Argentina’s economic future is reborn
Argentina at one time was the poster child for foreign direct investment in Latin America. This came to an end after periods of political, economic and social upheaval left Argentina troubled, however, for example with a populist regime in the past decade that intervened in all sectors of the economy, especially imposing huge protectionist taxes on imports and exports. Following the election of President Mauricio Macri’s new government in November 2015, much of that has begun to shift, and Argentina is once again opening for business and with that its economic future is reborn.
President Macri started his term with important changes, including the devaluation and managed float of the peso, the removal of many of the restrictions on the acquisition and movement of foreign currency, efforts to make it possible for a greater number of imports to enter the country without the need for import licences and the removal or reduction of taxes on agricultural exports.
Looking ahead, Argentina has plenty of opportunities for companies and investors. Sectors of importance include mining, oil and gas, renewable and nuclear energy, infrastructure and agricultural technology.
Below we have provided an overview of some the opportunities that exist:
Regardless of low international prices, development of hydrocarbons is still considered a great opportunity for the economy since Argentina has one of the mail shale oil and shale gas reservoirs in the world. The discovery of Vaca Muerta and the partnerships between YPF and foreign companies further improve the ground for the development of the sector.
On March 11th, 2016, the energy minister said the exporters of heavy crude form Argentina will receive USD$7.50 per barrel subsidy from the government as long as the international prices remain under $47.50 per barrel.
Exxon Mobil recently announced it could put upwards of $10 billion behind efforts over the next few decades to extract shale gas from Argentina’s Vaca Muerta region.
Exxon’s plans, as described by Chief Executive Rex Tillerson and reported by Bloomberg, have included a $200 million investment in the region and will include $250 million more “in coming months” for a pilot project. The remaining billions would come if the pilot program works out.
Agribusiness is considered a critical engine for the country and to ensure the rebound of this sector, the Government eliminated the export taxes on all agricultural, cattle, fishery and industrial products, with the exception of soybeans, whose tax was reduced by 5 p.p. Therefore, export taxes for soybeans are now set at 30%, and taxes for soybeans derivatives at 27%. In this context, wheat will be one of producers’ larger bets. Historically, wheat was seen as the crop to turn into cash at the end of the year.
In addition, Argentina is currently not producing enough food to cover its future demand. It is projected by Argentina’s Ministry of Agriculture that Food production shall increase by 70% in 2050 to attend demand. 80% percent of the necessary production increases would come from productivity increases and only 20% from expansion of arable land.
To take advantage of the need for higher productivity, input companies, distributors, and logistics enterprises can expand into new geographies as well as provide a wider range of products and services (for example, high-yield seeds, fertiliser, and resource-optimization techniques) to help farmers increase crop yields. Offering innovative technologies (for example, seeds requiring less water for similar yields) is important, but so is their distribution in emerging markets.
Argentine President Mauricio Macri recently unveiled RenovAr, a national program to help the country reach its mandated goal of a 20% renewable-powered grid by 2025.
System operator Cammesa will oversee the tender, which aims to award 600MW of wind, 300MW solar, 65MW biomass, 20MW small hydropower and 15MW biogas capacity, and attract US$2bn in investment.
Power purchase agreements (PPAs) will have a term of no more than 20 years. Cammesa, representing electric utilities and large consumers, will be the official off-taker.
Reviving infrastructure projects is a key part of Argentina’s efforts to boost its economy. Several major projects have already been re-launched, and news of more projects are expected in the coming months.
The infrastructure sector also opens up suitable opportunities. This industry presents two lanes: on the one hand, long-term projects, on the other, projects to solve bottle necks such as rural roads, bridges or high lanes connecting regional countries, that is, short-term projects that offer fast and high return rates.
Freight in Argentina will grow 40% over the next 10 years, from 430 million tons currently to about 600 million tons, according to estimates outlined by the national government’s transport secretary, Guillermo Krantzer, in a meeting with transport operators earlier this year.
To address this growth, the government plans to build 2,800km of divided highways in the next four years, under a 12-year plan in which another 4,000km of roads will be added and all national routes will be widened to 7.3 meters and modified to increase turning space. The road expansion program will require investment of around US$13 billion, half of which will go to construction of divided highways.
Foreign investment is undoubtedly a very important factor in the government’s economic strategy. And the role of private capital is key to that strategy.
With proposals focusing on rebuilding a good business climate in Argentina, the government has managed to attract the interest and sympathy of investors and business people in Argentina and abroad. But it faces a delicate task ahead to rebuild a climate of long-term confidence, which is critical to attract investment. As Roberto Chama says, Argentina is a secure country to do business, but it is not secure from a legal perspective.
Macri and his team now have the opportunity to change this. It won’t be done overnight, but infrastructure investments will certainly play a key role.
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