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WHY: Argentina’s investment climate has been improving thanks to last year’s election of a conservative, probusiness president.

WHAT NEXT: Private sector confidence has improved, but after 12 years of populist left rule the current administration has a long road to travel before it can convincingly argue that the country is an investment hotspot.

The new conservative government’s efforts to convince investors of Argentina’s appeal could be about to pay off, with ExxonMobil considering a major new oil and gas development.

WHEN ExxonMobil’s chairman and CEO, Rex Tillerson, visited Argentina in early June, the government was jubilant. Tillerson met with the country’s new president, Mauricio Macri, and his energy minister, Juan Jose Aranguren, and the photos show eager smiles on all sides. There is good reason for this. Macri, a conservative businessman, took office in December 2015 after 12 years of populist-left rule had drained the country of a good deal of its foreign capital. He needs to reel in huge investments to pull the economy out of a five-year slump, cut double-digit inflation and create jobs, all of which are key to his young political coalition gaining the popular support needed to extend their policies – and survival. ExxonMobil could be the next in line to join a small group of developers to launch mass development at one of the world’s bright spots for shale, Vaca Muerta.

Investment potential

Tillerson said ExxonMobil could invest more than US$10 billion over the next 20-30 years in developing two adjacent blocks in the play, where it has already ploughed US$200 million into exploratory drilling. Is this the right time to invest in Argentina? ExxonMobil thinks so, as long as the results of its pending shale pilot show the resources are economically viable for mass production. ExxonMobil is working with its XTO Energy subsidiary on exploring the Bajo del Choique and La Invernada blocks, where Tillerson said a production pilot was poised to start in the next few months, with an investment of US$250 million. The horizontal wells will be drilled laterally for up to 2,500 metres and include 25 frac stages. XTO will handle the project, given its expertise in Canada and the US, where it operates more than 30,000 unconventional wells. “I’m very optimistic with the changes that have occurred here in Argentina with the new government,” Tillerson said, according to Argentine media reports. “It is clearly improving the investment climate. Argentina is a very important place for us.” If ExxonMobil moves forward with the US$10 billion-plus project it would be one of the biggest investments since Chevron announced a US$16 billion venture with Argentina’s state-run YPF. The pair are producing about 50,000 barrels of oil equivalent per day from Vaca Muerta. Petronas, Royal Dutch Shell, Total and others have been testing the play and doing production pilots, but have yet to move into mass production.

Improving relations

This is for several reasons. The first is that the economic and political climate soured under the previous government of President Cristina Fernandez de Kirchner, a left-of-centre populist who ruled from 2007 to 2015. Her interventionism through price caps, high taxes, currency controls and restrictions on bringing money in and out of the country made it difficult to plan business. What is more, an unresolved sovereign debt default from 2001 made it harder and costlier to obtain project financing. With the arrival of Macri, the investment climate has started to improve. His conservative administration has settled the remainder of the US$100 billion default, helping to widen access to global financial markets. He has also cut export taxes, lifted capital flow restrictions – companies can once again send dividends abroad – and allowed an overvalued peso to devalue and float freely. The combination is expected eventually to bring down lofty borrowing and inflation rates, improve state finances and revive the economy. The International Monetary Fund (IMF) projects 2.8% growth in 2017 after a 1% contraction this year. Macri has vowed that signs of improvement will start to appear in the second half of this year, led by a decline in the inflation rate that is now touching 40%, which is up from 26% in 2015. High inflation, coupled with the economic contraction and 400-500% hikes in public utility rates, has fuelled a rise in public discontent, with unions holding more protests to demand wage hikes to sustain consumer spending power. Even so, many people are still giving Macri the benefit of the doubt. “In terms of public opinion, the expectations for improvement are very high,” said Carlos Germano, a political analyst at Carlos Germano y Asociados. “More than 60% of the population expects Macri will beat inflation, and they expect that Argentina will get on track for faster growth.” While Macri’s approval rating is down from 65% in the days after taking office, it is still running high at 53-54% despite high inflation and a decline in consumer spending power, he added. While this bodes well for his political future, Germano warned that this optimism could be cut short if Macri failed to cut inflation in the second half and improve spending power. Macri is taking steps to revive consumer spending, including by seeking congressional approval for the state to pay debts to 2.2 million pensioners. “As consumer spending improves, people’s empathy with Mauricio Macri is going to continue,” Germano said. “But if he can’t [reverse] the decline in consumption, then his popularity will decline.”

What next

With neighbouring Brazil in an economic, political and social crisis, Argentina is a contender to pull in foreign investment if Macri can sustain public support. But it will be gradual. “It’s going to take more time for investments to come. There have been some investments, but the first wave will be in the agribusiness sector,” said Fausto Spotorno, an economist at consultancy Orlando J Ferreres & Asociados. “The second wave will be in big projects, in energy, oil and gas.” He said public sentiment should improve in the second half of this year. Annual wage hikes will kick in and the government has vowed to keep a lid on fuel prices and utility rates, which should revive retail sales. “This will encourage companies to invest,” he said. “But it’s not going to be one day to the next.” The key to speeding up and sustaining investment will be to rebuild investor confidence in the economy, including by complying with regulations and providing guarantees that they will not be changed, Aranguren said last week. Another key is for adequate energy pricing. By keeping a lid on energy prices over the past 15 years, the country lost its “self-sufficiency in gas and oil”, the official said. With the recent hikes of up to 500% in energy prices – and an almost two-fold increase in the average wellhead price of gas to 5.20 per million British thermal units (US$143.83 per 1,000 cubic metres), there are more incentives to invest in rebuilding energy supplies. “We have to give value to what we have by acknowledging the cost of producing it,” he said. With an improvement in the conditions for doing business, Macri expects investor confidence to recover. “And the confidence will bring investments and jobs,” he said in a speech last week. “This is what we need in Argentina.”