Is the Argentine Economy Business-Friendly?
April 4, 2013
Last Friday, the Argentine government refused to follow a court order to put forth a proposal outlining how it would pay off $1.4 billion to remaining bondholders from its default more than a decade ago. Despite today’s positive reports that the Argentine government may reach a deal to pay holdout creditors, the issue highlights one of many relating to Argentina’s economic environment.
Most recently, the decision of Vale, the Brazilian mining company, to walk away from an $11 billion potash project in Argentina (initially estimated to be a $6billion investment), citing rapidly rising costs and a poor business environment, emphasizing particularly the Argentine government’s increasingly restrictive foreign exchange controls is evidence of things to come. In fact, reports show Brazilian investments in Argentine subsidiaries totaled $336 million in the first nine months of 2012, a steep decline of 61 percent from the same period in 2011. This bodes poorly for Argentina’s economy especially given that Brazil is Argentina’s biggest regional investor.
Q1: What is holding back investment in Argentina’s economy?
A1: One can take their pick in looking at what is hindering investment in Argentina’s economy. Increasingly restrictive foreign exchange controls are one factor. In 2012, government restrictions sought to force mining companies operating in Argentina to repatriate export revenue.
More recently, the government increased its tax on foreign purchases made by credit or debit cards to 20 percent and broadened the tax to include international flight tickets and payment of foreign services. While done in the name of slowing capital flight, they are not exactly the type of measures companies swoon over when deciding where to invest.
One can also look at the consequences of state-sponsored subsidies focused on keeping energy cheap, which has hindered reinvestment in oil and natural gas exploration. This was a key factor in the government’s decision to expropriate the oil company Repsol-YPF. Since the expropriation, the government has been courting other international oil companies (IOCs) to jumpstart exploration of its potentially vast gas reserves in the supergiant shale oil field and shale gas field at Vaca Muerta in Neuquén province. Despite promises they would be treated differently, the IOCs have been reluctant to commit, citing the risks of doing business in Argentina.
Q2: What has been the effect of growing state intervention in the economy?
A2: While some of the Argentine government’s interventions helped the economy surge back following the its collapse in 2001-2002, it’s becoming increasingly clear that these policies are limiting current economic growth potential—growth dropped from 8.9 percent in 2011 to 2.6 percent in 2012.
Additionally, signs of popular discontent are continuing to grow. A third cacerolazo (banging on pots and pans as political protest) is being planned for April 18 and promises to bring thousands of protestors to the streets of Buenos Aires. Several rural organizations are holding meetings throughout the countryside to decide whether or not to sell their soy crops for export. With taxes at 35 percent on soybean exports, a decision to withhold exports could undermine the government’s finances.
Argentina’s economic profile is also a concern for the international community. Multilateral financial institutions are recognizing the Argentine government’s unwillingness to honor its debt to organizations such as the Paris Club, where Argentina has an outstanding debt of over $6.3 billion since 2001, not including interest and penalties. In a rare move the International Monetary Fund decided to censure Argentina for inaccurately reporting its inflation rate in February, which the government continues to insist stands at 11 percent, though most market experts place it around 20 percent. And some member countries of the G-20 have even called for restrictions on official lending and foreign aid to Argentina from places like the Inter-American Development Bank and the World Bank.
Q3: Will we see improved conditions in Argentina’s economy in the near future?
A3: Despite growing signs of frustration, few expect any significant changes to address the growing dysfunction of the Argentine economy with legislative elections taking place in October. But change will be needed, or maybe even forced, on Argentina by the international community whether before the election or after. But if the government were to provide a “friendlier” economic environment, it would likely see a boom of investments. Unfortunately, until political dogma is replaced by level-headed thinking, conditions for international investment are likely to stay the same or even worsen.
Carl Meacham is the director of the Americas Program at the Center for Strategic and International Studies (CSIS) in Washington, D.C. Michael Graybeal, program coordinator with the Americas Program at CSIS, provided research assistance.
Critical Questions is produced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).
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