Argentina's oasis of sound macroeconomic management and prosperity.
BY WALTER T MOLANO
The windswept plains of Chubut are home to one of the biggest Welsh colonies outside Europe. With a population of 25,000 native Welsh speakers, it often does not feel like South America. The Welsh arrived in 1865, looking for an isolated outpost where they could preserve their language and cultural traditions. Many of them took to sheep herding and the related wool industry, creating small fortunes in the process. Wool was known as white gold before the discovery of synthetic fibers. Chubut was considered to be a national territory until the late 1950s, when it was finally incorporated as a province.
Although it is young, Chubut is one of the best managed provinces in Argentina. The economy grew at an average rate of 6.8 percent y/y since 2000, outstripping the sovereign’s pace of economic expansion of 5.3 percent y/y. Last year, Chubut posted a growth rate of 9.3 percent y/y, versus 9.1 percent y/y for the sovereign. Besides the City of Buenos Aires, it has one of the highest per capita incomes in the country, at $12,177. Chubut’s per capita income jumped 139 percent during the last seven years, reflecting the vast improvement in commodity prices and oil production.
Chubut is Argentina’s largest oil producing region, with 25 percent of the nation’s total output. During the last 7 years, the province’s oil output increased 12 percent. Meanwhile, the nation’s oil production declined 25 percent. One of the reasons for the variance is that YPF-Repsol does not play a dominant role in Chubut, as it does in other provinces. Therefore, Chubut was not exposed to the management issues that befell the oil giant. Chubut produces 9.5 million cubic meters of oil per year, trailed by the Province of Neuquén. Gas production is also on the rise, increasing 92 percent since 2003—but from a very low base. Chubut produces only 3.5 percent of the nation’s total gas output, with most of the biggest fields in the north-western region of the country. Nevertheless, it has the largest proven oil reserves in Argentina, with 174 million metric meters. This represents 43.2 percent of the country’s total reserves, and it ensures 18 more years of oil output. Recent geographic surveys found large deposits of shale oil and gas, which means that the province may see another boost in output. This makes Chubut one of the principal energy producing regions in Argentina.
In contrast to the other energy-producing regions, which mainly produce for domestic consumption, Chubut exports most of its oil. Indeed, it represents half of the nation’s oil exports. It is also a dominant player in other export sectors. For example, it has 100 percent of Argentina’s aluminium exports. It has 80 percent of Argentina’s wool exports, and 33 percent of its fishmeal embarkations. Given the export tariffs levied on oil, Chubut generates 10 percent of the retention taxes generated by the federal government. Interestingly, the Province of Santa Fe produces the highest amount of export tariff revenue, representing 35 percent of the nation’s take. Given the huge grain port of Rosario, and its booming agro-industry, it is little wonder that Santa Fe plays such a dominant role. Still, the Province of Chubut contributed $4.5 billion to the national coffers in 2010. This made it the largest per-capita contributor to the federal government, due to its small population. Not surprisingly, Chubut’s social indicators are impressive. The unemployment rate is 4.5 percent, versus the national rate of 7.1 percent. The poverty rate is 3.8 percent, and the infant mortality rate is half the national average.
Not surprisingly, the Province of Chubut has some of the most impressive credit indicators in Argentina. Although the province faced a long period of deficits during the 1980s and 1990s, it improved drastically after the nation’s devaluation and default. Debt to GDP fell to 3.59 percent in 2010, from 15.63 percent in 2003. Debt to tax revenues descended from 63.4 percent to 15.4 percent during the same time period, and debt service to tax revenues dropped from 9.26 percent in 2003 to 2.47 percent in 2010. It is little wonder why the Province of Chubut’s bonds are among the lowest yielding in Argentina and one of the least volatile in the emerging market spectrum. Rated Ba3 by Moody’s, the oil-backed bonds are several notches higher than the sovereign and the other provinces.
One of the reasons for the province’s strong performance was the sound management of Governor Mario Das Neves and his economic team. The presidential hopeful turned the province around and boosted its public works. Approximately, 36 percent of the annual budget is dedicated to public sector investment. He hopes to take his track record to the national stage, and Das Neves will most likely throw his hat into the ring during the next round. All in all, Chubut may be a Welsh outpost on the far end of the planet, but it is also an oasis of sound macroeconomic management and prosperity.
Walter Molano is head of research at BCP Securities.