Foreign investment rebounds as Argentina looks to enhance productivity

In the 15 years preceding President Mauricio Macri’s election in 2015, Argentina progressively distanced itself from global supply chains through the implementation of protectionist measures aimed at aligning economic policies with the government’s political agenda.

According to the World Bank, Argentina’s export to GDP ratio has continued on a downward trend since registering a high of 28.3% in 2002 to hit 12.7% in 2016. During this period, taxes on exports, import control and strong state interference in company processes reduced the competitiveness of key industries, while restricting the growth of less competitive ones. While levels of investment remained relatively static, this was achieved largely through artificial means, by imposing capital controls, for example.

After going through a period of recession in 2016, epitomised by a sharp drop in both trade and investment, the new administration’s market-friendly policies have begun to show positive results, with investment returning to 2015 levels, despite the liberalisation of capital controls. While stronger economic growth has seen imports increase, exports have not risen at a commensurate rate, widening the trade deficit. In this context, improving the country’s global competitiveness in exports remains one of the key challenges for the current administration.

Looking Ahead

In late 2016 the government enacted an overarching policy aimed at bolstering the country’s productivity. The National Productivity Plan (Plan Productivo Nacional) comprises eight pillars, ranging from improving the country’s infrastructure and human capital, to the debureaucratisation of processes and reintegration of Argentina in the global economy. “The national decree will have strong impacts on the country’s business environment,” Francisco Uranga, executive vice-president at the Argentine Investment and Trade Promotion Agency, told OBG. “The government is looking to tackle structural bottlenecks and address significant obstacles to economic development related to areas such as administrative procedures, fiscal pressures and competition.”

The government has also initiated discussions with a number of labour unions. By the end of 2017 seven partnerships had been signed between companies, labour unions and the government based on private sector engagement and labour productivity. The strength of labour unions in Argentina has often been a source of dispute and viewed by some as a deterrent to investment. The new partnerships, however, have already spurred investment across a variety of projects in the first half of 2018, including oil and gas extraction in Vaca Muerta – with two sites in production at the world’s fourth largest shale oil reserve – and the development of renewable energy in the north of the country, including three solar and six wind projects, according to international media sources.

Investment

Investment in the country has, however, been inconsistent in recent years. According to figures from the UN Conference on Trade and Development (UNCTAD), foreign direct investment (FDI) went from highs of $15.3bn in 2012 to $5bn in 2014, and back up to $11.76bn in 2015. In 2016, the administration’s first year in office, FDI dropped 51%, or $5.75bn, on the previous year, the sharpest drop in FDI since the default of the country’s economy in 2001. This was primarily due to the normalisation of fund transfers, which resulted in a certain amount of capital flight, albeit to a lesser extent than was expected. The latest figures from the Central Bank of Argentina show that the biggest source of FDI in 2016 was the US, with 23%, followed by Spain (18%), the Netherlands (12%) and Brazil (6%), with the largest recipients of investment by sector being manufacturing, with 35%, mining and oil (22.3%), and retail (7.6%).

Following the drop recorded in 2016, FDI increased 264% in 2017 to $11.86bn, according to figures from the Argentine National Statistics and Census Institute (Instituto Nacional de Estadística y Censos, INDEC).

According to the Argentine Agency of Investment and International Trade, which monitors investment announcements by companies based in the country, between end-2015 and August 2018, a total of 674 companies announced $115bn worth of investments, across 925 projects. The sector that accounted for the largest share of these in terms of value of investment was the oil and gas sector, with 43.16%, followed by mining (8.4%), energy and utilities (8.1%), and ICT (7.6%). Investment outflows, meanwhile, declined from $1.79bn in 2016 to $1.17bn in 2017, a 35% decrease.

Regional Integration

Since its creation in 1991, South American trading bloc Mercosur has progressively lifted almost all non-tariff restrictions for trade amongst its members, and the establishment of the common external tariff has standardised import tariffs across the bloc. In 2017 trade between Argentina and Mercosur countries accounted for 25% of Argentina’s trade. This amounted to $11.91bn in exports to the bloc and $19.62bn in imports, according to state figures. As of 2017 the country’s single largest trading partner in the region was Brazil, with the total volume of trade between the two countries reaching $27.3bn, and Argentine exports accounting for 16% of the total.

While the bloc has faced challenges in recent years – with Argentina and Brazil maintaining a protectionist stance, and Uruguay and Paraguay seeking to open themselves to global trade – negotiations on a number of matters have resumed, including those concerning a free-trade deal with the EU, which had been frozen since the election of US President Donald Trump in 2016. Moreover, after identifying 78 internal hurdles to trade among members, the countries in the bloc have successfully lifted 57 of them, including an Argentine import ban on Brazilian beef, Aloysio Nunes Ferreira, foreign minister of Brazil, told local media in late 2017.

Although Argentina has a trade deficit with Brazil, it possesses positive trade balances with other Mercosur member states including Uruguay and Paraguay, as well as Chile, Colombia, Peru.

Imports & Exports

In 2017 the value of exported goods excluding services was $58.4bn, up 0.9% on the previous year, according to December 2017 data from INDEC. Exports of fuel and energy products increased by 18.8% in 2017 and industrial manufacturing products rose 11.2%, while, primary goods and agricultural products were among the weaker performers, with exports experiencing declines of 5.6% and 3.6%, respectively, over the same period. According to product category, agro-industrial goods made up 38.5% of total exports, followed by industrial products (32%), primary goods (25.4%), and fuel and energy products (4.1%). In 2017 Argentine exports grew 0.9%, while those of Brazil, Peru, Chile, Colombia, Ecuador, Uruguay and Bolivia, all posted double digit growth rates, according to figures from the Inter-American Development Bank. However, as of the first quarter 2018 real exports were up 11% year-on-year, showing signs of potential recovery.

By contrast, imports grew by 19.7% in 2017, registering $66.9m in value, with strong gains from passenger vehicles and capital goods, increasing by 40.9% and 23%, respectively. Argentina’s imports were made up of intermediate goods (26.7%), capital goods (22.3%), parts and accessories for capital goods (19.3%), consumer goods (13.4%), passenger vehicles (9.4%), fuels and lubricants (8.5%), and other (0.4%), according to INDEC.

Outlook

Despite facing a number of challenges such as a high inflation rate, strong fiscal pressure and high operational costs, Argentina’s economy still provides strong fundamentals to continue the upward momentum achieved in trade and investment in 2017.

The country’s large internal market, availability of natural resources, agriculture and agro-industrial potential, and strong human capital – combined with market friendly policies and reforms at the administrative level – should provide the necessary impetus to reopen trade to the rest of the world. Meanwhile, the relative success of several reforms with strong social implications have entrenched investor confidence in the government’s ability to implement legislation.