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January 2016 Argentina – New Foreign and Economic Policies

2 Table of Contents

New Authorities in the Ministry of Energy and Mining...... 3

YPF’s Future...... 3

Perspectives for the Oil-and-Gas Sector...... 3

Perspectives on the Mining Industry...... 4

Perspectives on Electric Power Utilities...... 5

Macri divides the Ministry of Economy...... 5

Alfonso Prat Gay becomes Minister of Treasury and Finance ...... 5

Important measures immediately effected...... 5

Foreign exchange market...... 5

Exports ...... 6

Imports...... 6

Macroeconomic Programme...... 6

Macri chooses a gradualist policy over a shock policy to address Argentina’s economic problems...... 6

Fiscal policy ...... 6 Associates Inflation...... 7

Menas The change of Government leads to a different approach to international relations,

>>> trade, and financial markets...... 7

Mercosur and other free trade agreements ...... 7

Return to international financial markets...... 7

Macri goes to Davos and invites Massa to accompany him ...... 8

Trustworthy statistics and indices – one of the Administration’s top priorities...... 8

Changed business climate attracts attention of international companies...... 9 www.menas.co.uk Image source: Hernán Piñera, Buenos Aires, la ciudad contada Argentina – New Foreign and Economic Policies

3 ARGENTINA’S NEW ECONOMIC & FOREIGN POLICIES

Carlos María Regúnaga Menas de Argentina S.A.

On 10 December 2015, was inaugurated as . After twelve years of populist policies under presidents Néstor and Cristina Kirchner, characterised by the takeover by the state of some private companies and excessive regulations of economic activities, Argentina elected a former businessman with clear pro-business, pro-market views.

In Macri’s first 45 days in office, the appointment of cabinet members, the nature of the first measures adopted, and his attitudes in the international arena, are a stronger confirmation of his posture than the electoral campaign promises and the announcement of future programmes.

New Authorities in the Ministry of Energy and Mining

President Macri appointed Juan José Aranguren as Corporation (CNOOC) as minority shareholders — where Minister of Energy and Mining. Aranguren is a chemical he spent his entire professional life. engineer who was president of the Argentine branch of Royal Dutch Shell. From this position, he gained fame as The new mining authorities inside the Ministry of Energy and one of the very few business executives who faced up to Mining are the Secretary of Mining, Daniel Meilán, and the the Kirchners and refused to bow down to their demands under-secretaries of Mining Development, Mario Capello; Associates

and policies. Mining Policy, Santiago Dondo; and Legal Affairs, Juan Biset. Menas Another former oil-and-gas executive, José Luis Sureda, Meilán was Under-Secretary of Mining in former president >>> is the new Secretary of Fuels under Aranguren. Sureda Carlos Menem’s (1989-1999) administration. At that time, is a former executive of Pan American Energy — the modern legislation was enacted to create Argentina’ss Argentine company controlled by BP with the local first adequate legal framework for the operation of large Bridas Corporation and the China National Offshore Oil international mining companies.

YPF’s Future

Minister Aranguren is said to seek a new management Cristina Kirchner’s appointee, Miguel Galuccio, is currently for the vertically integrated YPF. The company is still a both Chairman of the Board and CEO but Aranguren private corporation quoted on the Buenos Aires and New believes that the two roles should be split. Unless Galuccio York stock exchanges and has many Argentinean and resigns, the new organisation chart will probably be international shareholders. The majority 51% of its stock approved by a shareholders meeting in March 2016. is, however, owned by the Argentine State and by several hydrocarbon-rich provinces. It is also controlled by the national government.

Perspectives for the Oil-and-Gas Sector

The oil-and-gas sector is in a strange situation. Argentina was self-sufficient in energy, began importing ever-greater has one of the world’s largest reserves of shale oil and, quantities of hydrocarbon fuels. www.menas.co.uk particularly, shale gas. When oil and gas were at record- high prices, the low maximum prices set by the Kirchners As a result, Cristina Kirchner reversed her policy and set discouraged exploration and production. Argentina, which domestic prices at levels higher than international ones, Argentina – New Foreign and Economic Policies

4 which by that time had fallen drastically. The result is that The previous government established a price of US$7.5 per domestic oil and gas producers currently enjoy prices million British Thermal Units (MBTU) for “new” natural gas that are substantially higher than those prevailing in from new fields or increased production from old fields. international markets. At the same time, existing production at the time the regulations were enacted is sold at a variety of prices that The price of Escalante grade oil, which is mainly produced result in an average price of US$3 per MBTU. Prices also in the Chubut Province, was set at US$55 a barrel, while the vary according to who purchases the gas with industrial better quality Medanito grade oil, produced in Neuquén plants pay about US$4 per MBTU while homes pay an Province, is sold at US$67.50 a barrel. average of only US$1 per MBTU.

The overall picture is, however, more complicated, because The new administration will seek to eliminate consumer petroleum extracted from one field may have very different subsidies and will maintain higher prices for producers, characteristics (density, sulphur content, etc.) when in an attempt to reduce demand and increase supply, and compared to another. Therefore, in spite of Argentina’s thereby move to eliminate the energy deficit. total energy deficit, some crude must be exported because it cannot be processed in the country’s domestic refineries. Aranguren is also convinced that oil and gas should have This limitation affects the Escalante type crude and the only one price and that it should gradually fall into line with companies that produce it. international prices.

Perspectives on the Mining Industry

When he presented his new team, Aranguren said, “The With the new measures, the exchange rate has fluctuated Associates

challenge we face is the need to make people fall in love between AP13-AP14 and there are no duties to be deducted. with mining. To achieve this goal, we have to work together This has an instantaneous impact on exporters’ income. Menas to return to common-sense, foreseeable attitudes and Furthermore, the exchange rate is now freely determined >>> policies and, thereby, regain the society’s confidence.” by the market which means that it will naturally adjust for inflation. This is important because inflation will remain According to a report by the Ecolatina y Key Market much higher in Argentina than in the United States for consultancy company, mining should be one of the sectors several years. From now on adjustments of the exchange to benefit most from the new government’s decision to rate will not depend on the arbitrary decisions by the stimulate exports through the floatation of the exchange Central Bank. rate and the elimination of export duties. The report’s authors believe that metallurgic mining — which already These measures benefit all exporters but metallurgical represents two thirds of Argentina’s mineral production — mining is the sector that exports the highest proportion will experience much greater growth. The reasons are as of its production. Only some agricultural products show follows: similar export-consumption ratios. This is not true for oil and gas or of agricultural products that Argentina is Under the previous government, the Central Bank famous for. For example, the majority of the beef that maintained an “official” rate of exchange that at the the country produces is consumed domestically. Farmers beginning of December 2015 reached a little below and ranchers are very happy with the government’s new AP10 to the US$. Exporters were forced to sell all the orientation but the impact on mining is proportionately foreign exchange obtained by the sale of their products even greater. This is, however, not true of non- at that rate of exchange. In addition, export duties were metallurgical mining products used in the construction deducted from those proceeds. In the case of minerals, sector. Most, if not all of construction materials that are the duties were 5% of the total value exported. At the mined, are used in Argentina.Another factor that analysts same time the parallel black market rate, as well as take into account is that, being a newcomer in modern quotations for Argentine pesos in foreign markets, were mining techniques, Argentina still has very large reserves www.menas.co.uk above AP14 to the US$. which need to be developed. Argentina – New Foreign and Economic Policies

5 Perspectives on Electric Power Utilities

Aranguren is also expected to produce major changes in However, Aranguren does not take an extreme orthodox the regulation of the electric power sector. He has pledged stand. In addition to maintaining subsidies to very-low to move towards ending all subsidies except those that income homes, he believes the state should stimulate the benefit the poorest two million homes. It is expected that renewable energy sector including wind power. the remaining consumers will gradually see energy prices gradually adjust to market rules.

Macri divides the Ministry of Economy

President Macri does not believe in concentrating all headed by the defeated candidate for the Tucumán departments dealing with economic issues into a single Province governorship, Radical party leader José Cano. Ministry of Economy. He would rather work with a team of ministers coordinated by Chief of Cabinet Marcos Peña. Gustavo Lopetegui is the Secretary of the Cabinet. This was illustrated by the division of the mega ministry His role will be the coordination, under Peña, of the headed by Axel Kiciloff under Cristina Kirchner into several economic ministries. Lopetegui is an accountant with ministries: Treasury and Finance, Production, Energy and a degree in Business Administration issued by the Mining, Transport, Agriculture and Interior. Universidad Argentina de la Empresa and an MBA from Barcelona’ IESE, Spain. He has been an executive in A very large “Plan Belgrano” public works programme for different private sector companies and, since 2009, was Northern Argentina will be handled by a separate agency the CEO of LAN Argentina. Associates

Menas

Alfonso Prat Gay becomes Minister of Treasury and Finance >>>

Economist Alfonso Prat Gay — who has degrees from the He was elected to Congress under the banner of the Catholic University of Argentina and Pennsylvania University — Acuerdo Cívico y Social. He chaired the Coalición Cívica-ARI was appointed Minister of Treasury and Finance. He has great bloc and the chamber’s Finance Committee. experience in the private financial markets and was president of the Central Bank and member of the Chamber of Deputies.

Important measures immediately effected

A populist politician is one who — in order to derive a short- The new economic team, and particularly minister Prat term benefit for himself — is willing to have his country pay Gay, took some urgent measures immediately after the a price in the medium or long run. Each of the measures new government’s inauguration: described below seek to put an end to populist policies that were politically profitable for the Kirchners but are no longer sustainable.

1. Foreign exchange market

Under Cristina Kirchner, the Central Bank maintained an transaction each buyer or seller of foreign currencies artificially low exchange rate, coupled with a number of performed. A large number of restrictions, quotas taxes and export duties. and the requirement of previous authorisations also www.menas.co.uk introduced further distortions. This policy effectively resulted in a myriad of real exchange rates that varied according to the kind of Argentina – New Foreign and Economic Policies

6 These measures were consistent with a macro-economic One key factor in the success of the elimination of restrictions approach that tended to stimulate consumption at the in the exchange market has been the expectation that the expense of exports. agricultural sector — including the large trading companies that export Argentine products — will sell billions of dollars Under Macri the Central Bank has now unified and liberated in the next few months. the exchange market. Authorisation is only required in the case of transactions for sums above US$2 million in Farmers alone are expected to sell grain from the last any given month. It is expected that the Central Bank will harvest for about US$4 billion before the end of February. intervene by buying or selling currencies to avoid great The traders could also pre-finance the new harvests fluctuations but, at the time of writing this memo, it has through the sale of up to US$10 billion. not yet done so.

Perhaps it is more important to point out that the market has been so stable that the Central Bank has not been forced to intervene.

2. Exports

All duties and other restrictions on exports of agricultural, partial reduction. The reason is that revenues generated minerals other than scrap metal, and industrial products by soy exports are very important for the national budget. have been eliminated. The only important exceptions are It has been announced that these duties will gradually be soybeans and soy products, which have benefited from a reduced until they have been totally eliminated. Associates 3. Imports Menas The former government had subjected all imports to by unfair trade practices by China and other Asian >>> permits that were issued following arbitrary decisions countries. based on non-transparent criteria. A few days after taking office, President Macri eliminated these permits, The liberation of the foreign exchange market, the thereby liberating almost all imports while creating elimination of duties and restrictions on exports, and the a system of licenses to maintain some protection abrogation of restrictions on imports, are all clear indications for sensitive products, and especially those affected of Macri’s position in favour of a more open economy.

Macroeconomic Programme

4. Macri chooses a gradualist policy over a shock policy to address Argentina’s economic problems

After addressing some of the most urgent issues with his macroeconomic approach. It turned out to be more the measures including those mentioned above, Finance gradual than most observers expected. Minister Alfonso Prat Gay waited until January 13 to explain

5. Fiscal policy

Cristina Kirchner left the Presidency with a record-high fiscal The strategy that will be used to achieve a reduction in the deficit of between 7% and 8% of GDP. Macri and his ministers deficit is the gradual elimination of unjustified subsidies, recognise that taxes are already at historically high levels. the reduction of government personnel, and the execution www.menas.co.uk Raising taxes has therefore been discarded as a tool to reduce of more efficient and transparent public works contracts. the deficit. In fact, the elimination of export duties and other measures will result in a reduction of tax revenues. Argentina – New Foreign and Economic Policies

7 In fact, the 2016 Budget, which was already approved by place, then the economy will grow and, as a result, so Congress before the inauguration of the new administration, should revenues. forecasts the total cost of subsidy payments that, adjusted for inflation, is about 30% lower than in 2015. The new minister expects to end 2016 with a deficit of about 4.8% of GDP. A balanced budget is the goal for 2019, which It is probable that increased production and exports will will be the last year of Macri’s presidential term. By then more than compensate for this loss of income in the Macri expects the new policies to have shown sufficient medium term. Furthermore, the new policies and more positive results to help him seek re-election for a second business friendly legal frameworks will probably attract and final term. larger investments. If these greater investments take

6. Inflation

The approach towards inflation will also be gradual, The aim is to have the consumer price index rise by 20%- avoiding shock policies that may seem to be more effective 25% percent in 2016, while all the relative-price adjustments in a theoretical, purely economic analysis, but normally and the elimination of distortions takes place. Prat Gay cause negative political reactions that may, in turn, provoke expects to move to lower levels of inflation in 2017 and the abandonment of the anti-inflationary programme. reach single-digit annual rates in 2019.

The change of Government leads to a different approach to international relations, trade, and financial markets Associates

7. Mercosur and other free trade agreements Menas

>>> Cristina Kirchner’s foreign policy favoured special relations with Latin American democracies, and then with Western with the populist governments of Venezuela, Ecuador and powers. He is also in favour of moving rapidly towards and authoritarian regimes such as those of Russia, a Mercosur - European Union trade agreement and the China and Iran. The Mercosur bloc acquired a political and exploration of a Mercosur - Trans Pacific Partnership (TPP) ideological orientation that almost abandoned its initial agreement. aim of building a common market. In order to facilitate the reconstruction of weakened links The consequence has been the ineffectiveness of with the West, Macri chose Susana Malcorra as his Minister negotiations with the European Union and the isolation of of Foreign Relations. She is a former businesswoman Mercosur from the tendencies towards trade liberalisation who, in the last few years, has performed as number two that currently prevail in the world. in the United Nations Organization. As such, she has met practically all top-level figures in the world. President Macri’s stand is exactly the opposite. His foreign policies will favour Argentina’s traditional alignments, first

8. Return to international financial markets

Argentina is in default as a consequence of Cristina Kirchner’s As a result, the country has been out of international refusal to comply with US federal judge Thomas Griesa’s financial markets at a time when interest rates have been rulings and negotiate with a small group of hedge funds and at historic low levels. other creditors (known as “hold-outs”)1. These creditors are those who, after Argentina’s 2002 default, did not accept the www.menas.co.uk swaps of defaulted bonds for new restructured bonds.

1 For further details please see: http://www.bloomberg.com/news/articles/2016-01-08/argentina-to-resume-debt-talks-with-holdout-creditors- next-week and http://www.chicagotribune.com/news/sns-wp-blm-argentina-1d9c1bec-ba10-11e5-85cd-5ad59bc19432-20160113-story.html Argentina – New Foreign and Economic Policies

8 Macri realises that Argentina has to comply with judicial New York with the hedge funds’ representatives and with decisions, act as a responsible country member of the the special sheriff appointed by judge Griesa to oversee the international community, and honour its obligations. application of his decisions.

Furthermore, access to international funding at low interest It has been announced that the government will make rates would allow his administration to soften the hard public an offer to the holdouts on 1st February. measures that will have to be applied in order to correct distortions created by Kirchnerista policies. Convinced that eventually this course of action will be successful, a group of international banks with branches in He also has announced a very ambitious public works Argentina have put together a package of loans for about programme that will not be feasible without foreign funds. US$6 billion to help finance the transition.

Steps are being taken to reach an agreement with the holdouts. Secretary of the Treasury Nicolás Caputo met in

9. Macri goes to Davos and invites Massa to accompany him

The Kirchners eluded meetings such as those organised Mexico’s President Enrique Peña Nieto; Switzerland’s by the World Economic Forum. Macri’s decision to President Johann Schneider-Ammann; Holland’s travel to Davos marked the return of Argentina to these Argentinean born Queen Máxima Zorreguieta, and international events. What is more unusual is that he Prime Minister Mark Rutte; and Israel’s Prime Minister invited an opposition leader of Peronist extraction, the Benjamin Netanyahu. Frente Renovador’s Sergio Massa, to accompany him in Associates

making joint presentations. The meeting with Cameron was reported as having been cordial. The two parties seem to agree on one essential Menas Macri’s motivation may be two-fold. Pleasing Massa with issue: putting the Malvinas-Falkland question under an >>> this move, which puts him on an equal footing with the umbrella that would allow each of them to maintain their president, is important to consolidate the necessary Frente respective countries’ positions without interfering with Renovador’s support for Macri’s proposed new legislation other mutually beneficial bilateral and multilateral aspects and policies. of their relationship.

At the same time, by revealing this entente to the world, The ministers of treasury and finance and foreign relations it enhances his credibility and the belief in the feasibility plus the president of the Central Bank accompanied of his policies. This is turn may convince business Macri and completed parallel agendas that included the executives that they can trust Macri’s intentions and Secretary of State and the Secretary of the Treasury of the invest in Argentina. United States and the Director General of the International Monetary Fund. Macri’s agenda in Davos consisted of about 30 meetings with government officials, bankers, business executives The United States has put an end to its policy of voting and representatives of international organisations plus against loans to Argentina by international financial some press conferences. Several top-level meetings organisations. included the US Vice President Joe Biden; UK Prime Minister David Cameron; France’s Premier, Manuel Valls;

Trustworthy statistics and indices – one of the Administration’s top priorities

Before the Kirchners, Argentina enjoyed very good statistics When their populist policies led to accelerating inflation, www.menas.co.uk and indices. The agency in charge, the Instituto Nacional de the Kirchners decided to hide rather than reduce the rate. Estadística y Censo (INDEC), enjoyed great prestige among They placed the INDEC under the control of Secretary its international counterparts. of Commerce Guillermo Moreno, who was in charge of Argentina – New Foreign and Economic Policies

9 fixing and enforcing price controls. In this author’s opinion, Todesca will now be in charge of the essential task of Moreno used questionable methods to collect, process, rebuilding the INDEC, and recovering former capable and and interpret the data. This policy caused the resignation experienced officials who were forced to leave by the of the most competent and serious officials. Kirchners.

President Macri knows that the country needs to reconstruct The return of former officials started with former INDEC the INDEC. For that task he appointed economist Jorge Director, Graciela Bevacqua, who becomes Todesca’s Todesca to head INDEC. deputy.

Before the Kirchners’ advent, Todesca had been Vice The goal of publishing a new consumer price index has Minister of Economy. As a private consultant, he created been set for August or September 2016. In the meantime, and published indices that attempted to portray real the national government will resort to statistics and indices inflation and, therefore, did not coincide with the official published by the city of Buenos Aires and by the province of indices published by the INDEC under Guillermo Moreno San Luis, which are the two jurisdictions to which Moreno and his successors. did not have access.

Changed business climate attracts attention of international companies

Little more than a week after Mauricio Macri’s election, Fiat Many international garment companies have set up Chrysler Argentina announced the first major investment branches or subsidiaries in the region in the last decade. project to be executed under the new administration. It will Some of them were active in Argentina in the past but left invest US$650 million to fully modernise and automate its the country either at the time of the 2002 crisis or because Associates

factory at Ferreyra, in Córdoba Province, and produce two of Kirchners’ policies. new cars. The project had been under study for months Menas and the measures that the new president is expected to These companies are now watching the new government >>> take now make it feasible. and are considering re-entering the Argentine market or returning to it as soon as new policies make their Coca-Cola’s CEO informed Macri in Davos that his company is operations both feasible and profitable. going to invest US$1 billion in Argentina in the next four years.

Investments in the non-conventional hydrocarbon reserves at Vaca Muerta are expected to be much larger.

28 January 2016 www.menas.co.uk