Further Nationalisations Will Continue To Deter Investment


The nationalisation of two more rail cargo concessions in Argentina will continue to deter investment at a time when FDI is most needed. Foreign investment is slowing down rapidly as a result of rampant inflation, import restrictions, foreign exchange controls and continuous expropriations. This has resulted in a poor business environment for the country which scores 41.5 in our Risk/Rewards Rating, below the regional average of 46.4.

Our Country Risk team forecasts that Argentina's economy will continue to slow in 2013, with real GDP growth falling to 1.8% from 1.9% in 2012, as currency devaluation pushes inflation higher, weighing on consumer and government spending. Despite government efforts to halt the rapid price growth, our country risk team estimates that consumer price inflation remains above 20% in year-on-year terms.

Poor Business Environment Deters FDI
FDI Inflows, % Change y-o-y

On the 4 th of June the government announced the nationalisation of two cargo railway concessions operated by the Brazilian firm América Latina Logística (ALL). The first line runs through the centre of Argentina while the second line connects the country with Paraguay, Uruguay and Brazil - they are two of the most important freight railways in all of Argentina. The government argues that the reason for the expropriation is the noncompliance with the contractual agreement in the form of underinvestment, unpaid royalties and accumulated fines for up to 30% of the concession.

ALL has not officially responded to the allegations yet. However, its operations in Argentina represented only 6.5% of net revenue and did not contribute to EBITDA (reported by Bloomberg). This unfavourable cost-benefit relationship had led the company to look for potential buyers to acquire the concession (reported by the Financial Times). ALL is Latin America's largest independent logistics firm and Argentina's biggest rail operator.

This nationalisation will likely place further strain on bi-lateral ties between Brazil and Argentina. Although Brazil is Argentina's main biggest trading partner, increasing inflation and foreign exchange controls have started to alienate Brazilian investors.

Expropriations Damage Business Environment

The nationalisation of these two rail cargo concessions in Argentina is the latest in a string of expropriations in the sector. Last year, the government took control over the Subte, Buenos Aires metro system ( see ' Buenos Aires Municipality To Take Control Of Subte', 3 Dec 2012) and more recently it nationalised Belgrano Cargas freight railway ( see ' Argentine Government Takes Control Of Freight Rail Line', 28 Feb 2013). This government approach to foreign investment has expanded to other sectors, including the nationalisation of the Spanish Repsol share in the country's largest oil company in 2012. This interventionist policy started with President Nestor Kirchner in 2003 and has continued with his wife Cristina Fernandez de Kirchner to present day, overseeing the nationalisation of an airline, water utilities, the post office, passenger trains and private pension funds. These events demonstrate that the government is not afraid of nationalisations. In fact, Minister of Interior and Transport Florencio Randazzo announced that further rail expropriations may take place if concessions do not meet objectives to reduce freight costs. As a result, we believe that FDI in Argentina will continue to decrease in the future in hand with the loss of confidence in the market.

This article is tagged to:
Sector: Infrastructure
Geography: Argentina

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