Mining Could Help Argentina Recover
Posted by Cheryl Rutledge on 8/12/2015 4:31:22 PM
Alexander Collen, Taylor Jackson, and Kenneth P. Green
Argentina’s upcoming elections may boost its mining sector’s investment attractiveness, according to Mining Weekly. The positive news is partially due to the anticipated pro-market reforms being emphasized in the country’s upcoming elections. According to Reuters, economic advisers to major candidates said they “plan to liberalize the dollar exchange rate, cut taxes on lucrative grains exports, and move to plug a fiscal deficit and tame inflation.”
Such reforms may provide investors with more confidence and avenues of investment into the nation’s mining industry. Moreover, many politicians have shown an interest in mining in particular, on the basis of the considerable benefits it’s brought to Peru and Chile.
The major issues deterring miners are the government’s capital and currency controls. For example, restrictions on the repatriation of profits from foreign investors remain in place. The deterring effect of capital controls is compounded by the high inflation (29 percent in 2014) that will erode the value of profits withheld. In addition, currency regulations deter investors because currency exchanges are artificially costly through legal venders, making investment less profitable. Removing these controls may go a long way to improve investor confidence.
However, the nation’s fiscal problems may be more difficult to eradicate. One of the nation’s most contentious fiscal issues is outstanding debt obligations. In 2001, Argentina defaulted on its government bonds and was sued by a group of New York hedge funds known as the ‘holdouts’ to receive full payment on the outstanding bonds. The ‘holdouts’, led by Paul Singer’s hedge fund Elliott Management, and other bondholders, are owed a total of US$23 billion.
According to The New York Times, The Federal District Court in Manhattan has ruled that Argentina will not be allowed to service its restructured debt if payment to litigators is not made. Argentina’s finance minister Axel Kicillof has so far only offered US$ 6.5 billion, leading to a stalemate that is hampering Argentina’s ability to participate in international markets. This may be significantly impacting the inflow of capital into the nation, and consequently into its mining sector as well.
The issues in Argentina highlight underlying uncertainties and regulations which are potentially hampering its investment attractiveness. According to the Fraser Institute’s 2014 Survey of Mining Companies, trade barriers strongly deterred 41 percent (averaged across all jurisdictions) of respondents from investing in Argentina, while 14 percent on average said they would not invest in the country at all for this reason.
The survey went on to find that uncertainty regarding the administration, Interpretation, and enforcement of existing regulations strongly deterred 18 percent of respondents from investing in Argentina and that 15 percent of respondents would not invest in the country at all based on this reason. The corresponding figures for the country’s political stability were 20 percent and 18 percent, respectively.
However, there are signs of recovery. According to Mining Weekly, Argentina’s government increased their cash reserves from $US28 billion to $US33 billion towards the end of 2014, and the Buenos Aires Stock Exchange rose 60 percent in 2014.
In terms of resource potential, Argentina is currently ranked 6th in the world according to the Mining Journal Survey, suggesting the industry may be a future boon to its contracting economy. The growing emphasis on market reforms and attention to mining may be what investors need to reduce uncertainty and allow Argentina’s mining industry to exploit the country’s significant resources.