Basic Keys To Consider When Stepping Into The Argentine Private Equity Arena
THE ARGENTINE ECONOMIC AND POLITICAL
SCENARIO.
The Economy's Fundamentals. Argentina's
GDP grew from 2003 to 2007 at annual rates higher than 8%, barely
declining to around 7% in 20081. However, the
global crisis accelerated the end of such impressive growth cycle,
and the GDP's evolution for 2009 is expected to be close to
cero2. Meanwhile, the annual inflation level is in
between 15 to 20 percent3, and the quotation of the U.S.
dollar as of mid August 2009 is around Pesos 3.85 to the
Dollar4. In this scenario, treasury reserves amount to
approximately US$ 45,000,000,0005, which allows the
government to maintain its grip for the time being. In any case,
the economy's fundamentals remain adequate, with surpluses both
on the fiscal and current accounts, even if threatened by the
voracious rise in public expenditure.
Probably the near future of the Argentine economic scenario will
highly depend on the evolution of the agribusiness commodities'
prices, since Argentina's annual exports on such sector keep
growing year to year, and could feed a population of more than
seven times Argentina's forty million people. Experts say that
as China and India's populations keep increasing their access
to the consumption markets, agribusiness will keep
blooming6, thus continuing its substantial and positive
impact on the Argentine GDP. Even though Argentina faced a drought
during 2009 that severely affected crop yields, such a situation
was circumstantial and has not affected investments for the 2010
campaign. Besides, not only traditional primary commodities have
been leading the Argentine recovery, but also Argentine exports of
manufactures (for example, automobiles, food and beverages, and
design products) and value added services (such as information
technologies, professional consultancy, and tourism) are
expanding.
Based upon the foregoing, and despite the government's
unorthodox methods and lack of credibility, economists forecast
that Argentina will return to growth during 2010, even if not at
more than at a modest rate7.
Foreign Debt: Restructured But Still A Stigma?
Argentina's foreign debt was defaulted in late 2001, and
restructured in 2005. As of August 2009, such restructured debt
amounts to approximately US$145,000,000,0008. Holdouts
to such restructuring amount to about US$ 31,000,000,000, and they
have initiated legal actions seeking enforcement. Government
sources have let slip that the government is about to initiate a
road-show in order to perform an offer comprising what is expected
to be around a 75%-cut payment to such holdouts.
In 2006, IMF's debt was cancelled, mostly for political
reasons, but Argentina still owes around US$ 7,000,000,000 to the
Paris Club, and such outstanding and unpaid debt remains an issue.
Rumors indicate that the government is unofficially negotiating
with the Paris Club.
In such scenario, access to sovereign debt markets for Argentina
that has remained partially closed could be reopened.
In any case, for the time being, insolvency fears disappeared
since the Government: (i) fixed a local exchange over guaranteed
loans this year; (ii) is launching a bond SWAP offer, which is
widely expected to succeed, and upon which it shall obtain
postponement of several 2009 and 2012 debt obligations; (iii) has
been paying its external debt obligations when due; and (iv) has
nationalized the pension funds system, thus gaining access to a
substantial cash source. In addition, despite the recent
international turmoil and credit crunch, Argentina's
fundamentals remain stronger than those of many emerging markets.
As to the financial system, the level of credit was very low even
before the international credit crunch since the Argentine economy
is usually not leveraged on credit, thus resulting in a low and
segmented impact of the international credit crisis within the
Argentine financial markets.
Devaluation And Inflation. Devaluation process
and foreign exchange control have been wisely and highly
professionally controlled by the Central Bank of Argentina,
avoiding sudden fluctuations typical during world financial crisis
in developing countries.
Inflation on the other hand may present a problem in Argentina.
The INDEC (National Institution of Statistics and Census)
official statistics lack credibility, and private sector resorts to
prestigious non-governmental institutions for trustworthy
statistics. This situation though, may be corrected in the
future.
Nationalization Of The Pension Funds. The
pension funds system nationalization by the end of 2008 allowed the
government access to all of the pension system's flow of funds.
The pension funds used to be a substantial source of money in the
Argentine capital markets, but after the nationalization, all such
inflow of money shall not necessarily be destined to the Argentine
capital markets, but rather to certain sectors deemed strategic by
the government, such as infrastructure, energy and public works.
Such drought in the capital markets is detrimental to the already
almost inexistent credit market, and is bound to generate, at least
indirectly, benefits and opportunities for private equity.
Official Defeat In Mid-Term Elections. In June
2009, Argentina's president Cristina Kirchner suffered a defeat
in the mid-term elections, which ended her control of congress and
exposed disenchantment with her governing style and policies. She
lost her grip on the legislature and also on the Peronist party,
since voters...
To continue reading
Request your trial