Amid Latin America's recent economic boom, the government of Argentina, led by president Cristina Fernández de Kirchner, has been putting a tango-like passion into choreographing the country’s economic fortunes. However, steps taken by the government to prevent a default scenario, which Argentina endured as recently as 2001, appear to be having the opposite effect of that intended.
To limit capital flight and tax evasion, Argentina's government has imposed currency controls, while to boost domestic production, import controls have been introduced on a number of goods. This has resulted in the black market value of the dollar soaring in 2012, which caused the rate of inflation to rise and industrial production to plummet, along with the country’s GDP growth rate.
As Argentina’s economy dipped, so too did Mr Fernandez’s popularity. After being elected for a second term in October 2011, the president had a popularity rate of 63%. One year later this figure stood at 28%. In December 2012 a wave of looting swept across the country, with many analysts claiming that dissatisfaction with Mr Fernandez’s administration was the main factor behind the unrest.
Mr Fernandez’s domestic problems seem to have extended into the international arena. “Over the course of 2012, Argentina alienated several important partners,” says Cenk Sidar, managing director at Washington-based consultancy SGA. First, Argentina reopened its dispute with the UK over the sovereignty of the Falkland Islands, and it then seized oil producer YPF from Spanish energy giant Repsol, seriously straining relations with Spain. Meanwhile, the International Monetary Fund has threatened to take action against Argentina over its inaccurate inflation data, and the World Trade Organisation could suspend trade concessions for Argentina, due to the country being accused of protectionism by a number of WTO members.
The response from investors to these events has been mixed. On the one hand, the number of the new FDI ventures coming into Argentina has decreased by half between 2011 and 2012, and now stands at its lowest levels since 2006. On the other hand, the country has secured some impressive crossborder investments, including General Motors' $450m automotive plant expansion and a deal between renationalised YPF and Chevron worth $1bn.
Energy company Gulf Oil has been operating in Argentina for 12 years, and is currently planning to launch a new blending plant in the country. “The business climate in Argentina has changed and there are challenges, but the decision was made by our company to stay,” says Frank Rutten, international vice-president at Gulf Oil. “Gulf Oil believes that in the medium to long term, the current issues will be solved.”
However, Mr Rutten remains cautious over predictions on whether the company will expand further in Argentina. “Further investments will be only contemplated if the economic environment creates new opportunities which make business sense,” he says.
As Ms Fernández's administration seems unlikely to relinquish power any time soon, many experts are advising that those doing business in Argentina should be vigilant. “Some opportunities may exist… in the industries that are not seen by the government as a way to access foreign financial sources, like in the case of YPF,” says Mr Sidar. In other words, if a company operates in a sector that offers low returns, the government will not directly bother it, though the same cannot be said of the capital controls and trade barriers imposed by the country.