South America has been a special part of my life for four decades. I have lived many years in Brasil and Peru. I am married to an incredible lady from Argentina. I want to share South America with you.
Whether it was their attempts to impound the presidential jet, the alleged harassment of her daughter or just the accusations of embezzlement and money-laundering, there is no question that Cristina Fernández de Kirchner developed a special kind of loathing for what she called “vulture funds”.
So it was no surprise that Argentina’s former president should have been so disparaging of the new government’s success in ending an agonising legal dispute with US hedge funds. The hedge funds had sought repayment on bonds in default since 2001, which did more than perhaps any other single issue to destroy Argentina’s reputation among foreign investors.
“They thought it would rain dollars after that agreement,” a scoffing Fernández told foreign journalists in July, poking fun at Mauricio Macri’s rosy forecasts during the 2015 presidential campaign that the floodgates of foreign investment would burst open were he to win.
Certainly, the deal with the “holdout” bondholders was an essential part of the “normalisation” of Argentina’s economy so important for luring back investors. Currency and trade controls were also swiftly removed, and steps were taken to strengthen transparency, institutions and political dialogue in a bid to regain business confidence. The market responded with enthusiasm — bankers soon filled up flights to Buenos Aires and booked rooms at the city’s smartest hotels.
Even so, some argue that the pace and magnitude of investment have been disappointing. There has been only a limited impact so far on the economy, which is expected to contract in 2016. A slow recovery could become a problem for the government if its supporters begin to lose patience as an austerity drive bites harder.
“Dollars aren’t just going to fall from the sky. You have to do a lot of work,” says Mario Blejer, a former central bank governor who advised Daniel Scioli, Fernández’s chosen successor in last year’s elections. Nevertheless, he is “optimistic” that “definitely quite a lot of foreign investment” is heading Argentina’s way — especially, he says, if that includes as much as $400bn that Argentines have stashed in foreign bank accounts. Much of that is now expected to return to the country after congress approved a tax moratorium in June.
“The opportunity [to invest] is there,” says Blejer, emphasising that after an investment drought of more than a decade there is a significant need for it. “There are signals that already some investment is coming in, but although there is quite a lot of renewal of old or obsolete capital stock, the point is that there is no new investment in big quantities.”
Juan Procaccini, who leads the government’s newly created investment promotion agency, says many companies are still waiting to see “more control” over the economy, as the government battles to extinguish stubbornly high inflation at the same time as reactivating economic growth. “But others know [these problems] will be fixed [and therefore are investing already], especially those who are already here and know Argentina has changed,” he says.
“This is moving very fast,” Procaccini continues, arguing that Argentina boasts the “perfect mix” of a new political cycle with a pro-investment government, diverse opportunities and a region where there is no major conflict. “Argentina was totally out of the equation for the last 10 years,” he says, adding that the country needs $25bn of investment a year just to “catch up” with levels in the rest of the region. While foreign direct investment in Latin America in the period since 2008 is about 4.5 times that in the 1990s, in Argentina it has remained largely flat, its share of total regional FDI plummeting drastically.
Procaccini has identified more than $170bn worth of projects where the government is looking for investment across a range of sectors, including $75bn in infrastructure, with roads, railways and sewage systems the highest priorities. A further $75bn has been earmarked for energy and mining, especially in renewable energy and Argentina’s vast shale and lithium resources. Agribusiness is another source of high hope.
Since Macri took power, a variety of companies have announced some $30bn in investments. They include carmakers such as Toyota, Renault-Nissan, GM and Fiat; energy companies ExxonMobil, Dow and Axion; miners First Quantum; Coca-Cola, Unilever and Procter & Gamble in the consumer goods sector; and financial services companies Santander, PwC and Accenture. However, in the first half of 2016 only $1.3bn entered the economy in the form of FDI, according to central bank figures.
There is “enormous enthusiasm” about Argentina abroad, says Jorge Familiar, vice-president for Latin America and the Caribbean at the World Bank. “We are very impressed by Argentina’s efforts. We want to accompany the country in this important moment,” says Familiar, who in July announced new investments in Argentina of $845m.
I don’t think the boom many imagine is going to happen this year or even next year
But many local companies, whose memories of Argentina’s past economic debacles are fresh, are circumspect about plunging money into the historically volatile economy. “Investment is going to be slower from the inside than from the outside,” admits one government official, who criticises local businesses as too slow to seize the opportunity: “Foreigners will get the first-mover advantage.”
Joaquin Cottani, chief Latin America economist at rating agency Standard & Poor’s, identifies two particular areas of concern among investors: the fiscal deficit — long the bane of Argentina’s economy — and the exchange rate. Despite the devaluation after currency controls were removed in December, the peso has already lost competitiveness thanks to high inflation. “The exchange rate is still perhaps too strong to attract investment in many sectors, and the fiscal situation is not good,” says Cottani. “Those two things are working against the boom in investment that people anticipated when the new government was elected.”
“So far we’ve only seen a ‘rain of dollars’ to finance the deficit of the government itself, and that’s because Argentina has been absent from international markets for so long, with all this pent-up demand from investors looking for returns,” adds Cottani. Indeed, between the national government, provinces and companies, Argentina issued $24bn in the first half of 2016, accounting for about a fifth of all emerging market debt issuance.
The government is also expecting an influx of as much as $30bn when the tax amnesty starts to trigger the repatriation of Argentines’ funds abroad. The success of the whitewash could improve investment, but it will also present a challenge for the central bank, which has been struggling with flows of “hot money” as investors seek to take advantage of high domestic interest rates. “It’s not a lack of dollars that is the problem. Paradoxically, we have an excess of dollars,” says an official at the central bank, which under the new administration is focusing on tackling inflation, rather then seeking to control the exchange rate too.
But Cottani, an Argentine who says he “optimistic” about Argentina’s prospects for attracting investment, argues that most businesses will wait on the sidelines to see what happens this year and what the outlook is for important midterm elections next year. “I don’t think the boom that many imagine is going to happen this year or even next year,” he says.
Emilio Ilac, chief executive of Puente, an investment bank in Buenos Aires, says Argentina is “already the star emerging market”. He is convinced it will keep that status for the remainder of Macri’s term. His bank has been inundated by “hundreds” of funds seeking advice, many of which have never invested in the country that had been demoted to a “frontier market” during the Kirchner years. “When something is too good to be true it usually is — but this is Argentina,” he says.