Deadbeat Socialist and emerging authoritarian Nestor Kirchner was in New York trying to woo global investors last month.
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Argentine Stigma Endures as Kirchner Courts Investors (Update1)
By Daniel Helft
Oct. 12 (Bloomberg) -- Argentine President Nestor Kirchner trawled New York for investment last month, telling business leaders his country's booming economy offers some of the best opportunities in the world. He left empty-handed.
"Kirchner wasn't convincing,'' says Carola Sandy, an economist at Credit Suisse Group, who heard him speak at an Americas Society dinner on Sept. 21, part of a schedule that included group meetings with some 250 company executives.
Even as Argentina's economy expands at one of the fastest paces in the region, corporate chiefs and investors aren't buying into Kirchner's growth story, saying he can't erase stains on the reputation of a country that defaulted on its debt, cold-shouldered creditors and reneged on contracts with utilities.
"There's a stigma to Argentina after the default,'' says Michael Discher-Remmlinger, an emerging-markets fund manager at Pacific Investment Management Co. in Munich, who declined to say whether he owned Argentine bonds.
Argentina has grown by more than 8 percent a year since suffering its deepest-ever recession in 2002. The country's default on $95 billion of bonds in late 2001 led to a run on banks that forced the government to allow the peso, which had been fixed at par with the U.S. dollar for a decade, to trade.
A 70 percent drop in the value of the peso during 2002 enabled local makers of textiles, automobiles and paper products to compete with the foreign-made goods that had flooded the country in the 1990s. At the same time, soaring prices for soybeans and other commodities encouraged farmers to produce record harvests. The Buenos Aires stock market's 13-member Merval index has more than tripled since Jan. 1, 2003.
Toyota, Peugeot
Companies such as Toyota Motor Corp., PSA Peugeot Citroen and Volkswagen AG have announced plans to expand production in Argentina to take advantage of lower costs and booming demand for vehicles locally and in neighboring Brazil. And Siemens AG, Germany's largest maker of turbines, said this week it's in talks with the government to build two power plants.
Even so, investment isn't running fast enough to sustain current growth rates for long, says Martin Apaz, an economist at Deloitte Touche Tohmatsu in Buenos Aires.
Foreign direct investment in Argentina averaged just 1.7 percent of gross domestic product in the past three years, compared with 2.9 percent in Colombia and 4.6 percent in Chile, a Deloitte report shows.
After growing 8 percent this year, Argentina's economic expansion will slow steadily over the next few years, reaching 3.7 percent in 2009, according to the report.
Spurned Creditors
Before his trip to New York, Kirchner, 56, had done little to endear himself to international investors, says Pablo Morra, economist at Goldman Sachs Group Inc. in New York. The former governor of a windswept Patagonian province who took office in May 2003 made a take-it-or-leave-it offer worth about 30 cents on the dollar to the holders of defaulted bonds in 2005.
He has refused to talk to, or pay, creditors who turned down the offer.
Kirchner also alienated utilities such as Paris-based water treatment and distribution company Suez SA and London-based power-transmission company National Grid Plc. They quit the country after he refused to relax a 2002 freeze on electricity, natural gas and water prices even though their operating licenses allowed increases.
After inflation doubled to 12.3 percent in 2005 from 6.1 percent the previous year, Kirchner increased his grip over the economy. To increase supplies of goods to the domestic market with the aim of reducing prices, Argentina has restricted exports of beef and increased export duties on dairy products, petroleum and soybeans. In January, Kirchner successfully pressured companies including consumer-goods makers Procter & Gamble Co. and Unilever NV to hold off price increases for at least one year.
Energy Shortages
Such interference in the economy is anathema to investors, says Jorge Romero Vagni, president of Companias Mineras Integradas SRL, a Buenos Aires-based mining company.
"Why would you want to invest in a country where the government wants to regulate how big your profits should be and at what prices you have to sell your products?'' says Romero Vagni.
Price regulations have led to a lack of investment in the energy industry, causing shortages of fuel supplies that may discourage manufacturers from expanding capacity, says Roberto Lavagna, 64, whom Kirchner fired as economy minister in November 2005.
"When the energy system cannot meet demand, you have a crisis,'' says Lavagna, who says he's considering running for president in elections next year. "The government makes announcements of energy works but then doesn't carry them out.''
Inflation Threat
Output of grains and oilseeds will probably drop next harvest because farmers cannot obtain sufficient diesel fuel to prepare and sow their fields, says Ernesto Ambrosetti, chief economist at the Argentine Rural Society, the country's biggest farm association.
A law enacted yesterday requires energy companies to fully supply the market with diesel or face possible jail sentences for executives, Commerce Secretary Guillermo Moreno said on Radio Diez. He said other sanctions include fines and the closing of gas stations. Fuel shortages are delaying the planting of crops such as corn and sunflowers and disrupting transportation in the farm sector.
Price controls and shortages of goods are an explosive mix that could result in faster rates of inflation in the future, says Miguel Kiguel, a former under-secretary of finance who now runs the Center for Financial Stability in Buenos Aires.
'Boomerang Effect'
"Inflation is held down but not controlled,'' Kiguel says. "There's risk of a boomerang effect, but the government doesn't want to pay the price of coming out of this situation.''
Planning Minister Julio De Vido says the government's price policy will continue.
"We see no need to change it,'' De Vido, who accompanied Kirchner to the U.S., said in an interview in New York during the trip. "We will exert very firm control to avoid a possible surge in inflation.''
For some, the potential for profit outweighs the risk.
Mario Quintana, managing partner at Pegasus Capital, a Buenos Aires-based private equity fund, says the 2002 economic collapse provided opportunities to acquire assets cheaply. Over the past three years, Pegasus paid about $100 million for companies that had been valued at as much as $700 million in the mid-1990s, Quintana says.
"We see opportunities in Argentina,'' Quintana said on Oct. 4 at a Buenos Aires conference on the economies of Latin America. "But you have to be willing to accept high risks and an unstable regulatory environment.''
Grupo Dolphin
Pegasus's purchases included Musimundo SA, a music and personal computer retailer, and ice cream chain Freddo SA. Both have turned from loss into profit.
Similarly, Grupo Dolphin, a Buenos Aires-based investment fund, acquired assets from France's Electricite de France SA and National Grid as they quit the country. Dolphin Chief Executive Officer Marcelo Mindlin says his fund paid EDF $100 million for 65 percent of Edenor SA, which supplies electricity in the Buenos Aires metropolitan area. Over the previous decade, EDF had invested about $1 billion in Edenor, according to Mindlin.
"Our strategy is to enter at a low price, restructure debts and wait for the regulatory environment to change,'' says Mindlin. "Things will have to normalize at some point, and then we will have very valuable companies.''
Higher Yields
Meanwhile, international bond investors are demanding a higher return to compensate them for the risk of investing in Argentina than in any other South American country except Ecuador, where the leading candidate in Oct. 15 elections has suggested he might default on the country's debt.
Argentina's 8.28 percent bond due in December 2033 yields 8.44 percent, or 3.7 percentage points more than similar-life U.S. Treasuries and 1.4 percentage points more than Brazil's 8.25 percent bond due in 2034.
"Yields on Argentina's bonds remain high because neither the macro outlook nor the institutional framework is straightforward,'' says Credit Suisse's Sandy.
So far, Kirchner has avoided raising funds in international markets by either selling debt on the domestic market or directly to the government of Venezuela, which has acquired $4 billion of Argentine bonds since early 2005. Kirchner, who backed Venezuela's December entry into the Mercosur regional trade bloc, backs Venezuelan President Hugo Chavez's regime, describing it as a "full democracy.''
Chavez, 52, has stacked courts with his backers, fired government workers who oppose his administration, and stripped landowners of farms he deems underutilized.
Rule by Decree
Like Chavez, Kirchner, taking advantage of a 67 percent approval rating, is extending his power, says Ricardo Rouvier, who runs Rouvier & Asociados, a Buenos Aires-based polling company.
In February, Kirchner boosted his influence over the nation's courts by changing the makeup of a board that nominates federal judges. In August, he used his Peronist Party's majorities in both houses of Congress to pass legislation that gives him greater freedom to distribute government funds and to rule by decree. In August, he split the country's main opposition Radical Party, winning the support of five of the movement's six provincial governors and 180 town mayors.
As a result, Kirchner, who has suggested he may seek re- election next year, enjoys more power than any Argentine president since a seven-year military dictatorship ended in 1983, says Rosendo Fraga, a Buenos Aires-based political analyst.
In South America, only Chavez enjoys more authority, says Fraga, who runs Nueva Mayoria, a political consulting and polling company. "Kirchner is becoming more and more like Chavez,'' says Fraga.
