Volatility Exposure: Argentina’s Business Leaders Point to Areas in Need of Reform

In Spanish

With the Argentine peso in free fall, the beginning of May was a tumultuous time for the country. Even though the central bank continued to sell its reserves and raise interest rates, the depreciation of the currency appeared unstoppable.

President Mauricio Macri has since entered into negotiations, with the IMF to open a line of credit worth $30bn, which should help to alleviate the crisis. Meanwhile, Christine Lagarde, managing director of the IMF, has expressed her “firm support” for the government’s planned economic reforms.

Regardless of how unstable the Argentine peso is at the moment, the country remains determined to lower inflation as well as promote consumption and investment. However, given the negligence of past governments, which has left the currency fragile and the economy overexposed, these goals will take time to reach.

According to our first Oxford Business Group Business Barometer: Argentina CEO Survey, conducted between November 2017 and May 2018, the local business community realises that the country has only just begun to embark on this undertaking.

Areas for improvement at the local level

Our survey found that the business community remains aware of the less-competitive aspects of the local operating environment. For instance, of the more than 150 interviewees, 96% consider the current tax environment to be either uncompetitive or very uncompetitive on a global scale.

Satisfaction with local suppliers, which is another interesting way to measure the competitiveness of a business environment and the quality of its supply chains, was notably divided. While 34% of respondents rate their satisfaction as high, another 33% rate it as low, indicating that more needs to be done to bring local supply
chains up to standard.

Upskilling the workforce could help to improve some aspects of the local supply chain, though interestingly the business community is most focused on harder skills in the realms of science and technology. CEOs identified engineering (43%) as the skill in greatest need in the local labour market, followed by computer technology
(26%) and leadership (12%). This result stands in contrast to that observed in many other emerging markets OBG covers, where leadership typically ranks first.

As Argentina looks to increase productivity by further developing local supply chains and improving its workforce, access to the capital needed to finance these changes will be paramount. Here, too, our survey suggests room for improvement, with 59% of respondents considering it difficult or very difficult to access credit. For this to change, however, the country must first find the mechanisms to maintain monetary stability.

New trade ties to provide greater protection from external influences In addition to these internal improvements, Argentina’s economy could benefit from further insulation from external shocks. Some 40% of respondents cited low commodity prices as the top external event that could impact the local economy in the short to medium term, while 21% pointed to the impact of Brazil and 18% cited US interest rates. As it stands, any of the three could significantly impact the local market. This is particularly true of the latter, given the ongoing affect of US interest rates on the value of the peso.

None of these results are particularly surprisingly given Argentina’s trade profile: soybeans, corn and wheat together account for nearly one-third of the country’s exports, and Brazil and the US rank as its top export markets, receiving $9bn and $4.4bn, respectively, worth of goods in 2016.

Facilitating regional trade through market integration could allow Argentina to secure more varied trade flows, thereby helping it to mitigate some of these external volatilities.

Aware of this, President Macri and his Chilean counterpart, Sebastián Piñera, have been promoting a rapprochement between the trade bloc Mercosur (made up of Argentina, Brazil, Paraguay and Uruguay) and the Pacific Alliance formed by Mexico, Chile, Colombia and Peru.

Such an alliance would promote regional trade and build a foundation for Latin America to one day become a single trade bloc. Given the protectionist stance of the administration of Donald Trump in the US, boosting trade with the Pacific region is increasingly important for Latin American nations. Unsurprisingly, as many as 90% of respondents say it is important or very important for Argentina to boost market integration in the region, and President Macri does appear to be making progress on this front.

This – along with shorter-term measures to urgently restore macroeconomic and fiscal stability – could offer a policy route to help maintain the optimism expressed by CEOs in the months leading up to the peso’s decline, when 80% of those surveyed described their companies as likely or very likely to make a significant capital
investment in the year ahead.