Argentina Bruised by YPF Expropriation
There’s no question about it – Argentina “lost” when they announced the renationalization of oil company YRG, seizing the 51% stake from the Spanish energy giant Repsol. In the weeks since, they have been taking a beating in the global media. If it was President Kirchener’s plan to take the oil company all along, the media wing of the party did a poor job conditioning the narrative. But has the hate-fest gone too far? Might there actually be some instinctual contrarians leaping to Argentina’s defense, denouncing the imperial abuses of the Spaniards?
Maybe not, but at the very least, many people can sympathize for the dire economic motivations that have led Argentina to undertake such a decision. From Win Thin, Global Head Of Emerging Markets Strategy at Brown Brothers Harriman, as quoted by Diverging Markets, I can’t help but feel very sorry for Argentina myself.
Basically, Fernandez is doubling down on its past policies that have done nothing but push Argentina closer to crisis. Put in the context of Latin America, Argentina is going further down the road traveled to some extent or another by Venezuela, Ecuador, and Bolivia. This group stands in sharp contrast to the orthodox-oriented core of Brazil, Chile, Colombia, Mexico, Peru, and Uruguay.
A look at the fundamentals shows why Fernandez is engaging in such visible theatrics, which also includes recent vitriol regarding the Falkland Islands. Simply put, we think economic stresses are intensifying. How deep the stresses will get is yet to be determined. Economic growth is slowing sharply after years of robust growth driven by high prices of its grain exports. GDP rose 7.3% y/y in Q4 vs. 9.3% y/y in Q3. Monthly data so far are pointing to a further slowdown to around 5.3% y/y in Q1. On the external side, export growth was weakened to around 11% so far in Q1 vs. average of 20% y/y in Q4 and 26% y/y in Q3. The current account surplus has rapidly fallen and moved into deficit in Q3 and Q4. For 2012 as a whole, the gap is expected near -1% of GDP.
Despite high inflation, the central bank has kept the repo rate at 11.5% since October 2009, when it cut rates 25 bp. Instead, the bank has counted on price controls and other unorthodox measures (including changing the CPI basket) to keep official inflation low. Private sector economists estimate true inflation to be closer to 25% than to the official rate of 9.8% y/y posted in March. Fiscal policy remains too loose after the election, with generous wage agreements adding to upward price pressures.