Background
On 11 August 2019, the candidates of Frente de Todos, headed by Alberto Fernández and Cristina Fernández de Kirchner, defeated Argentina’s current PresidentMauricio Macri in the primary elections. It is likely that they will form the next government after the second round of the elections. Their platform includes a number of measures that would likely affect foreign investors in a number of industries.
Possible threats
For example, Mr Fernández has proposed to rework the IMF’s support to Argentina and to amend, through consent or otherwise, the payment terms of Argentinean sovereign debt. The proposed measures would increase the political risks faced by foreign investors in Argentina’s financial market. Among other effects, they could fundamentally change the payout of Argentinean sovereign debt and trigger defaults of various bond instruments.
Equally, investors in the energy sector fear that Mr Fernández’s victory could translate into a return to the heavy State intervention that prevailed under former President Cristina Fernández de Kirchner. In recent interviews, Mr Fernández proposed to reduce consumer prices in public utilities such as electricity and gas through the imposition of controls that will no longer reflect inflation or the dollar exchange rate. These measures could change the circumstances under which a number of energy companies invested in Argentina. They also could negatively affect both the risks to which these companies are exposed and their profits.
What is next for Argentina and its investors?
Argentina has been in recession for over a year, with high inflation rates. Right after the primary elections, the Argentinean market collapsed.[1] President Macri’s government and the central bank have proposed a number of measures in an attempt to stabilise the economy as the October elections loom.[2] However, uncertainty among investors remains one of Argentina’s biggest challenges. It remains to be seen if Macri’s economic policies are successful. It also remains uncertain whether Mr Fernández will implement the proposed measures if he wins the presidency. In any event, Argentina will certainly navigate three rocky months before the new president takes power in December 2019.
In these circumstances, foreign investors in Argentina would be well-advised to take active measures to minimise their exposure to both the current uncertainty and future adverse governmental measures. Public International Law offers effective solutions to mitigate these types of risks. Specifically, international investment agreements (“IIAs”) can provide broad legal protection to foreign investors, including to those holding sovereign or SOE debt instruments and to investors in the energy markets, against measures that substantially undermine their investments or frustrate their legitimate expectations. The earlier a foreign investor moves to protect its assets, the more likely it is that the investor will get full compensation in the event that its investments are affected by unlawful, adverse government measures.
As Volterra Fietta explains in a separate article of this newsletter, prudent investors prepare against State conduct by structuring their investments in ways that maximise their protections under an IIA. For example, if a foreign investor in Argentina is not incorporated in a country that has concluded an IIA with Argentina, that company might want to restructure its investment through a subsidiary that is protected under an IIA to which Argentina is a party.
Investors should pay particular attention to the timing of the restructuring. Indeed, a number of arbitral tribunals have concluded that investors cannot restructure their investments with the sole purpose of benefiting from IIA protection once the disputed conduct has occurred. As a practical consequence, this means that an investor should review the status of its foreign investments under IIAs before a dispute with a host State arises. Pre-emptive action can save hundreds of millions of dollars to foreign investors.
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[1] Argentina’s stock market fell by 37%, the peso (Argentina’s currency) was down by 30%. The 100-year bonds that investors had clamoured for when President Macri issued them are now worth just 54 cents on the dollar, implying a default risk of 57%.
[2] On 28 August 2019, President Macri’s government announced it will postpone paying $7 billion of short term local debt for up to six months while pursuing to “reprofile” $50 billion of longer dated debt (which is owned by a majority of investors). The Government also said it plans to delay the repayment of $44bn of loans already disbursed by the IMF.
