Telefónica bets heavily on Argentine economic recovery

7 Nov 2003

Spanish incumbent Telefónica has acted on reports of an economic recovery in Argentina with the announcement of plans to invest ARS2 billion (USD701.3 million) in expanding and upgrading Telefónica de Argentina’s fixed line and mobile services in the country. The investment, to be spread over four years, is one of the largest to be pledged in the country this year and comes on the back of increasingly optimistic forecasts that Argentina is finally recovering after years of recession, with the economy expected to grow by 7% this year. Telefónica’s announcement follows last month’s news that its rival Telecom Argentina is set to gain ARS1.15 billion in investment from its principal backers Telecom Italia and France Télécom to expand services at the group’s cellco Telecom Personal.

Between May 1990 and November 1999 Telefónica de Argentina was the sole fixed line operator in the south of the country, and it remains the largest operator in terms of subscribers, with more than 4.22 million lines in service at the end of June 2003. Telefónica completed the digitalisation of its networks in mid-1998 and today operates a 17,000km fibre-optic network which includes 19 metropolitan rings and 30 switches in Buenos Aires. 12,000km of its fibre-optic backbone is in the south of the country, with the remainder having been installed in the north since November 1999, the date from which it was allowed to begin operating in the franchise area previously belonging to Telecom Argentina. ADSL services were launched in November 2000 under the banner Speedy, offering speeds of up to 256kbps, and by mid-2003 the company claimed 45,600 ADSL customers. Telefónica’s Argentine mobile operator, Telefónica Comunicaciones Personales (TCP), operates a nationwide service under the brand name Unifón. At mid-2003 it had an active customer base of 1.6 million, making it the country’s second largest cellco behind Telecom Personal.

Telefónica’s planned investment includes ARS900 million to install a million fixed lines, 50,000 public telephones and boost internet access by as much as 70%. A further ARS700 million will be used to upgrade and expand its cellular networks, with the eventual aim of expanding TCP’s customer base to 15 million, close to half of the total population. In a statement Telefónica Chairman Caesar Alierta said that, ‘the Argentine economy is beginning to show strong signs of recovery. It is good news for Telefónica because we are firmly tied to Argentina’s destiny and we will continue to be so’.

Argentina’s economic woes can be traced back to 1991 when the country’s government opted to peg the peso to the US dollar in a bid to restore confidence in its then ailing economy and combat hyperinflation. At the time the strategy worked well – Argentina was soon credited with having one of the healthiest economies in the region – but it soon became obvious to economic observers that by linking the peso to the dollar Argentina had adopted a currency whose exchange rate bore little relation to its own economic conditions. When in 1999 the Brazilian real plummeted, the peso was unable to follow suit, leaving Argentina’s exports vastly more expensive than those of its neighbour. A decline in world prices for farm products and the global economic slowdown worsened its problems. Fewer exports meant the country had limited ability to earn the foreign currency needed to repay dollar denominated debts. In January 2002 the decision was made to devalue the peso by 30% and the following month the currency was allowed to float freely. By mid-2002 the financial system was close to collapse and the government was reportedly spending USD60 million a day to support the peso.

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