Vale Rift Could Drag Argentina ETF Lower
In what represents a stunning reversal of fortune from how the fund performed last year, the Global X FTSE Argentina 20 ETF (NYSE: ARGT) has been a juggernaut to start 2013. The embattled ETF, the only tracking South America's third-largest economy, was up 8.4 percent year-to-date heading into Monday's trading session.
Any ebullience surrounding ARGT was dealt a serious blow on Monday when the fund sank 1.3 percent on volume that was more than double the daily average. The catalyst was a familiar one: Argentina is once again embroiled in a rift with a foreign commodities producer.
This time it is Brazil's Vale (NYSE: VALE), the world's largest iron ore maker, though the latest issue to bring pressure upon ARGT has nothing to do with iron ore. Vale is also a major potash producer and Argentina's Mendoza province has said it will take away a $6 billion concession for Vale if the company does not get back to work on the Rio Colorado mine.
Vale delayed the project in December as part of a company-wide cost-cutting initiative, Dow Jones reported. Vale also slashed its budget for Rio Colorado to $611 million from $1.08 billion last year, according to Dow Jones.
The Brazilian commodities giant issued this statement last week: "Vale clarifies that it has not announced the suspension of the Rio Colorado project, in Argentina. The company has extended the workers' end-of-the year break while it evaluates changes in the economics of the project." News of Argentina's intervention against Vale comes less than a year after ARGT plunged in the wake of the government's nationalization of energy company YPF (NYSE: YPF). The two scenarios are not without similarities. Argentina grew tired of YPF failing to increase output while the company kep heaping dividends on shareholders. On Monday, Vale announced a minimum $4 billion dividend for 2013.
Argentina doing battle with Vale reminds financial markets of one thing: Government policies there are viewed as unpredictable and inhospitable to foreign investment. Gross domestic product there grew at an average rate of 7.1 percent per year from 2003 to 2011, but now growth is faltering and Colombia has passed Argentina to become South America's second-largest economy.
Still, ARGT has found a way to jump almost seven percent in the past month even while it is widely known the country is on the brink of its second sovereign debt default this century.
Credit default swaps used to ensure Argentine sovereign debt against default blew out in the fourth quarter as market participants started pricing in that default and it cannot be forgotten that Argentina is in real danger of losing frontier market status.
Since 2011, President Cristina Kirchner has made it nearly impossible for foreign mining firms operating in Argentina, of which Vale is one, to repatriate profits or start new projects. The flap with Vale only serves as a reminder to the dangers of doing business in Argentina and that reminder could mean near-term downside for ARGT.
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