It has been just over a year since Argentina was able to return to global capital markets following 15 years of exclusion. The resolution was quicker than expected and well received by markets; significantly, the state’s private and public sectors embraced the new opportunities offered by global investors from the moment the announcement was made.
Today, the fruits of such a meaningful structural change are gradually starting to emerge. However, there is still so much more to come, particularly as regaining access to financing translates into a variety of investment projects across an array of sectors that are currently in great demand.
The true cost of 15 years of financial exclusion was deeply marked on all aspects of the Argentinian economy. The central government, which had been engaged in a long-standing dispute with a group of holdouts from its 2001 sovereign debt default, was simply unable to issue debt in global markets, given the numerous attachment risks involved. This kept the level of country risk high, making funding for the private and public sectors very limited and expensive. Even multilateral lending was limited against this backdrop, as Argentina was classed as a risky debtor.
Capital expenditure
During Argentina’s 15-year absence from global debt markets, limited resources were available to fund gross fixed capital formation. Confidence was low and investment was inhibited. Consequently, inflation grew, as fiscal needs had to be increasingly met by the central bank through monetary printing. This caused Argentina’s exchange rate depreciation to accelerate, which the government attempted to curb with market intervention on numerous occasions – but to little avail.
Argentina’s sharp drain in international reserves led the government to impose restrictions on imports and capital outflows in a bid to contain the devaluation of the country’s exchange rate. This meant GDP did not grow in the five years prior to regaining access to capital markets. Indeed, by 2016, real per capita GDP had fallen by six percent since 2011, the year in which capital controls were fully fledged.
70%
of Argentine infrastructure plans are intended to develop transportation links
$550bn
The size of the Argentine economy
$116bn
Value of assets declared in the 2016 tax amnesty
Fortunately, the picture today is very different. The central government is an active participant in debt markets in the US and Europe, as well as locally. It has also set fiscal targets to reduce its funding needs in the coming three years.
Significantly, the government has engaged in an aggressive public works programme, which roughly duplicates known capital expenditures. More than 70 percent of the infrastructure plans are intended to develop and improve transportation and roadways, especially around the largest manufacturing centres, which will significantly improve productivity and therefore competitiveness.
Multilateral agencies have increased the funding available to Argentina, while local governments have followed suit by showing active participation in markets, seeking funding in most cases for capital expenditures. In fact, the largest provinces are currently seeking to triplicate the money spent on public works. It is important to note that, in this changing landscape, companies have not fallen behind, having issued more than $10bn of debt already.
In all cases, financial markets have signalled confidence in the country and have generally supported debt issuances from all participants and currencies with great enthusiasm.
Investing in Argentina
Today, Argentina’s inflation rate is on the road towards deceleration. The exchange is a free float, and the country is much more open to international trade than it has been in many years. Furthermore, at the end of 2016, Argentines participated enormously in a tax amnesty that resulted in the declaration of $116bn in assets – a historic success and a potential game changer for the $550bn economy.
Argentina has become a huge opportunity for global investors seeking to do business. Though macroeconomic and political conditions have deeply improved, opportunities in the real sector are still in their early stages. The public sector is casting the first stone to kick-start production, and began to recover in the last quarter of 2016 (albeit slowly), suggesting that a much more active role from the private sector can be expected in the years to come. Undeniably, 2016 was just the beginning of a new era for the Argentinian economy.
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