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Latin America's sleeping giant begins to rumble

Latin America's sleeping giant begins to rumble

Posted by Juan Gavasa on June 05, 2014

The sleeping giant of Latin America, racked by its own pride and bungling politicians, has begun to rumble, driven by an unexpected turn of pragmatism.

Argentina's agreement with the creditor nations of the Paris Club announced last week is a significant step towards normalizing the country's relations with the international financial community that were severely damaged following the country's sovereign debt default in 2002.

Details of the agreement are still to come, but on the face of it, Argentina has negotiated well. Apart from an agreement to exclude the IMF from the deal in return for a larger down payment, the key element appears to be the incentive provided to the creditor nations to invest in the country.

While debt repayment under the agreement could last up to seven years, the period could fall to five years if creditor nations choose to invest in the country.

Following 13 years that will happily be forgotten by many, the country's creaking infrastructure and economic system are in desperate need of investment and reform. A deal with China to fund improvement to the country's rolling stock of trains has been a start, but opening the country up to the rest of the world and easing its shortage of reserves at the central bank is key.

The incentives for investors are clear. In its heyday, before the onset of the First World War, Argentina's economy was the tenth wealthiest in the world, making it the envy of its neighbors.

Much has changed since, following decades of political instability, starting with the establishment of a military junta in 1930, the return of democracy in 1983 and a series of economic crises.

In the meantime, the economies of China and more close to home that of Brazil have grown significantly to eclipse that of Argentina, but the potential for investors remains significant.

At its heart lie vast quantities of shale gas, hidden underground in the west of the country, estimated to be the second largest technically recoverable reserves in the world after China.

PRAGMATISM TRUMPS RHETORIC?

A cabinet reshuffle at the end of 2013 resulted from poor mid-term elections which coincided with the illness of President Fernández, forcing her to take a back seat from politics.

What followed were a serious of pragmatic measures, which appeared to have trumped earlier rhetoric and aimed to stabilize the country's economy.

The launch of new inflation and GDP measures intended to restore the credibility of the country's much maligned statistics agency (Indec) combined with a depreciation of the country's currency were followed by the settlement of a compensation agreement with Spanish oil company Repsol for the expropriation of YPF, clearing the way for investment in the country's shale gas reserves. A reduction in government subsidies was also made possible by a tariff increase.

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