Reforming the status quo of sector intervention creates clear winners and losers, even if it generates an overall rising tide, making it particularly challenging to modify. Unlike asset price dislocations based on the restrictions of capital detailed before, most of this sector dislocations are partially built into asset prices. However, some sectors combine both the characteristic of having limited access to capital markets and being well poised for a shift in sector policy.
The real exchange rate of Argentina is at its lowest level in more than a decade, driven by high inflation and an intervened nominal exchange rate. As a result, exporters have been severely hurt by rising costs and falling volume. Producers for the local market that would have been hit by falling real prices of competing import products have been protected by import restrictions.
A normalization of the exchange rate at a higher rate is probably a prerequisite for the liberalization of the capital account. Given how important this is to foster foreign investment,I believe there is a good probability that this policy shift will indeed take place.
Argentina Multilateral Real Exchange Rate
Source: Elypsis Web
The sector that has suffered the most because of government tax policy has been farming where exports pay a steep 35% levy on FOB prices. Reforming the tax code to benefit farming as a whole would be a very bold move with little positive short term effects and a high financial cost for the government. Consequently, I do not believe that the reduction of export taxes across all crops will be part of the reform package for at least a few years, although some of them might get a reduction.
On the other end of the spectrum, the electronic goods industry has received significant government assistance in the form of subsidies, tariffs, restrictions on imports and an impulse to internal demand. The industry creates a lot of jobs and would be very sensitive to external competition, so radical reform could only happen on the back of a very strong economy. However, a wind-down of some of its many perks or on some of its products (i.e. computers) is likely as it would have immediate positive effects for consumers.
In the distribution side, households have been subsidized by a mix of low prices by distribution companies and government subsidies. Subsidies have resulted in a higher electricity demand and will probably be diminished to both reduce that demand and save the government some cash. The low prices charged by distribution companies would also come up since there is no two tier system and investment in the sector is much needed, but will probably not be priority in the short term with rate hikes already in place.
In summary, sector policy will probably change, but those who expect an immediate change of all government policy are minimizing the short term effects of such reforms. We expect a normalization of the FX market, little changes to taxes and a reduction of subsidies but not a total "normalization" of tariffs.
Conclusion
Irecommend investments in
- Sovereign Fixed Income
- Large land plots
- Large Block Real Estate (i.e. Shopping Malls)
- "New" Energy Generation; very opportunistically old
- Exporters, though not soybean farms: food, software, mining, bpo
Pampa ADR Stock Price (US$)
The government has also kept the regulated prices of some sectors, like energy generation and distribution, below market prices. In generation, this has come coupled with a two-tier system whereas "new" energy (not clean, just new) is rewarded with a higher rate than "old" energy. The government pays old energy just the marginal cost to guarantee continuing production while promising new projects higher rates to justify the initial investment. Rates for new energy are higher than they would be in a one tier country and vice-versa. Given Argentina´s need for an increase in electrical generation investment, new energy prices will probably remain in place, but the unification of the market would be costly for the government without much short and medium term benefit, but that of the symbolical value of a "normalization". 
In the distribution side, households have been subsidized by a mix of low prices by distribution companies and government subsidies. Subsidies have resulted in a higher electricity demand and will probably be diminished to both reduce that demand and save the government some cash. The low prices charged by distribution companies would also come up since there is no two tier system and investment in the sector is much needed, but will probably not be priority in the short term with rate hikes already in place.
In summary, sector policy will probably change, but those who expect an immediate change of all government policy are minimizing the short term effects of such reforms. We expect a normalization of the FX market, little changes to taxes and a reduction of subsidies but not a total "normalization" of tariffs.
Conclusion
Irecommend investments in
- Sovereign Fixed Income
- Large land plots
- Large Block Real Estate (i.e. Shopping Malls)
- "New" Energy Generation; very opportunistically old
- Exporters, though not soybean farms: food, software, mining, bpo
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