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4-Traders Homepage  >  Equities  >  Bolsa de Madrid  >  Repsol YPF    REP   ES0173516115

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Repsol YPF : Economic Conditions Argentina

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01/13/2018 | 08:34pm CET

Overview

Argentina is one of South America’s largest economies. Endowed with rich natural resources, the country also benefits from a well-educated workforce, an export-oriented agricultural sector, and a diversified industrial base. Although the agricultural sector represents less than 10 percent of GDP, Argentina is one of the world's largest exporters of soybeans, wheat and meat. The services sector accounts for over 60 percent of GDP, supported by a growing number of financial and tourism enterprises. The industrial sector accounts for around 30 percent of GDP, including food processing, oil refining, machinery and equipment, textiles, chemicals and petrochemicals.

In the 1990s Argentina was Latin America's economic star, with GDP growing at an annual average rate of 6.1 percent between 1991 and 1997. But in the late 1990s, inflexible economic policies and a failure to deepen structural reforms left the country vulnerable to external shocks, and its economy slid into a deep recession. The economic situation worsened in 2001 with massive withdrawals from the banks and a further decline in consumer and investor confidence. As a result, Argentina experienced one of the worst economic crises in its history in 2001 and 2002, with real GDP contracting over 15 percent in these two years; inflation rose sharply; the exchange rate plunged; and in late 2001 the government announced the largest debt default in history.

While the economy recovered strongly after 2003, progress on structural reforms to address long-term vulnerabilities has been limited. Moreover, the government’s discretionary and interventionist policies are weighing on private investment and contributing to the erosion of fiscal and current-account surpluses. Price controls and distortions have resulted in electricity shortages and other problems, and at the same time inflationary pressures have picked up. The current global economic crisis, combined with domestic interventionist economic policies, has weakened trade conditions and investment. As a result, real GDP growth in Argentina slowed sharply in 2009 but rebounded strongly to record growth in 2010. Growth was expected to still be strong in 2010. However, the government continues to rely on expansionary fiscal and monetary policies, which could exacerbate already high inflation and negative interest rates. In late August 2011, credit ratings agency Moody’s lowered its outlook for Argentina’s banking sector to “negative” from “stable.” While the move upset the country’s banking industry and central bank, Moody’s defended the move by saying that Argentinean banks were becoming more dependent on “unsustainable” government policies. Indeed, growth slowed sharply in 2012. By June 2012, the World Bank was projecting that Argentina’s economy would slow to 2.2 percent for the year compared with nearly 9 percent in 2011. Some independent economists claimed that even that figure was optimistic, and that the country could actually end the year with a recession. Meanwhile, Argentina’s unemployment rate climbed to 7.6 percent in the third quarter of 2012, up from 7.2 percent in the same period of 2011.

Similar to President Hugo Chavez in Venezuela, Argentinian President Fernández de Kirchner’s government has given away massive subsidies in its quest to win elections – a move that leaves a country vulnerable to bankruptcy when world commodity prices stop growing. Roberto Lavagna — the former economy minister under Nestor Kirchner who is known for resurrecting Argentina’s economy after the country’s 2001 default on its foreign debts — estimates that government subsidies for transportation and energy surged to US$19 billion in 2011 compared with US$1.2 billion at the end of 2005, according to The Miami Herald. Also in June, President de Kirchner announced a plan to give out 400,000 low-interest mortgages and build 400,000 homes over the next four years using money borrowed from the country’s Social Security system. While the government claimed the plan would create 100,000 construction jobs, skeptics feared the money would just end up in the hands of corrupt officials.

The government expanded state intervention in the economy throughout 2012. In May the Congress approved the nationalization of the oil company YPF from Spain'sRepsol. The government expanded formal and informal measures to restrict imports during the year, including a requirement for pre-registration and pre-approval of all imports. In July the government also further tightened currency controls in an effort to bolster foreign reserves and stem capital flight. Overall, for 2012, expansion was modest and limited by weak global demand, a grain harvest impacted by drought, high inflation and the negative impact of currency controls on investment.

In February 2013, Argentina was censured by the IMF for failure to improve the accuracy of its inflation and GDP data. Analysts have accused Argentina's government of under-reporting inflation since early 2007 for political gain and to reduce debt payments. By October 2013, the Argentine government was reporting that economic activity grew 4 percent in August over the same month in 2012 – a performance that far exceeded market expectations. Overall, the government was predicting that GDP would expand 5.1 percent for the year.

In November 2013, the IMF said it planned to meet in December to review a fund report about Argentina’s economic data following the concerns about the quality of official figures. IMF head Christine Lagarde last Sunday said the country had made “positive progress” in reforming its data. If it failed to make progress, the IMF could potentially impose sanctions, barring Argentina from voting on IMF policies and accessing financing. Meanwhile, central bank reserves had sunk 24 percent to $33 billion by November 2013. Not exactly supported by the global bond market, government officials use the bank to pay government debts, finance the Treasury and prop up an overvalued currency.

In 2013, the government continued with a mix expansionary fiscal and monetary policies and foreign exchange and imports controls to limit the drain in Central Bank foreign reserves, which nevertheless dropped US $12 billion during the year. GDP grew and inflation remained steady, according to private estimates. In October 2013, the government settled long-standing international arbitral disputes (including with three US firms) dating back to before and following the 2002 Argentine financial crisis. In early 2014, the government embraced a series of more orthodox economic policies. It devalued the peso 20 percent, substantially tightened monetary and fiscal policies, and took measures to mend ties with the international financial community, including: engaging with the IMF to improve its economic data reporting, reaching a compensation agreement with Repsol for the expropriation of YPF, and presenting a proposal to pay its arrears to the Paris Club.

However, in July 2014, Standard & Poor’s declared Argentina in default after the government missed a deadline for paying interest on $13 billion of restructured bonds. It was the country’s second default in 12 years. (See below for more details) Argentina’s rating was cut from CCC- because “the grace period expired with bondholders not receiving their payment,” according to a statement from S&P. Meanwhile, Argentine President Cristina Fernandez de Kirchner said in a televised speech that the country wasn’t in default on its obligations because her government had duly sent the $539 million payment to a trustee bank before it was blocked by a judge. So essentially, the government denied that it was in default.

In October 2014, the IMF in its World Economic Outlook report said it expected Argentina’s economy to contract by 1.7 percent in 2014, and 1.5 percent in 2015. The IMF had revised down its estimates for Argentine growth due to what it described as “deepening macroeconomic and policy imbalances that are manifesting themselves as high inflation, negative growth, and a rising differential between the parallel and official exchange rates.”

The country’s government disagreed with the IMF’s conclusions, predicting the country’s economy would grow 0.5 percent in 2014, and 2.8 percent in 2015.

During 2014, the government continued with expansionary fiscal and monetary policies and foreign exchange and imports controls. Between 2011 and 2013, Central Bank foreign reserves had dropped $21.3 billion from a high of $52.7 billion. In July 2014, Argentina and China agreed on an $11 billion currency swap; the Argentine Central Bank has received the equivalent of $3.2 billion in Chinese yuan, which it counts as international reserves.

In 2014, the government also took some measures to mend ties with the international financial community, including engaging with the IMF to improve its economic data reporting, reaching a compensation agreement with Repsol for the expropriation of YPF, and agreeing to pay $9.7 billion in arrears to the Paris Club over five years, including $606 million owed to the United States. In July 2014, Argentina made its first payment to Paris Club creditors since the country's 2001 financial crisis. At the same time, the Argentine government in July 2014 entered a technical default on its external debt after it failed to reach an agreement with holdout creditors in the US. The government's delay in reaching a settlement and the continuation of interventionist and populist policies are contributing to high inflation and a prolonged recession, according to private analysts.

Argentina's economic recovery was expected to gather pace in 2016 as domestic consumption strengthened, investments picked up and export flows increased, according to a budget bill presented by Argentina's economy minister, Axel Kicillof, in September 2015.

A copy of the draft bill seen by Reuters as Kicillof began presenting the measure to Congress stated, "The prudent administration of exchange rate policies, together with income and investment policies, will guarantee economic stability and ensure an improvement in jobs and salaries."

A new government was slated to take office on Dec. 10, 2015, and that seemed to be driving optimism in the country, according to CNN Money. Argentina's Merval stock market was up 45 percent for the year, more than Europe's performance and significantly more than the S&P 500. And, the country's consumer confidence index was up over 40 percent from a year prior, according to Torcuato di Tella University, a private university in Buenos Aires. Kicillof had also recently announced that Argentina had sold $1.4 billion in government debt.

"The economy seems to not be falling anymore," says Eugenio Aleman, an Argentine and senior economist at Wells Fargo Securities, was quoted by CNN Money as saying in September 2015. "There are a little bit more positive vibes going around."

Argentina was facing a difficult external environment for commodity exports and posted a $3 billion trade deficit in 2015, according to Forbes.

After his December 2015 inauguration, newly-elected President Mauricio Macri abandoned currency controls, reduced energy subsidies to try to get the government's budget under control and issued sovereign bonds, ending Argentina's 15-year banishment from the international bond market. The new administration also moved swiftly to implement core reforms such as the unification of the exchange rate, an agreement with international creditors, the modernization of the import regime, reduction of inflation and reform of the national statistics system, noted the World Bank.

The U.S. responded positively. On Feb. 19, 2016, a U.S. court lifted an injunction that had barred Argentina from issuing new bonds. “Put simply, President Macri’s election changed everything...The Republic has shown a good-faith willingness to negotiate with the holdouts," Judge Thomas Griesa was quoted by Forbes as saying.

Yet investors remained wary, and the country continued to suffer from some of the world’s worst inflation.

After an economic growth of an estimated 2.4 percent in 2015, economic growth in the first quarter of 2016 slowed to 0.5 percent year-over-year, and the first official estimates for the first half of 2016 showed an annual decline of 1.3 percent.

By September 2016, Argentina’s economy was still struggling. Analysts in a central bank poll expected inflation of 41 percent in 2016 and 19.8 percent in 2017, according to Reuters. They also predicted GDP would shrink 1.5 percent in 2016 before rebounding to 3.2 percent growth in 2017.

Also in September 2016, Argentina completed its first IMF Article IV Consultation since 2006.

After years of international isolation, Argentina took on several international leadership roles in 2017, including hosting the World Economic Forum on Latin America and the World Trade Organization Ministerial Conference, and was set to assume the presidency of the G-20 in 2018.

Overall, the economy shrank by an estimated 2.3 in 2016. The government was expecting the economy to grow by 3.5 percent in 2017, although economists were projecting growth closer to 3 percent – mainly on the back of increased infrastructure spending.

In March 2017, Reuters reported that Argentina’s economy had exited a prolonged recession in the second half of 2016, with government data indicating a 0.5 percent expansion in the fourth quarter of 2016 compared with the third quarter. Meanwhile, data from government statistics agency Indec showed that 30.3 percent of Argentines lived in poverty in the second half of 2016, down from 32.2 percent in the second quarter.

In September 2017, President Mauricio Macri said that single digit inflation was within sight for the first time in more than a decade.

“We have turned a corner,” Macri said on Bloomberg Television. “Without a fixed exchange rate, without any type of price controls, we have been reducing inflation. I am more confident than ever that in 2019 we will have single-digit inflation.”

GDP expanded 2.7 percent in the second quarter of 2017 from a year earlier, driven by investment and consumption. It was the economy’s best performance since Macri took office in December 2015, according to Bloomberg.

In November 2017, Argentina’s credit rating was raised one level by Moody’s Investors Service to B2 from B3 with a stable outlook. That move followed Standard & Poor’s raising its rating on Argentina by one level in October to B+.

Special Update:

Argentina defaults on debt following failure of talks with bond holders in New York --

On July 31, 2014, for the second time in more than a dozen years, Argentina defaulted on its debt. The 2014 default was actually the extended outcome of an economic crisis in 2000, which was marked by 20 percent unemployment and a run on the banks. That crisis led to a number of rescue maneuvers, including a credit line from the International Monetary Fund (coupled by austerity measures), all aimed at avoiding default. Nevertheless, in December 2001Argentina missed interest payments on its international debt, leading to the largest debt default in history.

In fact, Argentina has defaulted on its debt eight times in its history, but the 2001 episode stands as the most significant and was followed by the devaluation of the peso.

These moves -- while derided by financial mainstreamers who eschew default -- were actually actions of a responsible country aiming to avoid a deflationary spiral. While default certainly curtailed Argentina's access to international capital and gave the people of Argentina the heart ache of massive inflation, it did serve the particular purpose noted here. That being said, these moves still allowed Argentina's economy to recover sufficiently, so that it was able in 2005 and 2010 to attempt to repay the holder of its defaulted debt at a rate of about 35 cents on the dollar of the original debt.

The vast majority of Argentina's bond holders agreed to new restructuring terms; however, a particular group of hedge funds, including Aurelius Capital Management. Elliot Management, and NML Capital, did not. Argentina's 2014 default stemmed from the refusal by this cadre of bond holders to assent to the new restructuring terms. Instead, they insisted that they could and should hold out for a better deal.

It should be noted that United States courts blocked payments to other the bond holders who were willing to be paid under restructured terms until an agreement with the "hold out" hedge fund investors could be forged. Thus, with the courts involved, a final effort to find a resolution was advanced in the form of a meeting in New York.

The 2014 default occurred after these talks with bond holders in New York ended in failure, with Argentina rejecting the proposal on the table. As intimated here, that proposal was not much of a compromise with the hedge funds demanding that the full amount of $1.3 billion be paid on the bonds they (the investors) held. While Argentina was willing to repay its debt along restructured terms, it now had the choice to either pay all the bond holders -- including the hedge funds who were demanding full payment -- or to go down the road of default. Argentina chose the latter path. As noted by the court-appointed mediator, Daniel Pollack, "Unfortunately, no agreement was reached and the Republic of Argentina will imminently be in default."

For her part, Argentina's President Cristina Fernandez de Kirchner accused the United States hedge funds that bought Argentina's debt at cheap rates of operating like a "vulture fund," noting that they were reaping profits at the expense of Argentina's economic woes. It was certainly true that those hedge funds had gobbled up Argentina's defaulted debt from 2001 at cheap rates.

Meanwhile, the credit ratings agency Standard & Poor's (S&P) downgraded Argentina on the basis of the default, although it said a revision would be in order if Argentina found a way to make the payment.

Updated in 2017

Supplementary Sources: Roubini Global Economics, Bloomberg, Forbes, CNN Money, MiamiHerald.com and Reuters

(c) 2018 CountryWatch, Inc. 2017. All Rights Reserved. Provided by SyndiGate Media Inc. (Syndigate.info)., source Middle East & North African Newspapers

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Sales 2017 44 808 M
EBIT 2017 3 298 M
Net income 2017 2 162 M
Debt 2017 8 137 M
Yield 2017 4,78%
P/E ratio 2017 11,32
P/E ratio 2018 11,35
EV / Sales 2017 0,73x
EV / Sales 2018 0,69x
Capitalization 24 736 M
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Mean consensus OUTPERFORM
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Average target price 16,2 €
Spread / Average Target 2,8%
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