December 21, 2014
Wall or BRICS?
Today’s column finds Argentina on the eve of two potential pointers towards its future sources of international investment — tomorrow’s resumption of negotiations with the hedge fund creditors in Manhattan under the mediation of “special master” Daniel Pollack and Russian President Vladimir Putin’s visit here the next day (to be followed by his Chinese counterpart Xi Jinping at the other end of the BRICS summit in Fortaleza).
There can be no illusions about Argentina’s motives for its retreat from isolationism, leading up to the current U-turn on talking to the hitherto demonized “vulture funds,” the climax after several months of such stepping-stones as heeding some adverse International Centre for the Settlement of Investment Disputes (CIADI in its Spanish acronym) verdicts, the compensation of Spain’s Repsol for the 2012 expropriation of YPF and settlement with the Paris Club creditors six weeks ago. Indeed pretty much the same motives as for that abrupt YPF expropriation —namely, the discovery of world-class shale deposits in Vaca Muerta and the desire to milk that cash cow for all it is worth, a goal which would entail investment on a scale vastly beyond Argentina’s current cash trickles.
Paradoxically enough, in a month in which Argentina would seem to have been cornered into a technical default by adverse court rulings in the United States, there appears to be contrasting options for that investment as personified by Pollack and Putin — the private sector and multinational majors of the world’s biggest shale success story (moving from being the planet’s biggest energy importer to already its third-largest oil exporter and set to go top next year) or the likes of Russia’s Gazprom (majority government-owned, very much like YPF), the state energy adjuncts of emerging market heavyweights.
It did not take the Cristina Fernández de Kirchner administration long to learn that making the most of Vaca Muerta involved rather more than a share grab. Far from energy becoming a massive contributor to the trade surplus and balance of payments, it is a huge and growing cost factor for now. And not just the billions of dollars for a fuel import bill swollen by this year’s maxi-devaluation — a reckless money supply is the most frequent culprit for inflation continuing at last year’s levels despite markedly lower economic activity. But never underestimate the effect of those constantly rising petrol prices (at the behest of YPF) in an economy which moves on wheels. Nor does the CFK administration monopolize all oil revenues — a battle royal over provincial royalties still awaits.
Far too many people are taking the Vaca Muerta bonanza for granted and debating whether the windfalls will be squandered as in Venezuela or ploughed into anti-cyclical funds as in Norway (or Chile). This is jumping the gun — YPF and CFK simply do not have the money to go it alone. First, the huge capital sums needed to set the hydraulic fracking in motion must be raised and fairly quickly before comparable deposits are located elsewhere in the world (if Sussex has shale, who doesn’t?).
So where will the coin fall — on the side of New York or Fortaleza? We are not likely to see this question answered by either Pollack or Putin in the next couple of days but already in the course of this month we may have some clues as to whether global capital markets and private-sector majors or strategic emerging market alliances are the shape of the investment to come. While there can be little doubt that the CFK administration’s ideological preferences would favour the latter prospect, they are also a highly pragmatic outfit who would take the money from wherever it came, including Wall Street. Of course, while the odds are on both a settlement with the holdouts (for which Argentina’s need is so strong that it has bred a rare national consensus) and Sino-Russian interest in developing the country’s wealth of resources, failure is also possible on both fronts — Economy Minister Axel Kicillof has repeatedly underlined the “impossibility” of veteran Manhattan judge Thomas Griesa’s ruling while Xi Jinping’s predecessor Hu Jintao visited Argentina a decade ago amid talk of a US$20-billion Chinese investment which ended up being a pipe-dream.
Not that investment here should necessarily be assumed to be an either/or proposition between the Wall Street and BRICS axes— thus without waiting for either a settlement with holdout creditors or the Fortaleza summit, General Motors announced a quarter-billion-dollar investment on Monday.
Meanwhile the domestic economic scene is full of gloom and doom — more so than most countries according to an Ipsos survey which shows the Argentine public as the most pessimistic of the world alongside Italy, Spain, Japan, Brazil, Mexico and South Africa (curiously enough, all the Latin American heavyweights seem to be floundering while the region’s minor economies are flourishing quite nicely). Looking at the fellow-pessimists (misery loves company, they say), how much more is the national mood set to plunge in Brazil in particular after the Wagnerian rendering given to the “sete mares” of Toquinho’s Acuarela in Belo Horizonte on Tuesday?
Yet (returning to Argentina) amid all the economic woes, should we necessarily assume that the CFK administration is failing in its objectives? The steady trend of this year has been to expand the state’s share of the economy at the expense of a languishing private sector while public spending surges ahead by some 40 percent — faster than either almost any estimate of annual inflation or the pace of revenue increase. But revenue is still aggressive enough (especially with the ravages of a rigidly low income tax floor which has not been updated in the last 10 months) to crowd out the private sector. Doubts have been cast on Kicillof’s Marxist credentials because of his tame attitudes to creditors in recent months but viewing the advance of the state share of the economy under his stewardship, the man is a true Stakhanovite.
If we are awaiting Putin in today’s column, it will be the turn of Chinese President Xi Jinping in next week’s while the following Thursday the end of the 30-day grace period to heed Griesa’s ruling will be around the corner. They also serve who only stand and wait.