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OP-ED | 01-06-2024 05:45

Risky Investment Guarantee Inconsistencies

The primacy of the fiscal over the economic causes problems elsewhere.

Undeterred by the frustration of last weekend’s national day relaunch with its initial hopes that all the provincial governors would be undersigning President Javier Milei’s 10 pro-market points in Córdoba, the government set about making a fresh start in the following days – on Monday evening the taciturn Cabinet Chief Nicolás Posse was replaced by the far smoother Guillermo Francos moved from the Interior Ministry, on Tuesday President Milei flew up to California to wow four of the world’s top 10 businessmen with his libertarian gospel and on Wednesday the pitch to overseas investment was boosted by clinching Senate committee approval for the ‘Ley de Bases’ deregulatory reform and a fiscal package. including the RIGI (Régimen de Incentivo para Grandes Inversiones) scheme of major incentives for investors.

Such investment would be vital for kickstarting back into growth an economy plunged into deep recession by fiscal austerity with over a quarter of a million salary accounts closed in the first quarter and unemployment fears gaining ground over a receding inflation as the top concern of public opinion. With agriculture very good at taking care of itself if the weather is on its side, the key areas for attracting productive investment would be energy and mining. Various major investments, such as the gas liquefaction plant contemplated by Malaysia’s Petronas which would add a new dimension to energy exports, hinge on the approval of RIGI but rather more work than these incentives, presidential showmanship or even the end of currency and capital controls will be needed to bring overseas investors on board.

The future of such projects as the gas liquefaction plant boils down to whether their products will be profitable and various obstacles loom here. Of these, perhaps the most important is a collision course between fiscal policy and economic growth. Milei seems convinced that the only real answer to inflation is deflation, accompanying his cornerstone of a fiscal surplus with dismantling the quasi-fiscal deficit via ever lower interest rates and a mega-appreciation of the peso leading the world. The resulting exchange rate is a strong disincentive for exports while the lower interest rates which have their benefits also discourage savers – given the almost invariably strong correlation between saving and investment rates in countries, this works against the local input which many overseas investors are waiting to see before making their own move.

Another complication for the energy sector is the continuing government reluctance to bite the bullet when it comes to gas and electricity billing. One result has been the virtual default imposed on electricity and gas generator companies when they were bullied by Economy Minister Luis Caputo into accepting half-value bonds falling due for payment in 2038 in lieu of the state arrears of recent months – after similar treatment inflicted on prepaid health plans, once might be a misfortune but twice looks like carelessness, in the words of Oscar Wilde. This would seem to contradict the cast-iron guarantees contained in the RIGI scheme, which include the obligation of courts to quash any norm modifying its conditions (whither does this leave the 2016 Supreme Court ruling that increases in public service billing may not exceed pay hikes?) – in rolling over its debts to the generators, the government pleads “grave socio-economic upheavals” to justify this departure from legal security but when is Argentina ever free from crisis?

The primacy of the fiscal over the economic causes problems elsewhere with the midweek disruptions caused by the delays in paying a Petrobras compressed natural gas liquefaction vessel perhaps the most recent example – the continuing dependence on imports is not merely the result of an autumn cold snap earlier than usual but also the halt to the extension of the Néstor Kirchner gas pipeline within the general paralysis of public works in order to ensure a fiscal surplus. But the consequences of a previous government’s policies are raising an even darker cloud. On the same day Milei was heading to California to dazzle hi tech tycoons, there was an ominous judicial setback at the other end of the United States in a New York court – Manhattan judge Loretta Preska is mulling naming YPF as an alter ego for the Argentine state, which she has found liable for US$16 billion for a legally sloppy 2012 nationalisation ignoring minority shareholders, a decision which could result in YPF shares being gobbled up by a hedge fund as payment.

No end to the problems but at least we have a proactive government which, having struck out in one relaunch, has embarked on another.      ​

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