Saturday 13th February 2016
NEWS TICKER: FRIDAY, JANUARY 12TH: Morningstar has moved the Morningstar Analyst Rating™ for the Fidelity Global Inflation Linked Bond fund to Neutral. The fund previously held a Bronze rating. Ashis Dash, manager research analyst at Morningstar, says, “The fund’s rating was placed Under Review following the news that co-manager Jeremy Church was leaving Fidelity. Lead manager, Andrew Weir, who has managed the fund since launch in May 2008, remains in charge and is further supported by the new co-manager, Tim Foster. While we acknowledge Weir’s considerable experience in the inflation-linked space, some recent stumbles and below-benchmark returns over time have led us to lower our conviction in the fund. This is currently reflected by our Neutral rating.” - Italian GDP growth looks to have stalled to 0.1pc in the last quarter of 2015, falling below analyst expectations of 0.3% growth. The Italian economy grew by just 0.6% last year having come out of its worst slump since before the pyramids were built. The slowdown will put further pressure on reforming Italian prime minister Matteo Renzi, who has been battling to save a banking system lumbering under €201bn (£156bn) of bad debt, equivalent to as much as 12% of GDP. It is a serious situation and one which threatens Italy’s traditionally benign relationship with the European Union. The EU’s bail in rules for bank defaults seeks to force creditors to take the brunt of any banking failures. Italy suffered four bank closures last year, which meant losses of something near €800m on junior bond holders (with much of the exposure held by Italian retail investors). No surprise perhaps, Italian bank stocks have taken a beating this year, Unicredit shares are currently €3.06, compared with a price of €6.41 in April last year. In aggregate Italian banking shares are down by more than 20% over the last twelve months. Italian economy minister Pier Carlo Padoan told Reuters at the beginning of February that there isn’t any connection between the sharp fall in European banking stocks, as he called on Brussels for a gradual introduction of the legislation. He stressed that he did not want legislation changed, just deferred - Is current market volatility encouraging issuers to table deals? Oman Telecommunications Co OTL.OM (Omantel) has reportedly scrapped plans to issue a $130m five-year dual-currency sukuk, reports the Muscat bourse. Last month, the state-run company priced the sukuk at a profit rate of 5.3%, having received commitments worth $82.16m in the dollar tranche and OMR18.4m ($47.86m) in the rial tranche. Meantime, Saudi Arabia's Bank Albilad says it plans to issue SAR1bn-SAR2bn ($267m-$533m) of sukuk by the end of the second quarter of 2016 to finance expansion, chief executive Khaled al-Jasser told CNBC Arabia - The US Commodity Futures Trading Commission (Commission) announces that the Energy and Environmental Markets Advisory Committee (EEMAC) will hold a public meeting at the Commission’s Washington, DC headquarters located at 1155 21st Street, NW, Washington, DC 20581. The meeting will take place on February 25th from 10:00 am to 1:30 pm – Local press reports say the UAE central bank will roll out new banking regulations covering board and management responsibilities and accountability – Following yesterday’s Eurogroup meeting, Jeroen Dijsselbloem, says that “Overall, the economic recovery in the eurozone continues and is expected to strengthen this year and next. At the same time, there are increasing downside risks and there is volatility in the markets all around the world. The euro area is structurally in a much better position now than some years ago. And this is true also for European banks. With Banking Union, we have developed mechanisms in the euro area to bring stability to the financial sector and to reduce the sovereign-banking nexus. Capital buffers have been raised, supervision has been strengthened, and we have clear and common rules for resolution. So overall, structurally we are now in a better position and we need to continue a gradual recovery”. Speaking at the press conference that followed the conclusion of the February 11th Eurogroup, Dijsselbloem also acknowledged that “good progress” has been made in official discussions between Greece and its officials creditors in the context of the 1st programme review. Yet, he noted that more work is needed for reaching a staff level agreement on the required conditionality, mostly on the social security pension reform, fiscal issues and the operation of the new privatization fund. On the data front, according to national account statistics for the fourth quarter of 2016 (flash estimate), Greece’s real GDP, in seasonally and calendar adjusted terms, decreased by 0.6%QoQ compared to -1.4%QoQ in Q3. The NBS Executive Board decided in its meeting today to cut the key policy rate by 0.25 pp, to 4.25%. - Today’s early European session saw an uptick in energy stocks, banking shares and US futures. Brent and WTI crude oil futures both jumped over 4% to $31.28 a barrel and $27.36 respectively before paring gains slightly; all this came on the back of promised output cuts by OPEC. That improving sentiment did not extend to Asia where the Nikkei fell to a one-year low. Japan's main index fell to its lowest level in more than a year after falling 4.8% in trading today, bringing losses for the week to over 11%. Yet again though the yen strengthened against the US dollar, which was down 0.1% ¥112.17. Swissquote analysts says, “We believe there is still some downside potential for the pair; however traders are still trying to understand what happened yesterday - when USD/JPY spiked two figures in less than 5 minutes - and will likely remain sidelined before the weekend break.” Japanese market turbulence is beginning to shake the government and may spur further easing measures if not this month, then next. Trevor Greetham, head of multi asset at Royal London Asset Management, says “When policy makers start to panic, markets can stop panicking. We are seeing the first signs of policy maker panic in Japan with Prime Minister Abe holding an emergency meeting with Bank of Japan Governor Kuroda. We are going to get a lot of new stimulus over the next few weeks and not just in Japan. I expect negative interest rates to be used more in Japan and in Europe and I expect this policy to increase bank lending and weaken currencies for the countries that pursue it”. Greetham agrees that both the yen and euro have strengthened despite negative rates. “Some of this is due to the pricing out of Fed rate hike expectations; some is temporary and to do with risk aversion. In a market sell off money tends to flow away from high yielding carry currencies to low yielding funding currencies and this effect is dominating in the short term”. Australia's S&P ASX 200 closed down 1.2%. In Hong Kong, the Hang Seng settled down 1.01. in New Zealand the NZX was down 0.89%, while in South Korea the Kospi slid 1.41%. The Straits Times Index (STI) ended 1.25 points or 0.05% higher to 2539.53, taking the year-to-date performance to -11.91%. The top active stocks today were DBS, which declined 0.91%, SingTel, which gained 1.13%, JMH USD, which declined 1.39%, OCBC Bank, which gained 0.13% and UOB, with a0.34% advance. The FTSE ST Mid Cap Index declined 0.50%, while the FTSE ST Small Cap Index declined0.31%. Thai equities were down 0.38%, the Indian Sensex slip 0.71%, while Indonesian equities were down another 1.16%. The euro was down 0.3% against the dollar at $1.1285, even after data showed Germany's economy remained on a steady yet modest growth path at the end of last year. Gold fell 0.7% to $1238.80 an ounce, after gold gained 4.5% Thursday to its highest level in a year. Greetham summarises: “Like a lot of people, we went into this year's sell off moderately overweight equities and it has been painful. What we have seen has been a highly technical market with many forced sellers among oil-producing sovereign wealth funds and financial institutions protecting regulatory capital buffers. However, economic fundamentals in the large developed economies remain positive, unemployment rates are falling and consumers will benefit hugely from lower energy prices and loose monetary policy.”

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Game set and nationalisation

Wednesday, 23 May 2012
Game set and nationalisation In mid-April Argentina seized control of 51% of YPF, the country’s largest oil group, by taking over the holdings of its biggest shareholder (Spanish oil company Repsol) in a move that stunned foreign investors and provoked the EU trade commissioner to seek settlement at the World Trade Organisation (WTO). It is the latest in a series of grandstanding moves by Argentine president Christina Fernández de Kirchner and begs the question: how could this decision possibly be beneficial for the country in the long term? Elsewhere in Latin America, Bolivia says it will expropriate Transportadora de Electricidad, the assets of Spain’s Red Eléctrica, sending armed troops to its headquarters. Vanya Dragomanovich reports from Buenos Aires on the long term implications. http://www.ftseglobalmarkets.com/

In mid-April Argentina seized control of 51% of YPF, the country’s largest oil group, by taking over the holdings of its biggest shareholder (Spanish oil company Repsol) in a move that stunned foreign investors and provoked the EU trade commissioner to seek settlement at the World Trade Organisation (WTO). It is the latest in a series of grandstanding moves by Argentine president Christina Fernández de Kirchner and begs the question: how could this decision possibly be beneficial for the country in the long term? Elsewhere in Latin America, Bolivia says it will expropriate Transportadora de Electricidad, the assets of Spain’s Red Eléctrica, sending armed troops to its headquarters. Vanya Dragomanovich reports from Buenos Aires on the long term implications.

Foreign direct investment in so-called strategic national assets can be a risky business.  Just ask BP about its investments in Russia’s oil exploration industry; the ups and downs of that particular history would make a pretty hairy ­fairground ride. Nascent and high growth markets are often caught in a miserable quandary. They need foreign investment and expertise to lift their own industries (some strategic, some otherwise) out of the workaday and into the international league tables. However, once that happens, it requires a particular temperament to accept that a good slug of nationally earned cash goes abroad. Privatisation too is a double edged sword for countries that at one time needed foreign inputs to inject capital and efficiencies into ­moribund state run businesses and which later find themselves frustrated at the business strategies of the private sector business owners.

Going forward, it might be time for high growth markets to reassess their approaches to FDI and privatisation in strategic industries; perhaps adopting contract structures that allow returns to gravitate to investors over a defined period, with a buy-back agreement scaled over mutually agreed terms. That seems to be one moral perhaps of a growing (and somewhat worrisome) trend in some Latin American countries to expropriate the assets of foreign direct investors when local market developments create problems for governments.



Argentina has stunned foreign investors by its decision to nationalise Repsol’s stake in oil company YPF. Until April Repsol owned 57.4% of YPF. Some 25.5% was (and still is) held by the wealthy Argentinian Eskenazi family, which owns Grupo Petersen; 17% is traded on the local stock exchange and 0.02% belonged to the government. Now the government owns 51% of the shares, all from Repsol’s stake, dealing a massive blow to the company.

Repsol’s shares in YPF had accounted for 42% of the company’s total global reserves of crude oil (estimated to be in the region of 2.1bn barrels). It is a big deal in other ways too: YPF is Argentina’s largest company (and is valued at approximately $13.6bn) and operates more than half of the country’s oil refineries. Spain is the biggest single investor in the country followed by the United States and the value of YPF is around $13.6bn.

The government has indicated that Repsol will be compensated, but that the amount will be determined by an Argentine tribunal. For its part, Repsol has said it will demand compensation of up to $10bn for its 57% stake.

Argentine president Fernández cut to the heart of the matter in an official address to the nation that the move was an attempt to recover sovereignty over Argentina’s hydrocarbon resources. Argentina is one of the few South American nations without an influential state-owned company in the energy sector. She explained the government had become increasingly frustrated with Repsol and YPF, in a speech peppered with patriotic references and culminating in a tearful mention of the president’s late husband and former president Nestor Kirchner.

The government claims Repsol has repatriated 90% of its profits; the country has had to spend more than $9bn on oil and gas imports in 201 and that nationwide oil production stood at 796,000 barrels per day in 2011, virtually unchanged since 2009. The expropriated shares will be divided between the Argentine government and provincial governors, leaving Repsol with a meagre 6.4% stake.

The appropriation of YPF has popular appeal and is in line with other political dynamics in the country. Since ­Fernandez’s husband, the late Nestor Kirchner was elected president in 2003, public policy and elector preferences have shifted towards a bigger role for the state and a reversal from free-market policies which many have blamed for the economic crash of 2001-2002. President Fernandez, elected as her husband’s successor in 2007, has continued his economic programme, re-nationalising the flagship airline Aerolineas Argentinas and pushing through reforms giving the government the right to use central bank reserves to pay off the country’s foreign debt.

Nationalisation of strategic assets also plays well to the political gallery in the country. Governors of a number of oil producing Argentine provinces, including Santa Cruz and Neuquén, have rapidly withdrawn up to 16 oil concessions that had been awarded to YPF alleging that the company failed to live up to its promises to develop the fields and increase production. It is an accusation that YPF has countered, saying that the revoking of concessions came shortly after Repsol-YPF presented provincial authorities with a plan to invest more than $4bn between 2012-2017, ­including the drilling of 2,249 new wells and the upgrading of some 2,664 existing wells.

Moreover, according to LatinMinerìa, the Spanish minerals and mining news service, over the past five years, Repsol has participated in some of the hottest oil exploration plays in the industry in Brazil, the Gulf of Mexico and West Africa. It has also invested in Alaskan oilfields and US shale gas, as part of the firm’s strategy to have 60% of its upstream assets in politically stable OECD countries. The data services company expresses surprise that Repsol would not have done the same in Argentina.

The future of FDI

The move now calls into question Argentina’s appeal as an FDI destination. Ironically, up until the end of 2010 and possibly early 2011 Argentina was attracting a lot of interest from foreign investors. Since it defaulted on $95bn debt in 2001 the country had turned around its economy and towards the end of 2010, when large chunks of the global economy were fighting to stay out of recession, Argentina’s economy grew by over 8% per year.

In 2010 too, the FTSE Argentina 20 Index, which consists of ADRs of the country’s top 20 companies, rose 44%, against a gloomy global economic backdrop. Investors flocked not only into Latin American stocks but into Argentina’s in particular. Even so, “It is difficult to distinguish how much of the growth had to do with government policies and how much it was helped by a boom in international commodity prices given that Argentina is a major exporter of soy, wheat and corn,” explains Carlos Maria Regunaga, a former adviser-in-chief to the Argentina’s secretary of commerce and a director at Menas Consulting Argentina, a boutique political risk consultancy. Moreover, for a number of years the country not only enjoyed rapid economic growth fuelled by grain exports but also self-sufficiency in oil and gas generation.

However, the domestic economy started slowing down last year as stagnation in commodity prices began to have an effect on the surplus in the balance of payments and as did reduced growth in Brazil, Argentina’s largest trading partner. According to Regunaga, this coincided with the worst harvest in decades, the maturation of a large slug of long-term debts, and the drain on foreign reserves which resulted from the purchasing of foreign currencies, payments for oil and gas imports and local inflation of 22%.

Over the last decade Argentina’s oil production has steadily fallen and domestic demand has grown, creating a squeeze for a government which was trying to keep prices artificially low in order to maintain public support, ­particularly as president Fernández is hoping to overturn constitutional ­limitations on presidential terms and run for office indefinitely.  As well, the cost of rising oil imports began to have a significant negative effect on the domestic trade balance. In that context, it is no surprise that the government began focusing its attention on YPF and Repsol.

There have been other long term factors in play too. The crisis in 2001 left as one of its legacies an emergency law which gives the government a major tool to regulate the economy by executive order, and which Fernández’s government wields freely. Pension funds were nationalised in 2008, for instance, instantly giving it key positions on the boards of major companies. The central bank also limits how much foreign currency can leave the country and—a decision which has particularly riled foreign fund investors —capital controls stipulate that money invested in the country cannot be ­expatriated for a number of years.

With regard to Repsol, Argentina’s former president and Christina Fernandez’s late husband Nestor Kirchner pushed the firm in 2007 to sell a 25.5% stake to Enrique Eskenazi, a close friend and a supporter of the Kirchners, under extraordinarily favourable terms which involved no direct payments. Instead, Repsol agreed to cover his payments on some $3.45bn in debt with dividends that accounted for 90% of the company’s profits. The payout of the bulk of YPF profits as dividends rather than their reinvestment in production was an integral part of the deal. Ultimately it meant that Repsol had no motive to invest in the country; though the firm continues to insist that it did. To add insult to injury, the government capped the price of a barrel of oil at $55 at a time when oil was trading at over $100/bbl in global markets. Naturally, Repsol began to invest capital in Brazil, Trinidad and Bolivia, where it could generate better returns.

Snowballs and avalanches

However, the snowball that started the YPF avalanche was the company’s announcement that it had found a major deposit of 800m barrels of shale oil in Patagonia. The significance of this cannot be underestimated. When US oil companies developed and perfected a technology to extract oil and gas from continental shale deposits the boom in gas production made the US completely self-sufficient in gas generation in the space of three to four years.

A working shale gas supply has massive implications for any country’s economy; not only because it no longer has to spend money to import gas, but also because gas is used in power ­generation and the lower cost of energy feeds through to manufacturing ­industries which can in turn significantly cut production costs. If Argentina develops its shale oil deposits in Patagonia it could reach the same levels of self-sufficiency as the US within a relatively short period of time. However, the terms of agreement between Repsol, YPF and the government were such that there was little incentive for Repsol to spend the money in the country.  “Repsol had no interest in developing the deposit given that the government was bleeding it dry,” said one foreign investor who did not want to be named.

“Fundamentally the government does not care how this decision is taken internationally. They feel that if Spain will not invest in the country there will be always somebody else who will be interested, most likely Chinese investors, and that they will be able to raise the money to develop shale gas,” the investor added. So far, reactions by international investors have been fairly pragmatic.

Stock investment has taken the immediate hit. FTSE's Argentina Top 20 Index dropped 11% for the year to-date. However, the FTSE Latin American Index increased 11% over the same period.

“In the long term, Argentina will remain part of benchmark indices. It is well positioned as an economy, it has massive shale gas reserves, it has good trade particularly with Brazil, infrastructure is good and it has a well educated population. But this has to be balanced out with high inflation which is close to 30%, massive wage increases and a mixed outlook on resources. This has to be reflected in the valuation of the stocks and while stocks have priced in some of that I still don’t see that valuations are reflecting that,” says Adam Kutas, who manages two Latin American funds for Fidelity Advisors. Fidelity’s Latam funds were among the ten most successful Latam funds this year, according to Morningstar.

“You have to ask yourself why invest in Argentina when you have better options for instance in Colombia’s energy sector? I can for instance find great opportunities in Colombia, Chile or Brazil,” adds Kutas. He notes that a major deterrent to fund investors is the fact that money invested in Argentina has to be kept in the country for a number of years. “As a fund manager I need to have access to money, I cannot afford for it to be tied up and to have to be able to wait for a few years,” he adds.

 “Latin America is a pretty dynamic region and these situations create opportunities. If, for instance, you already are an investor in the country and you have dollar-funding then you can command higher returns on your investment,” explains Ernest Bachrach, managing partner at Advent International, a global private equity firm.

Companies active in the country include Americas Petrogas Inc, a junior Canadian exploration company operating in Neuquén, the province in which the shale oil was discovered, and major oil services firm Schlumberger, as well as Cargill, the agriculture exporter.  “Nobody says that this ­decision is a good thing but it is a question of returns. Emerging market investors are fairly resilient, they are used to these kinds of situation and they will stay in a country even if the red tape becomes more complicated as long as they can make good returns on their investment,” says the head of emerging markets research in a London-based bank.

What investors are trying to assess now is how long policies such as the current strict foreign-exchange controls will stay in place. Argentina’s political system is modelled on the one in the US and allows the president a maximum of two terms in power. The current government was voted in for its second term at the end of 2011 and will most likely stay in place until late 2015. However, in a move reminiscent of Putin’s manoeuvring in Russia there has been talk about changing the constitution to allow for a longer presidency.

Before that happens however Argentina will likely lose Spain, and potentially Netherlands, as one of its major trade partners and face repercussions from the EU for breaching international trade regulations. China is likely to take up the space left open by European investors. What kinds of strings this will bring with it remains to be seen.

Bolivia’s investor assault

In early May came the news that Bolivia’s president Evo Morales intended to seize Bolivia’s main ­electricity company, reinforcing the divide between free market Latin American leaders and those seeking more state control. Bolivia is nationalising the local assets of Alcobendas, Spain-based Red Eléctrica Corp., giving him control of the country’s power grid. Reminiscent of Fernandez’s reasoning, Morales says the company’s local investment was inadequate.  However, Morales has been at the nationalisation game for a lot longer. He began his nationalisation drive in 2007 when he took control of the country’s largest telecommunications company and an electricity company and forced foreign oil companies into minority shareholder agreements as part of joint ventures. Then, on May 1st 2010, he nationalised four power companies, including assets from the UK’s Rurelec Plc and France’s GDF Suez SA.

Bolivia’s latest announcement is not of the magnitude of the Argentine move. The benchmark IBEX 35 index dropped 1.2% on the news; Bolivia generated €45.7m ($60m) in revenue for Red Eléctrica in 2011, less than 3% of total sales.

However, the impact of the spectre of nationalisation has been felt in the debt markets. Venezuela’s dollar bonds yield 913 basis points (bps) over ­Treasuries while Argentina’s spread is 953bps, according to JPMorgan. The countries post the two highest yield gaps among major emerging-market countries. Colombia by comparison has a yield spread of 148bps and Brazil has a yield gap of 184bps. The latter two juris­dictions are liberalising with a bullet; with Brazil having raised $14bn earlier this year from a ­February auction of licenses to operate three of the country’s busiest airports in an effort to accelerate investments ahead of the 2014 World Cup (please refer to www.ftseglobalmarkets.com, for more details).

The timing of the moves is clever. Spain (and in fact the EU) is in a greatly weakened position on the international stage. Look at opprobrium the UK faced in the American and Latin American press and in Latin American seaports having underscored its claim to the Falkland Islands following Fernandez’s revival of a claim on the island group at the end of last year. Now, as in 1982, the American presidency happily stood on the sidelines. It is presidential election year in America, and no one wants to upset the bloc Latino vote.

Equally, Fernandez and Morales (together with Venezuela’s Chavez) have calculated that Asian investors have few qualms in substituting their investment dollars in place of disenfranchised Europeans. It’s a new power play by resource-rich nations and institutional investors will have to take note of the new political risks in play in cross border investment as this decade matures. How they respond will be telling. What is certain is that this story will run and run.

In mid-April Argentina seized control of 51% of YPF, the country’s largest oil group, by taking over the holdings of its biggest shareholder (Spanish oil company Repsol) in a move that stunned foreign investors and provoked the EU trade commissioner to seek settlement at the World Trade Organisation (WTO). It is the latest in a series of grandstanding moves by Argentine president Christina Fernández de Kirchner and begs the question: how could this decision possibly be beneficial for the country in the long term? Elsewhere in Latin America, Bolivia says it will expropriate Transportadora de Electricidad, the assets of Spain’s Red Eléctrica, sending armed troops to its headquarters. Vanya Dragomanovich reports from Buenos Aires on the long term implications.

Foreign direct investment in so-called strategic national assets can be a risky business.  Just ask BP about its investments in Russia’s oil exploration industry; the ups and downs of that particular history would make a pretty hairy ­fairground ride. Nascent and high growth markets are often caught in a miserable quandary. They need foreign investment and expertise to lift their own industries (some strategic, some otherwise) out of the workaday and into the international league tables. However, once that happens, it requires a particular temperament to accept that a good slug of nationally earned cash goes abroad. Privatisation too is a double edged sword for countries that at one time needed foreign inputs to inject capital and efficiencies into ­moribund state run businesses and which later find themselves frustrated at the business strategies of the private sector business owners.

Going forward, it might be time for high growth markets to reassess their approaches to FDI and privatisation in strategic industries; perhaps adopting contract structures that allow returns to gravitate to investors over a defined period, with a buy-back agreement scaled over mutually agreed terms. That seems to be one moral perhaps of a growing (and somewhat worrisome) trend in some Latin American countries to expropriate the assets of foreign direct investors when local market developments create problems for governments.

Argentina has stunned foreign investors by its decision to nationalise Repsol’s stake in oil company YPF. Until April Repsol owned 57.4% of YPF. Some 25.5% was (and still is) held by the wealthy Argentinian Eskenazi family, which owns Grupo Petersen; 17% is traded on the local stock exchange and 0.02% belonged to the government. Now the government owns 51% of the shares, all from Repsol’s stake, dealing a massive blow to the company.

Repsol’s shares in YPF had accounted for 42% of the company’s total global reserves of crude oil (estimated to be in the region of 2.1bn barrels). It is a big deal in other ways too: YPF is Argentina’s largest company (and is valued at approximately $13.6bn) and operates more than half of the country’s oil refineries. Spain is the biggest single investor in the country followed by the United States and the value of YPF is around $13.6bn.

The government has indicated that Repsol will be compensated, but that the amount will be determined by an Argentine tribunal. For its part, Repsol has said it will demand compensation of up to $10bn for its 57% stake.

Argentine president Fernández cut to the heart of the matter in an official address to the nation that the move was an attempt to recover sovereignty over Argentina’s hydrocarbon resources. Argentina is one of the few South American nations without an influential state-owned company in the energy sector. She explained the government had become increasingly frustrated with Repsol and YPF, in a speech peppered with patriotic references and culminating in a tearful mention of the president’s late husband and former president Nestor Kirchner.

The government claims Repsol has repatriated 90% of its profits; the country has had to spend more than $9bn on oil and gas imports in 201 and that nationwide oil production stood at 796,000 barrels per day in 2011, virtually unchanged since 2009. The expropriated shares will be divided between the Argentine government and provincial governors, leaving Repsol with a meagre 6.4% stake.

The appropriation of YPF has popular appeal and is in line with other political dynamics in the country. Since ­Fernandez’s husband, the late Nestor Kirchner was elected president in 2003, public policy and elector preferences have shifted towards a bigger role for the state and a reversal from free-market policies which many have blamed for the economic crash of 2001-2002. President Fernandez, elected as her husband’s successor in 2007, has continued his economic programme, re-nationalising the flagship airline Aerolineas Argentinas and pushing through reforms giving the government the right to use central bank reserves to pay off the country’s foreign debt.

Nationalisation of strategic assets also plays well to the political gallery in the country. Governors of a number of oil producing Argentine provinces, including Santa Cruz and Neuquén, have rapidly withdrawn up to 16 oil concessions that had been awarded to YPF alleging that the company failed to live up to its promises to develop the fields and increase production. It is an accusation that YPF has countered, saying that the revoking of concessions came shortly after Repsol-YPF presented provincial authorities with a plan to invest more than $4bn between 2012-2017, ­including the drilling of 2,249 new wells and the upgrading of some 2,664 existing wells.

Moreover, according to LatinMinerìa, the Spanish minerals and mining news service, over the past five years, Repsol has participated in some of the hottest oil exploration plays in the industry in Brazil, the Gulf of Mexico and West Africa. It has also invested in Alaskan oilfields and US shale gas, as part of the firm’s strategy to have 60% of its upstream assets in politically stable OECD countries. The data services company expresses surprise that Repsol would not have done the same in Argentina.

The future of FDI

The move now calls into question Argentina’s appeal as an FDI destination. Ironically, up until the end of 2010 and possibly early 2011 Argentina was attracting a lot of interest from foreign investors. Since it defaulted on $95bn debt in 2001 the country had turned around its economy and towards the end of 2010, when large chunks of the global economy were fighting to stay out of recession, Argentina’s economy grew by over 8% per year.

In 2010 too, the FTSE Argentina 20 Index, which consists of ADRs of the country’s top 20 companies, rose 44%, against a gloomy global economic backdrop. Investors flocked not only into Latin American stocks but into Argentina’s in particular. Even so, “It is difficult to distinguish how much of the growth had to do with government policies and how much it was helped by a boom in international commodity prices given that Argentina is a major exporter of soy, wheat and corn,” explains Carlos Maria Regunaga, a former adviser-in-chief to the Argentina’s secretary of commerce and a director at Menas Consulting Argentina, a boutique political risk consultancy. Moreover, for a number of years the country not only enjoyed rapid economic growth fuelled by grain exports but also self-sufficiency in oil and gas generation.

However, the domestic economy started slowing down last year as stagnation in commodity prices began to have an effect on the surplus in the balance of payments and as did reduced growth in Brazil, Argentina’s largest trading partner. According to Regunaga, this coincided with the worst harvest in decades, the maturation of a large slug of long-term debts, and the drain on foreign reserves which resulted from the purchasing of foreign currencies, payments for oil and gas imports and local inflation of 22%.

Over the last decade Argentina’s oil production has steadily fallen and domestic demand has grown, creating a squeeze for a government which was trying to keep prices artificially low in order to maintain public support, ­particularly as president Fernández is hoping to overturn constitutional ­limitations on presidential terms and run for office indefinitely.  As well, the cost of rising oil imports began to have a significant negative effect on the domestic trade balance. In that context, it is no surprise that the government began focusing its attention on YPF and Repsol.

There have been other long term factors in play too. The crisis in 2001 left as one of its legacies an emergency law which gives the government a major tool to regulate the economy by executive order, and which Fernández’s government wields freely. Pension funds were nationalised in 2008, for instance, instantly giving it key positions on the boards of major companies. The central bank also limits how much foreign currency can leave the country and—a decision which has particularly riled foreign fund investors —capital controls stipulate that money invested in the country cannot be ­expatriated for a number of years.

With regard to Repsol, Argentina’s former president and Christina Fernandez’s late husband Nestor Kirchner pushed the firm in 2007 to sell a 25.5% stake to Enrique Eskenazi, a close friend and a supporter of the Kirchners, under extraordinarily favourable terms which involved no direct payments. Instead, Repsol agreed to cover his payments on some $3.45bn in debt with dividends that accounted for 90% of the company’s profits. The payout of the bulk of YPF profits as dividends rather than their reinvestment in production was an integral part of the deal. Ultimately it meant that Repsol had no motive to invest in the country; though the firm continues to insist that it did. To add insult to injury, the government capped the price of a barrel of oil at $55 at a time when oil was trading at over $100/bbl in global markets. Naturally, Repsol began to invest capital in Brazil, Trinidad and Bolivia, where it could generate better returns.

Snowballs and avalanches

However, the snowball that started the YPF avalanche was the company’s announcement that it had found a major deposit of 800m barrels of shale oil in Patagonia. The significance of this cannot be underestimated. When US oil companies developed and perfected a technology to extract oil and gas from continental shale deposits the boom in gas production made the US completely self-sufficient in gas generation in the space of three to four years.

A working shale gas supply has massive implications for any country’s economy; not only because it no longer has to spend money to import gas, but also because gas is used in power ­generation and the lower cost of energy feeds through to manufacturing ­industries which can in turn significantly cut production costs. If Argentina develops its shale oil deposits in Patagonia it could reach the same levels of self-sufficiency as the US within a relatively short period of time. However, the terms of agreement between Repsol, YPF and the government were such that there was little incentive for Repsol to spend the money in the country.  “Repsol had no interest in developing the deposit given that the government was bleeding it dry,” said one foreign investor who did not want to be named.

“Fundamentally the government does not care how this decision is taken internationally. They feel that if Spain will not invest in the country there will be always somebody else who will be interested, most likely Chinese investors, and that they will be able to raise the money to develop shale gas,” the investor added. So far, reactions by international investors have been fairly pragmatic.

Stock investment has taken the immediate hit. FTSE's Argentina Top 20 Index dropped 11% for the year to-date. However, the FTSE Latin American Index increased 11% over the same period.

“In the long term, Argentina will remain part of benchmark indices. It is well positioned as an economy, it has massive shale gas reserves, it has good trade particularly with Brazil, infrastructure is good and it has a well educated population. But this has to be balanced out with high inflation which is close to 30%, massive wage increases and a mixed outlook on resources. This has to be reflected in the valuation of the stocks and while stocks have priced in some of that I still don’t see that valuations are reflecting that,” says Adam Kutas, who manages two Latin American funds for Fidelity Advisors. Fidelity’s Latam funds were among the ten most successful Latam funds this year, according to Morningstar.

“You have to ask yourself why invest in Argentina when you have better options for instance in Colombia’s energy sector? I can for instance find great opportunities in Colombia, Chile or Brazil,” adds Kutas. He notes that a major deterrent to fund investors is the fact that money invested in Argentina has to be kept in the country for a number of years. “As a fund manager I need to have access to money, I cannot afford for it to be tied up and to have to be able to wait for a few years,” he adds.

 “Latin America is a pretty dynamic region and these situations create opportunities. If, for instance, you already are an investor in the country and you have dollar-funding then you can command higher returns on your investment,” explains Ernest Bachrach, managing partner at Advent International, a global private equity firm.

Companies active in the country include Americas Petrogas Inc, a junior Canadian exploration company operating in Neuquén, the province in which the shale oil was discovered, and major oil services firm Schlumberger, as well as Cargill, the agriculture exporter.  “Nobody says that this ­decision is a good thing but it is a question of returns. Emerging market investors are fairly resilient, they are used to these kinds of situation and they will stay in a country even if the red tape becomes more complicated as long as they can make good returns on their investment,” says the head of emerging markets research in a London-based bank.

What investors are trying to assess now is how long policies such as the current strict foreign-exchange controls will stay in place. Argentina’s political system is modelled on the one in the US and allows the president a maximum of two terms in power. The current government was voted in for its second term at the end of 2011 and will most likely stay in place until late 2015. However, in a move reminiscent of Putin’s manoeuvring in Russia there has been talk about changing the constitution to allow for a longer presidency.

Before that happens however Argentina will likely lose Spain, and potentially Netherlands, as one of its major trade partners and face repercussions from the EU for breaching international trade regulations. China is likely to take up the space left open by European investors. What kinds of strings this will bring with it remains to be seen.

Bolivia’s investor assault

In early May came the news that Bolivia’s president Evo Morales intended to seize Bolivia’s main ­electricity company, reinforcing the divide between free market Latin American leaders and those seeking more state control. Bolivia is nationalising the local assets of Alcobendas, Spain-based Red Eléctrica Corp., giving him control of the country’s power grid. Reminiscent of Fernandez’s reasoning, Morales says the company’s local investment was inadequate.  However, Morales has been at the nationalisation game for a lot longer. He began his nationalisation drive in 2007 when he took control of the country’s largest telecommunications company and an electricity company and forced foreign oil companies into minority shareholder agreements as part of joint ventures. Then, on May 1st 2010, he nationalised four power companies, including assets from the UK’s Rurelec Plc and France’s GDF Suez SA.

Bolivia’s latest announcement is not of the magnitude of the Argentine move. The benchmark IBEX 35 index dropped 1.2% on the news; Bolivia generated €45.7m ($60m) in revenue for Red Eléctrica in 2011, less than 3% of total sales.

However, the impact of the spectre of nationalisation has been felt in the debt markets. Venezuela’s dollar bonds yield 913 basis points (bps) over ­Treasuries while Argentina’s spread is 953bps, according to JPMorgan. The countries post the two highest yield gaps among major emerging-market countries. Colombia by comparison has a yield spread of 148bps and Brazil has a yield gap of 184bps. The latter two juris­dictions are liberalising with a bullet; with Brazil having raised $14bn earlier this year from a ­February auction of licenses to operate three of the country’s busiest airports in an effort to accelerate investments ahead of the 2014 World Cup (please refer to www.ftseglobalmarkets.com, for more details).

The timing of the moves is clever. Spain (and in fact the EU) is in a greatly weakened position on the international stage. Look at opprobrium the UK faced in the American and Latin American press and in Latin American seaports having underscored its claim to the Falkland Islands following Fernandez’s revival of a claim on the island group at the end of last year. Now, as in 1982, the American presidency happily stood on the sidelines. It is presidential election year in America, and no one wants to upset the bloc Latino vote.

Equally, Fernandez and Morales (together with Venezuela’s Chavez) have calculated that Asian investors have few qualms in substituting their investment dollars in place of disenfranchised Europeans. It’s a new power play by resource-rich nations and institutional investors will have to take note of the new political risks in play in cross border investment as this decade matures. How they respond will be telling. What is certain is that this story will run and run.

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