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Argentina: Argentina Infrastructure Report 2013

2011/09/20

Argentina's infrastructure sector remains dependent to some extent on a US$10bn credit agreement from China. In addition, events in Q411 reinforced our view that the financial support of multilaterals, notably the Inter-American Development Bank (IDB), will remain a key source of infrastructure financing.

Meanwhile, the sector continues to benefit from robust economic activity, although we expect this to cool slightly in 2012 - BMI forecasts a 4.1% year-on-time(y-o-y) increase in real GDP - as the government is forced to scale back some of its pre-electoral spending. Data from the INDEC reveals that Argentina's construction industry outperformed by an impressive 10% y-o-y in real terms through the first three quarters of 2011 and we therefore estimate that the sector experienced increase of 9.9% for the year. We are forecasting that Argentina's construction sector will, in real terms, grow by 3.3% y-o-y in 2012 and 4.8% in 2013.

Argentina has inaugurated its third nuclear power plant. The Atucha II plant was opened by Argentine President Christine Kirchner, who said the plant was a step towards diversifying the country's power production. The 700MW plant is expected to be fully operational by Q312, raising the proportion of Argentina's power production from nuclear to 10%.
The Inter-American Development Bank (IDB) offered US$400mn in financial assistance to Argentina to develop infrastructure for 70 poor urban settlements (December 2011). The loan, secured by the Ministry of Federal Planning, Public Investment and Services, will be directed towards the provision of basic services, such as electricity, infrastructure and gas distribution for the urban settlements. The loan will as well be used to build storm drains, access roads, pedestrian networks, green spaces, and water and sewage networks. The project has been designed to benefit 280,000 low-income residents.

This quarter saw Argentina downgraded in BMI's infrastructure risk/reward ratings. Having been on our political risk radar for some time, the downgrade reflects the rising risks within the country's business environment. Although the October 2011 elections ran fairly smoothly, seeing incumbent Cristina Fernández win again as anticipated, the policy continuity is, in this case, detrimental to the country's business environment. In the immediate aftermath of re-election, a form of capital control on the profits of extractive industry players was unilaterally passed, indicating a continuation of ad hoc marketunfriendly policies, making for an uncertain policy environment.

Argentina's foreign minister, Hector Timerman, announced the completion of rail upgrade negotiations with Chinese engineering company China Machinery and Equipment, reports the Railway Gazette. The company will undertake a US$2.5bn upgrade of the Belgrano rail network. The contract was expected to be signed in October 2011.

Our medium-to-long term core view broadly prices in the US$10bn Chinese credit agreement for Argentine railways as the major factor driving increase in Argentina's infrastructure sector in the coming years. While such projects and robust economic activity should allow the sector to comfortably maintain average yearly increase of 5% in real terms throughout our core estimate period to 2015, we assert that a post-election change in policy is required to lure new capital into the sector.

Construction sector increase of 8% year-on-time(y-o-y) during Q111 (according to estimates from Argentina's national statistics agency Indec) has prompted to upwardly revise its annual real construction sector increase estimate from 5.2% (expected in the last quarter) to 6.2% y-o-y for 2011. This increase, however, does not change our core view for 2011 and we continue to expect the government to channel funds into other areas - aimed at drawing provincial votes and quelling social instability - and to largely ignore investment in infrastructure and construction.

However, the following developments suggest that the sector will maintain momentum:

  • In July 2011, the Autovia del Mar consortium was awarded the 30-year concession to operate and maintain the Costa Atlantica toll road network. Over the 30-year period, the concessionaire will spend ARS8bn (US$2bn) on the upgrade and maintenance of the network. The consortium is comprised of local companies Benito Roggio e Hijos and Esuco y Helport, part of the Eurnekian group.
  • The expansion of the Buenos Aires metro appears likely to resume, with a loan application in place with the European Investment Bank (EIB) and the Environmental Impact Assessment (EIA) expected to get underway sometime in 2011. Ciudad Autónoma de Buenos Aires is reportedly seeking financial assistance of up to EUR200mn (US$290mn) from the EIB.
  • The provincial government of Córdoba in Argentina is looking to launch tenders for nearly ARS1.01bn (US$244mn) of new beltway construction projects in Córdoba and Las Varillas city. Construction work at Section I of the Córdoba beltway, budgeted at ARS590mn (US$142.53mn), involves developing a 13.8km stretch between provincial highways 5 and 20. Section II, valued at ARS186mn (US$44.93mn), will include construction of a 3.4km passage between Colón avenue and highway 20. Moreover, the ARS10.6mn (US$2.56mn) Las Varillas beltway project will involve the construction of a 3km stretch between national highway 158 and provincial highway 13.

A risk worth highlighting, however, is that the government has been trying to solicit private investment with limited success. Foreign investors remain wary of partnering with the government on major infrastructure projects, due to concerns about the country's debt sustainability. A further major area of concern is the highly regulated business environment, which can deter new investors.

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