Argentina implemented a range of extremely restrictive economic policies in the wake of the Oct. 2011 presidential election, including trade restrictions on its Mercosur partners. Those trade restrictions caused significant tension between Argentina and its largest partner in Mercosur, Brazil. This latest announcement indicates that relief is near for some of the hardest-hit industries, including the automobile and shoemaking industries. Coupled with this announcement, Argentina has indicated that it is willing to support progress in trade negotiations with the European Union — negotiations it had previously been stalling.
A mix of constraints is shaping these actions. First, the stringent restrictions were necessary because Argentina's balance of payments has turned negative and will drain more than $10 billion from central bank reserves in 2013. Contributing to this imbalance has been Argentina's stagnant hydrocarbon production, which has been unable to keep up with increasing consumption of price-controlled and subsidized fuels. Import restrictions were designed to help strengthen the country's current account despite rising energy imports, but they have caused significant tension within Mercosur because the restrictions disproportionately impacted exporters in Brazil and Uruguay.
At the same time, continued manipulation of inflation statistics at the country's national statistics agency has helped to keep inflation-linked debt obligations under control despite real inflation of 30-35 percent, but it has isolated Argentina from capital markets. The International Monetary Fund has censured Argentina for poor inflation reporting, and although the IMF can do little to hurt Argentina directly, it complicates Argentina's efforts to resolve outstanding debt, including about $9 billion worth of overdue debt to the Paris Club lenders. Without having this resolved, Argentina remains mostly alienated from international capital markets, as it has been since its massive debt default in the 2001-2002 economic crisis. It is too soon to tell if Argentina is serious about resolving its inflation statistics and outstanding debt completely, but the current rate of central bank reserve drainage is untenable, and the decision to lift restrictions on Brazilian imports is an important indicator that the calculus is changing in Buenos Aires.
Meanwhile, Mexican national energy company Petroleos Mexicanos managed to broker a deal between Argentine national energy company YPF and Spanish energy company Repsol to compensate Repsol for Argentina's nationalization of YPF in 2012. Argentina has had some successes in attracting foreign investment in the past year, but it has fallen far short of the government's expectations. The resolution of the outstanding dispute with Repsol will make it much easier for Argentina to attract investment in its promising oil and natural gas deposits.
The deal may also go a long way toward repairing Argentina's reputation. Argentina has already made progress in loosening restrictions on oil and natural gas companies, incentivizing higher levels of production. At the same time, Bloomberg has reported that Argentine Planning Minister Julio de Vido has embarked on a trip to Russia and China in order to secure $17 billion worth of infrastructure investment, including in hydroelectric dams. This follows the formation of a Chinese-Argentine consortium that plans to build two dams in southern Argentina capable of producing 1,740 megawatts of electricity, equivalent to 10 percent of Argentina's current production capacity. This new focus on hydroelectric energy — which currently makes up 30 percent of total electricity production in Argentina — will take pressure off natural gas supplies used to generate electricity. Shortages of natural gas are frequent in the winter in Argentina, and since 2008 Argentina has been a net importer of natural gas. Currently, Argentina is reliant on expensive liquefied natural gas imports and piped imports from Bolivia.
All of this may be too little, too late unless Argentina can get access to international financing. As Argentina's cash reserves dwindle, it becomes increasingly important for it to return to international capital markets to be able to finance its own domestic development. Normalizing its external position, particularly with regard to its debt, brings risks and costs to the cash-strapped government. But without it, Argentina will be unable to address the major infrastructure challenges that make it difficult to guarantee electricity to industry and households.
