From basket case to FDI hotspot? Argentina's revival under Macri

A marble inscription referencing the “blossoming economy” praised by Argentina’s former president Cristina Kirchner hangs at the entrance of Buenos Aires’ former central post office. Designed to celebrate the economic legacy of the 12 years of Kirchner tenure (the late Néstor Kirchner between 2003 and 2007, then his wife Cristina for the following eight years), the dedication drew little attention from the foreign investors passing through the doors to attend an investment forum in September.

In fact, they were in town to see current president Mauricio Macri turn the page on the Kirchners’ contentious “blossoming economy” once and for all.

Marking a new phase

Setting the tone of the forum, Mr Macri told the audience of 1900 attendees representing almost 1000 companies from 67 countries: “You are in the right place at the perfect time. Your presence reiterates the trust in the new phase we have inaugurated.”

Since taking office in December 2015, the president has devoted himself to reversing the stifling economic policies typical of Ms Kirchner’s years, which used to deter many of the same investors at the Buenos Aires forum. Additionally, he has mended fences with the international financial community, agreeing a deal with the last holders of the bonds Argentina defaulted on in 2001.

By doing so, Mr Macri has managed to bring in new investment after years of decline. However, things in Argentina are still tricky. Inflation remains very high and the economy is in recession. The government has pledged that matters will improve from 2017 onwards. Investors have so far believed this, putting some trust in Mr Macri after his first, bold measures in office – but his margin of error remains slim.

“This is the last chance for Argentina,” says Norberto Spangaro, vice-president of the Argentine-American Chamber of Commerce in Florida.

Investment crucial

After years of relative isolation, Mr Macri’s political and economic success hinges on that “rain” of foreign investment he repeatedly promised in his electoral campaign. Despite its vast wealth of natural resources, the country missed out on the commodity boom that, albeit temporarily, made the fortunes of neighbours such as Chile and Brazil. Argentina made up 24% of South America’s total stock of FDI in 2001, according to figures from Unctad. This had dropped to 8% in 2015, and today the country critically needs foreign investment to upgrade its infrastructure and industry, rebuild its foreign reserves and sustain economic growth.

“We have investment opportunities across the sectors for $150bn,” says Juan Procaccini, president of the newly established national Investment and Trade Promotion Agency. “We are calling out to the world: Argentina is open for business.”

According to data from greenfield investment monitor fDi Markets, FDI figures are already showing a shift of momentum. The amount of greenfield FDI announced in the first nine months of 2016 surpassed $4.1bn, more than the full-year totals for 2015 and 2014, and ended a downward trend that began in 2011.

Hopeful signs

There should be more to come. General Electric said in October that it will invest $10bn in Argentina over the coming decade, with a focus on energy infrastructure. Shortly before that, Siemens said it would help to generate investment and provide financing for $5.6bn in infrastructure projects in the country. Added to these is another $23bn of possible investments from 130 foreign companies that the Investment and Trade Promotion Agency has identified since it was established in February.

However, local economist Miguel Angel Broda says: “It’s the right time to invest, but investors shouldn’t fall in love with Argentina. They should still keep an eye on how pending issues such as institutional reforms and macroeconomic stabilisation are carried out.”

After 2001’s disastrous debt default, the Kirchners managed to reignite Argentina's economic cycle, but this came at the cost of running high fiscal deficits and double-digit inflation rates, as well as introducing heavy regulation to prevent capital flight.

Once elected, Mr Macri’s liberal Cambiemos ('Let’s Change') coalition put an end to such policies. It scrapped most capital restrictions and export duties, floated the exchange rate, cut unsustainable subsidies and settled the last claims from the 2001 default, thus regaining access to the international bond markets.

Although warmly welcomed by the international community, these measures further weakened the country’s economic cycle. Annual inflation rose to 43.5% in August because of tariff hikes and the peso devaluation, and the country's economy is now expected to shrink by 1.4% in full 2016. However, the government considers this to be a natural downturn in the path to economic recovery and expects growth to resume and inflation to fall in 2017.

“Argentina is a country that comes from 70 years of decay,” says Mr Broda. “We were the world’s eighth largest GDP per capita 100 years ago, now we are the 70th. Mr Macri gave the impression that he can be a point of inflexion in this story. There are all the conditions to get the economy out of recession. There won’t be miracles, but it’s likely going to grow at about 3% to 3.5% in 2017, with an annual inflation rate of about 20%.”

Call for guarantees

Despite the overall improvement in Argentina's business climate, Mr Macri cannot shrug off the country’s past economic and political performance overnight. There may be investment opportunities, but investors are asking for solid guarantees to shield their interests from the kind of sudden political turnaround that Argentina has become infamous for in the past few decades.

“Conditions are getting better, we are willing to invest but there are a lot of risks for Chinese companies. It would be of help if there was a sovereign guarantee on our investments,” says Roy Wang, business development manager at Beijing-based engineering company Jereh.

The government is addressing these concerns by adding elements of sovereign and external guarantees to some of the contracts it is proposing to foreign investors. A recent tender for the development of renewable energy drew bids for six times the original 1000 megawatts of offered installed capacity thanks to a 20-year dollar-denominated power purchase agreement and a multilayer structure of guarantees tracing back all the way to the World Bank, which guarantees the investment in US dollars should local institutions fail to honour their contractual duties.

“Those levels of guarantee are necessary because Argentina is still perceived as a country with high risk,” says Daniel Redondo, Argentina's energy planning secretary. “However, we hope that in the future the country’s risk decreases and those levels of guarantee won’t be necessary any more.”

Eye on the mid-terms

In a highly polarised country such as Argentina, the success of Mr Macri’s efforts to lure back investors will depend on his continuing in power. From this perspective, many of the government’s domestic policies are designed to create momentum for the 'Let’s Change' coalition in the 2017 mid-term elections.

Since Argentina’s military dictatorship ended in 1983, mid-term elections have always anticipated the results of the following round of presidential elections. Should Let’s Change win the mid-terms, the case for a second term by Mr Macri and a general continuity of his policies would be stronger than ever.

Even then, the president will still have to deal with the phantoms of the country’s past, particularly those of the Kirchner years. Their memory has been crystallised in the many monuments dedicated to Néstor Kirchner across the country. The same office building that hosted the investment forum was renamed Néstor Kirchner Cultural Centre after a 10-year restructuring. Now, Mr Macri is on a quest to dispel these phantoms, and revive the country’s international standing.