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...

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