Argentina at a crossroads as the presidential election approaches
June 2015 | SPECIAL REPORT: MERGERS & ACQUISITIONS
Financier Worldwide Magazine
Argentina is an extraordinary country for many reasons. Some of them we are proud of, such as being the birthplace of Pope Francis, of the world’s best current football player, and of the world’s best ever footballer (although this is not an undisputed statement). We also have the best polo and steaks. Other aspects are a source of less pride, such as making headlines for the largest default ever of a sovereign debt (the effects of which continue to linger after 13 years), or for having one of the top three highest inflation rates in the world, or for our legal and factual restrictions that condition investments and international trade by affecting normal payment of dividends or, imports.
The origin of some, if not all, of the problems mentioned above is essentially political. Politics have a very significant influence in everyday life in Argentina, including economic activity and the M&A market.
After 12 years of continuous rule by the moderate left-of-centre Kirchner spouses, Argentina will have a new president chosen in October 2015, as the incumbent Ms Fernandez de Kirchner cannot run for re-election due to constitutional restrictions. The top three candidates are Mr Scioli (who belongs to the Kirchner-led coalition), Mr Massa and Mr Macri, (both of whom are, arguably, moderately right-of-centre). Despite their differences, all three are voicing the need to promote new investments in key areas of the economy, such as energy (where the lack of investment in the last decade switched the country´s net position from exporter to importer of oil and gas) and infrastructure.
The business community, including both strategic and portfolio investors, is aware of how politics conditions investments in the local marketplace. This explains why the deal landscape has been in a sort of standstill over the last few years, delaying investment decisions until there is clarity on what comes next. The expropriation from Repsol of the majority stock of local oil company YPF in May 2013, coupled with the failure to reach an agreement with the holdouts of sovereign debt in mid-2014 after a contrary ruling by the US courts, also put several investment projects on hold. Since then the government has reached a settlement with Repsol but could not agree with the holdouts and does not seem in a hurry to do so before the succession takes place. The government has turned its full attention to entering into strategic agreements with China and Russia, the extent and impact of which on the local economy is yet to be known. As such, the recent level of deal inactivity will likely remain until the new presidential cycle begins in late 2015.
The big question is what to expect for 2016 in general, and particularly in the M&A space. The first major challenge the new administration will face is stopping the inflationary cycle (private consultants estimate that the annual inflation rate in each the last five years has exceeded 25 percent) without freezing the economy, and regaining the confidence of the international business community. These are tough tasks but the next government, no matter which one is elected, has no option but to address them. Boosting investment, both internal and external, is of the essence as the current levels of public spending cannot be cut abruptly without creating unemployment, or social unrest, or both. In other words, Argentina will have to return, albeit rationally and gradually, to the international capital markets and will have to provide investors with a solid and sound investment environment, probably by relaxing or eliminating some of the current regulatory and factual barriers. The economic teams of all of the major presidential candidates are already designing plans to overcome the two main obstacles Argentina currently faces to generate investment – the holdouts problem and lack of investor appetite for local assets. Therefore, a general sense of cautious optimism can be perceived among business people.
Where should we expect greater M&A activity? We believe once the macroeconomic issues are dealt with, Argentina will undoubtedly regain attractiveness. There are three main sectors which will probably become very dynamic. Energy is the first one. Argentina is the third largest power market in Latin America, after Brazil and Mexico. This sector is dependent on natural gas power generation, hydroelectricity and oil-fired generation. The Vaca Muerta shale oil and gas field in the north Patagonian province of Neuquén is estimated to be one of the largest shale oil reserves in the world and will most likely be a source of direct or indirect major investments, such as acquisition in the oil-related service sector. Timing of these might depend on the variation of oil futures. The same applies to infrastructure. There has been no major infrastructure investment (be it in electricity, gas, roads, telephony, etc.) since the 1990s, due in part to a freezing of tariffs and increased regulation; the need for investment there is crucial. It is likely that public-private partnerships will take the lead in updating the local infrastructure.
The third most dynamic sector will probably be technology. Argentina, and especially Buenos Aires, is home to some of the more successful pan-Latin American tech companies, such as Mercadolibre.com (the Latam equivalent of eBay), Despegar.com (an online travel agency), Etermax (the creator of Preguntados, a trivia game with over 150 million downloads), Globant (a software development company that recently went public on the NYSE), among others. Buenos Aires is a technology hub and it would be natural to expect more venture capital funds to enter the market and become more active in funding new projects.
Other sectors which should gain vitality might be the agribusiness, mining and telecoms. Last but not least, one major failure of the Argentine economy is its capital market. Very few local companies think of a local IPO as a viable funding option, and a very small numbers of investors trade in local shares. This is something that, with the right incentives, could change in the near future.
Diego Krischcautzky and Pablo García Morillo are partners at Marval, O’Farrell & Mairal. Mr Krischcautzky can be contacted on +54 11 4310 0100 or by email: email@example.com. Mr Morillo can be contacted on +54 11 4310 0100 or by email: firstname.lastname@example.org.
© Financier Worldwide
Diego Krischcautzky and Pablo García Morillo
Marval, O’Farrell & Mairal