded in 2016. Antoine follows analyzes and comments on developments in international trade, investment, and finance, with a particular focus on Asia-Pacific relations. He is also a scholar at The Chinese University of Hong Kong, Faculty of Law, a leading academic institution in Asia.
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