For most foreign investors, being able to invest with greater ease in a country’s energy sector is an exciting prospect that spells new opportunities. But not when that country is Argentina, a nation that has, for numerous reasons been in the global market doghouse for the better part of the past couple of years.
The Argentine government recently announced measures that will facilitate the entry of foreign capital into its energy sector. The new legal framework has been designed to invite international oil companies to help develop the country’s vast shale deposits, which promise great potential and have captured the attention of high level financiers like George Soros, who in August, more than doubled his investments in YPF, Argentina’s state-owned energy company.
But though the new rules, which, among others, have reduced the minimum investment for companies to be exempt from import controls to $250 million from $1 billion, are exciting, many investors are still leery about Argentina.
“The country does not have a history of treating foreign investors very nicely,” said Brian Jacobsen, chief portfolio strategist at Wells Fargo Funds Management. “Argentina is desperate for money as oil prices have fallen and foreign capital has fled, but while the change in Argentina’s law to allow for more foreign participation in the development of the energy sector is a good step, it’s woefully inadequate. They can roll out the red carpet, but if you think your assets are going to be taken on a whim, why would you want to walk down that carpet?”
With under $30 billion in foreign exchange reserves and a $6 billion structural trade deficit in the energy sector, “Argentina has little choice but to fix things,” said Jim Barrineau, co-head of emerging market debt relative and head of Latin America at Schroders in New York. “They’re finally doing something, albeit grudgingly, and it has enormous potential but we’re talking about a very long drawn out process and it will be a long time, probably only after the next presidential elections, before we see anything really happening.”
Argentina’s sovereign debt default in July – its second defualt in 13 years — and the long and bitter legal tussle that preceded it and is still ongoing is one of the main reasons why investors have been so turned off by Argentina. They’ve also become increasingly distrustful of the government of President Cristina Fernandez de Kirchner and its unpredictable policies, which, said Diego Ferro, co-chief investment officer at Greylock Capital, “are so conflicting and don’t seem to come from a decision making center, but more from the influence that different people have on the president.”
With respect to the new energy regulations, it’s clear that parties such as YPF itself would be keen on a more pro-market stance, and stand to greatly benefit from increased private sector investment in the sector. However, “while this measure may be great by itself, it isn’t possible for a country to progress on a single measure in isolation,” Ferro said. “If Argentina really wants to improve its image and attract investment, then what’s needed is a much broader set of reforms that address areas like labor law and taxes.”
Investors are excited about Mexico, a country where serious energy reform “that is embedded in the constitution” is currently under way, Ferro said, and rightly so, since “the changes that are happening in Mexico are more structural in nature and part of an overall that the president has. In Argentina, we’re just talking about just one measure.”
As such, foreign investors’ perception of Argentina remains more or less the same, Jacobsen said, and is only likely to change if the country undertakes dramatic reforms the way Mexico has – something that isn’t likely to happen until a new government comes to power after elections next year.
Nevertheless, investors like Ferro and Barrineau haven’t been totally off Argentina and have found some good opportunities in the local bond market there. On the international front, too, Argentina’s sovereign debt is performing better on expectations that the default issue will see some resolution in January.