YPF

The recent announcement by the Argentine government that it would seize control of both YPF and YPF Gas came as a surprise to many.  Rumors that the move was imminent had been discounted as out of sync with an increasingly progressive Latin America and globalized economic relations.

Yet it did occur, and it was preceded by a seemingly concerted action on the part of some provinces to cancel YPF’s concessions.  As of yet, there is no detail as to how such government control will be instrumented nor how much YPF intends to pay for it. 

Readers may remember that when Bolivia expropriated foreign oil and gas companies, it paid nothing for the assets it took; the expropriation decree specifically stated that only the foreign oil companies that accepted the government action and agreed to stay on and cooperate would receive some share of future revenues to be negotiated.

In retrospect, the Argentine government action was not totally surprising.  After all, in 2005, Argentina basically reneged on its external debt by imposing a 75% haircut.  It also took over some $25 billion of domestic private pension funds and recently appropriated the foreign exchange reserves held by the Central Bank.  Nationalization is within a country’s rights (whether it is a good choice or not) provided that proper compensation is paid.  I do not know what the government will decide in this respect, but if it depends on international pressure, it may be little.

Indeed, the reactions from fellow Latin countries have been mixed and in some regards, surprising.  Quite naturally, “fellow travelers” such as Bolivia and Venezuela applauded the move; the Uruguayan president was on the whole sympathetic without endorsing the decision; his Chilean homologue was non-committal (which is surprising since Chile suffered from the Argentina decision, a few years ago, to renege on its obligations to supply it with natural gas).  Perhaps more unexpected was the reaction from the Mexican president who declared that, after such a move, any foreign investor contemplating putting money in Argentina would need to have his head examined.  Just as startling was the comment by Haroldo Lima, Head of ANP (the Brazilian National Petroleum Agency) that the move was excellent news for Latin America.

What to make of all this?  One conclusion is that bad habits die hard.  This is clearly the case with Argentina, and oil continues to provoke irrational reactions in many quarters.  Another, more controversial perhaps, is that with some notable exceptions, Latin America’s seeming economic miracle has had more to do with huge demand for its raw materials than with profound and durable internal reforms.  I am thinking about Brazil in particular where President Cardoso’s reforms have not been pursued and, in several instances, have been partially reversed.

Chile continues to have the most transparent economy and rule-book, but after some 30 years, it shows some signs of free market fatigue that bear watching.  Peru has achieved the fastest and most consistent growth in large part thanks to its mining industry; but it has also diversified and President Humala has so far surprised the skeptics, me included.

The two most interesting success stories are Mexico and Colombia. 

Having boosted its economy thanks to maquiladoras on the border with the US in the 1980s, Mexico’s industry then suffered from the competition from China.  But the trend has reversed in recent years as the US and Mexican economies integrated ever more.  Indeed, as Argentina nationalized YPF, Mexico may be about to open Pemex to minority investors.

Colombia’s recovery started when President Uribe regained control over the security of the country.  It was then sustained by a large domestic market, the country’s position between North and South America and by intelligent development and monetary policies. 

In a sense, I think that Colombia, barring unforeseen setbacks, is in the third inning of a virtuous economic and political cycle while Chile is late in the sixth.  I am not sure where I would put Brazil (fourth, eighth?) and Peru (second, seventh?).  Mexico is probably in the fifth.

In sum, political and cultural factors continue to be greatly underweighted in assessing sovereign risk and this YPF episode is a vivid example of that.  But the YPF crisis also helps highlight some countries which have been misjudged in my view.