LONDON (Reuters) - International investors rattled by Argentina’s multi-billion-dollar grab of the country’s main oil firm should steel themselves for other states to raid foreign-held assets as one easy solution to their economic woes.
Buenos Aires’ high-profile seizure of YPF from Spain’s Repsol is unlikely to set off a wave of out-and-out asset expropriations.
But instability and hardship caused by five years of global crisis could become a powerful inducement for a shakedown of non-voting outsiders, with high crude and metals prices making commodity producers particularly vulnerable.
Soaring profits and cheap loans have left many multinationals flush with cash, presenting tempting targets for governments that, while balking at outright seizures, may turn to gradual clawbacks by for instance altering contracts or tax regimes, risk consultants say.
Last year, international investor/state disputes hit a record level, the United Nations says. In 35 of the 46 cases filed under international agreements, respondents were developing countries.
“When you get into periods of economic turmoil it can be tempting to get government revenues from low-hanging fruit, i.e. foreign investors who are already there,” says Peter Jenkins, political risk underwriter at specialist insurer Beazley.
According to Jenkins, past experience suggests a strong correlation between economic cycles and state interference. Investors in high-revenue industries such as mining will be particularly vulnerable, he says, as will sectors reliant on offtake from the state, such as power utilities.
“We are in a period where flows of trade and investment are a lot less predictable and that makes country risk itself less predictable, even without specific domestic political shocks.”
The stakes are high in a globalised world where the stock of foreign direct investment stands at an all time high above $20 trillion, a tenfold jump from 1990 levels.
Recent examples of state intervention include a $2 billion tax tussle with Vodafone in India, where the government has tried to change laws to slap retrospective tax charges on investments. In Hungary, specially targeted tax hikes have been slapped on the largely foreign-owned banking sector.
In the commodities sector, a run of high prices may persuade governments that investment deals negotiated in the past give them too small a share of profits.
Indonesia, for instance, wants to limit outside ownership of mines, asking foreign firms to sell back stakes to local companies or the government. Australia and South Africa plan to slap hefty new taxes on the bumper profits of mining companies.
“Private companies with a large foreign shareholder base are tempting targets for governments across much of emerging markets: outright expropriation is just an extreme method of redistributing resources away from foreign investors on a post-hoc basis,” Deutsche Bank strategist John-Paul Smith writes.
With corporate cash balances at record highs of over $2.2 trillion in the United States alone, resisting that temptation may be hard.
What Smith terms “the malign influence of the state” in emerging markets has waxed and waned over the decades.
While resource nationalism swept the world in the mid-20th century resulting in the nationalisation of giant oil and mining companies across Latin America and the Middle East, the dominant impetus for years before the latest crisis was privatisation, with swathes of the public sector going under the hammer.
The financial meltdown triggered by the 2008 collapse of Lehman Brothers has altered the landscape however, making investors keener on state involvement in the economy, both to bail out the financial sector and to try revive growth from the fallout.
Recent calls for Western policymakers to cap company bosses’ remuneration and bonuses, raise taxes and take over poorly performing utilities or transport firms may inadvertently have given even more ammunition to countries eyeing a shift towards China-style state capitalism.
“Western governments’ intervention in banks and companies has influenced the tone in a way because it can be used by those who argue the government should have a bigger role,” said David Hauner, head of EEMEA economics and fixed income strategy at BofA/Merrill Lynch Global Research.
“So you may not be able to say Argentina has started a trend but there is something broader here which is going in a similar direction.”
What repercussions Argentina suffers may determine how far other countries go in their interventions with investors.
Actions such as the YPF seizure usually have a negative impact on foreign investment because higher insurance costs drive up the hurdle rate, the required rate of return above which an investment makes sense.
“Argentina won’t know the true cost of its actions for a while,” said Peter Hornsby, who runs the political risk division at insurance broker Lockton in London.
“It increases your risk profile, the cost of investment goes up and the return on investment goes down. And when insurers pay a claim they won’t rush to insure that particular risk again.”
In 2001, Argentina defaulted on $100 billion of debt, triggering an economic collapse, and ten years on it has still not returned to global capital markets. FDI remains around $6 billion a year compared to a high of $22 billion in 1999, IMF data shows.
But this time around the odds look weighted more in the country’s favour.
Faced with years of sluggish growth and deleveraging in the developed world, most companies will be keen to up their emerging markets operations, despite the risks.
In Argentina’s case, its vast shale gas deposits may well attract overseas investments into YPF, not just from China but also from global oil majors desperate for additional reserves.
Even an impending slowdown in China leading to lower commodity prices may actually worsen the short-term picture for foreign companies in the developing world, some reckon.
“Ultimately...it may require something close to a crisis or a series of individual crises for the authorities in some of the key emerging markets to be shaken out of their hubris or to overcome the internal vested interests and popular pressures that result in policy inertia,” Deutsche’s Smith says.
Reporting by Sujata Rao; Editing by John Stonestreet