YPF Takeover: Political Risks of Investing in Emerging Markets - Real Time Insight

Argentina shocked and angered the global investors by announcing the takeover of YPF, its largest oil and gas company, earlier this week.

Argentina government accused YPF for not investing enough in its local oil fields and for not producing enough oil, which led to a 110% increase in country’s oil imports last year. The fact is that the country’s faulty economic policies are responsible for rising energy imports.

While there have been several instances of nationalizing private and foreign controlled assets in countries like Venezuela and Russia, most countries have changed in the recent past as they have recognized the importance of foreign capital, and the technology and management skills that come alongwith the capital. Though many emerging countries still restrict the operations of the foreign companies in order to protect their domestic companies.

Global investors continue to favor the emerging markets (which received nearly 40% of total foreign direct investment in 2011), in order to take advantage of high growth rates in these countries. The IMF projects that the emerging economies will grow 5.7% in 2012, versus 1.4% growth for the developed economies

There is no doubt that the action has massive implications for the foreign investment climate in the country. Argentina has huge shale reserves (about a third of the US shale reserves) and they are less deep- making them cheaper and easier to access. YPF had estimated that as much as $250 billion will be needed over the next decade to develop those reserves into a viable shale industry. However the expropriation would almost close the country as an investment destination for foreign investors.

The shares of US listed YPF SA, which resumed trading today (trading was halted on Monday after the announcement) dropped almost 30%. The Argentina ETF (ARGT) has also lost more than 4% of its value since the announcement. (Read: Argentina ETF In Focus On Nationalization Proposal)

Do you think Argentina’s action should be seen an exception or does it represent the general risks of investing in emerging markets?

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