In the comedy of economic errors that has blighted Argentina under president Cristina Fernández de Kirchners administration, Mondays push to re-nationalize YPF, the countrys biggest oil company expelling Spains Repsol as majority shareholder represents one of the more dramatic shocks that has confronted foreign investors in recent years.
Understandably so. The prospective move harks back to Latin Americas penchant of yesteryear for asset expropriation and has triggered an ugly diplomatic spat between Spain and the commodity-rich economy.
But dont say we did not warn you. Analysts participating in the Euromoney Country Risk survey, which tracks economists perceptions of sovereign risk in 180 markets, have reported rising political risk in Argentina since the beginning of 2011, while its score in the surveys indicator for government interference/non-repatriation of capital is the worst in Latin America, having fallen from four out of 10 in September 2010 to 2.6 out of 10 in April 2012.
Heres the story, charted:
The nationalization push further throws into sharp relief the declining creditworthiness of Latin Americas heterodox economies Argentina and Venezuela relative to the rest of South America, with Uruguay recently attaining investment-grade status, an ever-expanding emerging market club.
And analysts views of Argentinas financial position relative to Chile, the regions poster-child for fiscal prudence, charted:
In recent years, Argentina has scrambled under Kirchners populist administration to boost money supply to increase investment and growth. The government recently removed legal limits to access on central bank financing to public and private sectors. Its no surprise that these stubborn fiscal monetization efforts have resulted in a sharp fall in the peso and a rise in inflation.
Against this backdrop, bank lending has collapsed amid risk aversion and soaring inflation. The ratio of bank credit to the private sector to GDP stands at only 12%. Contrast that with red-hot Brazil, which under a relatively more stable policy environment has managed to capitalize on soaring commodity prices and a subsequent surge in portfolio flows to boost consumer financing to eye-watering levels.
After raiding domestic capital providers in Argentina the social security system, state-owned banks and the central bank itself the government is running out of financing options fast. If the government makes good on its nationalization push, then the prospect for foreign capital has darkened further.
- Euromoney Skew and Euromoney Country Risk