A traffic sign is seen near Barrick Gold Corp.'s Veladero gold mine in Argentina. Argentine government economic policies and capital restrictions are prompting Canadian mining firms to rethink projects in the Andean country.Pav Jordan/Reuters
With the good times coming to an end in Argentina, President Cristina Fernandez de Kirchner may live to regret her controversial decision to expropriate the country's main energy company, YPF, belonging to Spain's Repsol.
The move, while popular at home, prompted Spain to call Argentina an "international pariah," and has spooked mining companies, including Canada's. Investors are right to think carefully before committing to future investment in Latin America's third largest economy, which is rich in untapped oil and natural gas resources.
"I think the YPF [Yacimientos Petroliferos Fiscales]is a reminder to everybody else that your assets are not 100 per cent safe," said Alberto Ramos, co-head of Latin American research for Goldman Sachs.
While analysts do not believe the Argentine government is poised to nationalize other companies, the government's trade and currency restrictions and policies to stem capital outflow have made it more difficult for mining companies, especially smaller ones, to operate. Argentina is already known for ignoring fines in international disputes, and never fully repaid the Paris Club of international investors after defaulting on a $100-billion loan in 2001.
The timing is also particularly bad: Following several years of 7 per cent annual growth in Argentina, analysts now predict 2-3 per cent growth, with some even warning a recession is near. Inflation is as high as 25 per cent. The country needs more investment, not less.
Ms. Fernandez blames Repsol for not investing enough in the country's reserves of gas and coal. And yet the nationalization itself will discourage private investors, and could scare off Spanish banks, utilities and other companies. Discussions for a proposed free trade agreement between the European Union and the Mercosur trading bloc of Argentina, Brazil, Paraguay and Uruguay, have also been derailed.
Expropriating YPF won't help Argentina, a G-20 country, in the long-run, is unlikely to make the oil sector more efficient and further damages the country's global reputation. No wonder the "smart money" is already flowing out of the South American nation, as a former economy minister recently put it.