Argentine President Cristina Fernandez de Kirchner (R) speaks in Buenos Aires as Economy Minister Axel Kicillof looks on Feb. 12.(DANIEL GARCIA/AFP/Getty Images)
Summary
Argentina took one step closer to normalizing its financial relationship with the outside world May 29, when the government announced a deal that would settle outstanding debts with the Paris Club, a group of 19 public creditors including mostly European countries, the United States, Canada, Australia and Russia. After 13 years of default, Argentina has promised to pay back a total of $9.7 billion over the next five years, with the first payment of $1.15 billion to be paid in two installments in July 2014 and May 2015.
Resuming payments will open the door for these public creditors to once again lend money to Argentina. Thus, the deal is an important phase in the process of Argentina's regaining access to international credit markets, which Buenos Aires will need if it hopes to avoid an economic crisis. Argentina is betting that it can eventually revive its energy sector and once again return to its status as a net exporter of natural gas and oil, a transition that will affect the entire region.
Analysis
Details about how Argentina will pay this debt have not yet been released. Likely, Argentina will pull from dwindling Central Bank reserves, which fell by $24.8 billion to $27.7 between February 2011 and April 2014 partly because reserves have already been used to make debt payments. They are also falling because Argentina has struggled to deal with capital flight amid a declining trade surplus, a development owed to the fact that the country is a net importer of oil and natural gas and not a net exporter as it once was. This persistent balance-of-payments crisis has been responsible for a lot of Argentina's recent behavior: imposing trade restrictions that have negatively affected its neighbors, nationalizing YPF and trying to bring foreign investment into the stagnant energy sector.
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Although efforts are underway to cut subsidies and stabilize inflation, implementing those policies will not come easy. In fact, previous efforts to do so have failed. In the long run, Argentina needs the energy sector to recover so the country can once again become a net exporter -- which it can then parlay into economic prosperity. But in the short term, the government is calculating that a return to international capital markets would give Argentina the financial wherewithal to stabilize its eroding economic position.
The Holdouts Are Next
Nearly 13 years after the 2001-2002 economic collapse and the massive sovereign default, Argentina is still isolated from international borrowing. The Paris Club deal will help the country re-enter lending markets, but the next step will require a resolution of an outstanding dispute with holdout borrowers, who refused to participate in Argentina's past bond restructuring offers and are hoping to receive the full repayment of their bonds, plus interest. Of the total estimated value of $15 billion in outstanding debt plus interest from the original, $1.3 billion is being litigated in U.S. federal courts. It is this dispute where the remaining impediments to Argentina's full financial normalization still remain.
The U.S. Supreme Court will decide June 12 whether it will consider a petition from the Argentine government. The petition asks the Supreme Court to reverse a ruling by lower courts that effectively links all Argentina's debt payments together. Essentially, it implies that if Argentina makes its scheduled payments to exchange bondholders who participated in the 2005 and 2010 restructuring periods, it will have to also make payments to the holdouts who refused to accept the discounted bonds. If Argentina continued to refuse payment to the holdouts, the court ruling mandates the seizure of payments to the exchange bondholders, effectively forcing Argentina into a technical default. The case could affect countries beyond Argentina; a precedent could make issuing debt in the United States much less attractive. Nevertheless, U.S. Secretary of State John Kerry said explicitly in March that the administration would not intervene on behalf of Argentina.
If the Supreme Court refuses to hear the case and Argentina is serious about resolving its outstanding debts, it will leave Argentina with no choice but to reach an agreement with the holdouts sooner or later. An agreement seems increasingly likely, considering the Paris Club settlement. At least one holdout creditor, Elliot Management, is willing to accept a flexible repayment scheme that offers a mix of cash and bond repayments, according to a May 28 interview with a senior Elliot Management representative. Even if the Supreme Court rules in favor of Argentina, the country has plenty of reason to put the whole affair behind it.
Implications of an Energy Revival
In addition to bolstering financial resources, infrastructure development and trade financing, Argentina needs a comprehensive return to international capital markets because it must reliably be able to finance its own energy investments. Although the country has managed to attract some investment from foreign players, including Chevron, by offering higher prices and other incentives, Argentine state-owned company YPF will be responsible in large part for kickstarting Argentina's energy development. To do so, YPF will have to overcome several challenges, including regulatory restrictions imposed by provincial governments as well as acquiring significant amounts of capital. YPF has already placed $1 billion worth of U.S. dollar denominated 10-year bonds, but the demands on the company are very high. As of 2012, after the nationalization, YPF planned to invest $37.2 billion in just five years.
Luckily for Buenos Aires, Argentina's energy sector has some things going for it. The country is thought to have enormous conventional and unconventional hydrocarbon deposits. Moreover, the infrastructure is already in place in the major oil and natural gas producing regions to facilitate immediate delivery to consumer markets once exploration and production increases.
The very first goal for YPF and the Argentine government is to satisfy domestic demand, which at subsidized rates has far surpassed domestic production. This has forced Argentina to ramp up natural gas imports from Bolivia and begin importing costly liquefied natural gas and liquid petroleum products from international markets.
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Once domestic markets are satisfied, Argentina can be expected to return to international markets, a move that will reshape the energy landscape of the Southern Cone. Bolivia is the only significant net exporter of natural gas in South America, primarily servicing Brazil and Argentina. Bolivia has significant untapped natural gas potential, and it has seen a boom in demand from its major patrons, particularly from Brazil, which has been using more and more natural gas as feedstock for its fertilizer.
For its part, Argentina needs natural gas for household and industrial consumption; often the country is insufficiently supplied. In the winter, industrial consumers are routinely asked to shut down to preserve enough supply for household use. With an 8.8 billion cubic meter annual deficit, Argentina has a domestic demand that outstrips the pipeline capacity from Bolivia, forcing Argentina to also rely on LNG imports.
Bolivia does not have direct pipeline connections to Chile; in fact, because of a long-standing dispute resulting from the 1879-1883 War of the Pacific, Bolivia's constitution actually prevents selling natural gas directly to Chile. Chile therefore received natural gas from Argentina. However, rising consumption has caused Argentina to drastically reduce its exports to Chile. As a result, Chile has had to rely on costly LNG imports to fuel its own energy needs.
And so there are significant regional implications to a recovery of the Argentine energy sector, particularly for Chile and Bolivia. Even if it takes five to 10 years for Argentina to resume exporting natural gas, it will likely come online in direct competition with Chile's LNG imports and Bolivian natural gas usage. If this happens, it may confirm rumors that Bolivia would try to access international markets more easily by a natural gas pipeline with Peru, which already has one LNG export facility.
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