New capital controls make Argentina a riskier business
By Chris Noon | 1 November 2011 15:55 GMT
Argentine President Crisitna Fernandez de Kirchner told companies to repatriate 100% of their future export revenue. (PA)
Analysts have told Interfax that the operating environment for oil and gas companies in Argentina continues to deteriorate, with ratings agency Moody’s downgrading both Repsol-owned YPF and Petrobras Argentina on Monday. Moody’s said the reason for the downgrade was last week’s government decree requiring companies to repatriate all of their export proceeds and convert them to pesos.
The ratings agency said in a statement that it cut YPF’s global local currency rating to ‘Ba2’, two levels below investment grade. Moody’s also downgraded the Argentine business of Brazilian state-controlled Petrobras to ‘Ba3’, three levels below investment grade. The foreign currency ratings of Pan American Energy’s Argentine unit and Petersen Energia, a minority shareholder in YPF, were also cut. All ratings are on review for downgrade, Moody’s added.
Last week, Argentine President Cristina Fernandez de Kirchner ordered gas, oil and mining companies to repatriate 100% of their future export revenue, and convert them to Argentine pesos. Previously, oil and gas companies were permitted to keep up to 70% of their export proceeds offshore.
“The decree highlights the high level of unpredictability of the Argentine government and heightened risk of increased capital controls and regulatory changes in the country,” Moody’s said in a statement. It added that the change has increased the overall risk profile of the downgraded companies. At the time of publication, neither Repsol YPF nor Petrobras had responded to calls seeking comment.
The added risk is not simply a result of companies repatriating revenue from oil and gas exports, but also from the sales they make from operations outside of Argentina. YPF has activities in the United States and Guyana through YPF International, but a substantial portion of its debt is denominated in foreign currency, and the risk of increased capital controls in Argentina could impact its ability to service this debt.
Petrobras Argentina has gas operations in Peru, Venezuela, Ecuador and Bolivia. Pan American Energy also operates in Chile. Petersen Energia is part of the Spanish conglomerate wholly-owned by the Eskenazi family, and its sole function is to hold the Eskenazi’s 14.9% stake in YPF. According to BP’s Statistical Review of World Energy 2011, Argentina’s gas exports were 420 million cubic metres (MMcm) in 2011, the bulk of which went to Chile via pipeline.
Even though the tighter capital controls may be manageable, the policy environment in the country appears ominously unpredictable. Daniel Sachs, an analyst at Control Risks, told Interfax in an interview on Tuesday that the government decree appeared to be short-term thinking that may not address Argentina’s deep-seated structural problems.
“The decree marked deterioration in Argentina’s operating environment. It’s an attempt by the government to prevent capital flight from the country, which has reached $3 billion per month. But Argentina is also contending with the hefty inflation, and the devaluation of the peso. Without recourse to international debt markets, it is now overly reliant on Central Bank reserves, which is not sustainable,” he said.
“Asking oil and gas companies to repatriate 100% of their export proceeds will lead to higher foreign exchange losses, and lower dividends and remittances. It’s mainly a sign that Argentine economic policy, which has never been predictable, is becoming increasingly heterodox as Kirchner moves into her second term,” Sachs added.
The Argentine official statistics office, Indec, says inflation last year was a little over 10%, and is currently running at 8%. But many economists and opposition politicians dispute Indec’s assessment, believing the true figure to be between 25% and 30%. Kirchner prosecuted some economists that disputed Indec’s statistics earlier this year.
Interfax wrote earlier this month that Argentina’s energy industry also appears to be run according to similarly unsustainable policies. Since the privatisation of the gas industry in 1992, the government has relied heavily on price controls and subsidies to keep tariffs low.
The country’s LNG imports are also mushrooming as domestic production stagnates. Domestic gas production fell from 44.9 billion cubic metres in 2004 to 40.1 bcm in 2010, despite the country sitting on top of the world’s third-largest bounty of technically recoverable shale gas. According to BP’s Statistical Review of World Energy 2011, Argentina’s reserves-to-production ratio, discounting the putative shale, is the lowest in Latin America (see Argentina on the brink, 13 October).
The Argentine government is still a long way from a possible default on its debt repayments. However, a further tightening of capital controls remains likely while Kirchner enjoys strong political support and commodity exports drive the country’s economy. Moody’s predicted a 6.3% GDP growth for the Argentine economy for 2011, and 4.3% for 2012 in July this year.
New capital controls make Argentina a riskier business
Argentine President Crisitna Fernandez de Kirchner told companies to repatriate 100% of their future export revenue. (PA)
Analysts have told Interfax that the operating environment for oil and gas companies in Argentina continues to deteriorate, with ratings agency Moody’s downgrading both Repsol-owned YPF and Petrobras Argentina on Monday. Moody’s said the reason for the downgrade was last week’s government decree requiring companies to repatriate all of their export proceeds and convert them to pesos.
The ratings agency said in a statement that it cut YPF’s global local currency rating to ‘Ba2’, two levels below investment grade. Moody’s also downgraded the Argentine business of Brazilian state-controlled Petrobras to ‘Ba3’, three levels below investment grade. The foreign currency ratings of Pan American Energy’s Argentine unit and Petersen Energia, a minority shareholder in YPF, were also cut. All ratings are on review for downgrade, Moody’s added.
Last week, Argentine President Cristina Fernandez de Kirchner ordered gas, oil and mining companies to repatriate 100% of their future export revenue, and convert them to Argentine pesos. Previously, oil and gas companies were permitted to keep up to 70% of their export proceeds offshore.
“The decree highlights the high level of unpredictability of the Argentine government and heightened risk of increased capital controls and regulatory changes in the country,” Moody’s said in a statement. It added that the change has increased the overall risk profile of the downgraded companies. At the time of publication, neither Repsol YPF nor Petrobras had responded to calls seeking comment.
The added risk is not simply a result of companies repatriating revenue from oil and gas exports, but also from the sales they make from operations outside of Argentina. YPF has activities in the United States and Guyana through YPF International, but a substantial portion of its debt is denominated in foreign currency, and the risk of increased capital controls in Argentina could impact its ability to service this debt.
Petrobras Argentina has gas operations in Peru, Venezuela, Ecuador and Bolivia. Pan American Energy also operates in Chile. Petersen Energia is part of the Spanish conglomerate wholly-owned by the Eskenazi family, and its sole function is to hold the Eskenazi’s 14.9% stake in YPF. According to BP’s Statistical Review of World Energy 2011, Argentina’s gas exports were 420 million cubic metres (MMcm) in 2011, the bulk of which went to Chile via pipeline.
Even though the tighter capital controls may be manageable, the policy environment in the country appears ominously unpredictable. Daniel Sachs, an analyst at Control Risks, told Interfax in an interview on Tuesday that the government decree appeared to be short-term thinking that may not address Argentina’s deep-seated structural problems.
“The decree marked deterioration in Argentina’s operating environment. It’s an attempt by the government to prevent capital flight from the country, which has reached $3 billion per month. But Argentina is also contending with the hefty inflation, and the devaluation of the peso. Without recourse to international debt markets, it is now overly reliant on Central Bank reserves, which is not sustainable,” he said.
“Asking oil and gas companies to repatriate 100% of their export proceeds will lead to higher foreign exchange losses, and lower dividends and remittances. It’s mainly a sign that Argentine economic policy, which has never been predictable, is becoming increasingly heterodox as Kirchner moves into her second term,” Sachs added.
The Argentine official statistics office, Indec, says inflation last year was a little over 10%, and is currently running at 8%. But many economists and opposition politicians dispute Indec’s assessment, believing the true figure to be between 25% and 30%. Kirchner prosecuted some economists that disputed Indec’s statistics earlier this year.
Interfax wrote earlier this month that Argentina’s energy industry also appears to be run according to similarly unsustainable policies. Since the privatisation of the gas industry in 1992, the government has relied heavily on price controls and subsidies to keep tariffs low.
The country’s LNG imports are also mushrooming as domestic production stagnates. Domestic gas production fell from 44.9 billion cubic metres in 2004 to 40.1 bcm in 2010, despite the country sitting on top of the world’s third-largest bounty of technically recoverable shale gas. According to BP’s Statistical Review of World Energy 2011, Argentina’s reserves-to-production ratio, discounting the putative shale, is the lowest in Latin America (see Argentina on the brink, 13 October).
The Argentine government is still a long way from a possible default on its debt repayments. However, a further tightening of capital controls remains likely while Kirchner enjoys strong political support and commodity exports drive the country’s economy. Moody’s predicted a 6.3% GDP growth for the Argentine economy for 2011, and 4.3% for 2012 in July this year.