Group Blog # 2
Buenos Aires Travel Blog› entry 5 of 6 › view all entries
Argentina is very open to foreign investors and direct foreign investment. Both have been earmarked as vital elements to the country’s economic growth strategy. Out of all of the countries in Latin America, Argentina fosters the best environment for investment. As the third largest economy in Latin America, the involvement of U.S. corporations opened this door by first entering the major economic sectors. Former President de la Rua had said he encouraged foreign investment through national treatment under a free foreign exchange and capital movement regime without wage or price controls. Foreign firms have also had a profound impact on the Argentine economy, especially following the privatization program initiative. The program first began to affect oil, gas, electric power, telecommunications, transport, water, and other major service sectors. “Foreign firms may also participate in publicly financed research and development programs on a national treatment basis.”
Outlined below are four facts available for those interested in investing capital in Argentina.
1. Foreign investors need not register in Argentina nor obtain permission to invest.
2. Complete foreign ownership of local companies is permitted.
3. Investment in shares on the local stock exchange requires no government approval.
4. Investors are free to enter Argentina through merger, acquisition, or joint venture.
(The Following are taken from an article written by Vladimir Gasic, all is directly taken from article)
There are 5 main areas to invest in Argentina: Mining Promotion Regime, Forestry, Software, Automotive, and Tourism. First of all, I will caution you that the Automotive market is not very favorable currently. Especially compared with the other markets, your investment will not make you much profit.
Mining in Argentina is more important than most people realize. This spot occupies 2nd place in the ranking of investment opportunities, according to the government. In Argentina, the estimated area for potential mining is 750,000 km2. Only ¼ of that has been used so far. Argentina has gold, copper, lead, zinc, natural borate, bentonite, clay, and ornamental stone deposits. The tax rate is lower that the average for the major Latin American mining nations, at 41%. It is significantly lower than the major Canadian and Australian mining regions.
Argentina has excellent land for foresting. It has the perfect soil types, climate, costs, and human resources. Like the mining situation, the land suitable for forestry is extremely under-used. Of the 20 million hectares available, only 5% are actually being used. One thing to note is that land suitable for forestry does not compete with other agricultural activities. If you are looking for a large return, this is the place to be. The land value is so low and the yield rate of tree growth is excellent.
The Software industry is a new adventure. The city of Cordoba is the prime place for this investment market. The Governor and Minister of Finance say that it has an excellent investment climate with strong tax and fiscal policies and strong human capital endowment. Cordoba’s tax system actually encourages investment, especially for small and medium-sized companies. Also, the area has an excellent educated workforce with numerous notable colleges and universities nearby.
After the economic crisis of 2001, Argentina has already exceeded expectations for recovery. Tourism is becoming inherently popular all over the country. Argentina is special because of its vastness; it has anything from the Andes Mountains, to big beautiful cities, to the southern Patagonicos with glaciers and marine animals. The culture is also rich and inviting to foreigners. The tango occupies a privileged place as a dance and singable music. Its language is also very unique, using determined customs and a characteristic philosophy that identifies ones who tango.
My personal recommendation, at this moment, is to buy land either for mining, forestry, or tourism. It is a safe investment because Brazil has become a massive agro-economic power in the past 10 years and Argentina is next.
As a disciplined real estate value buyer, I know Argentina is an excellent choice for land. It is very affordable, has good soils, and plentiful water. Argentina also has a relatively stable socio-political environment with low terrorist possibilities. In addition, Argentina has the potential to rise much higher and has already shown recent signs of growth with room for more. Argentina is the place to be for land investment!
For mining land investments, literally the whole country is open. Currently there are mining projects in 14 of the 24 provinces, spanning from the southern-most border, all along the western border, and to the northern-most border. There are almost 50 cities already invested in by other mining companies. This is a fast growing commodity, so buy soon!
As for forestry, Argentina has a very interesting situation. Of the 570 species of trees sold internationally, Argentina grows 370 of them but only exports about 12. There are 5 main provinces for forestry all in the northern part of the country.
Tourism is all over the country in all 24 provinces. Argentina is especially popular for active tourism including trekking, mountain-biking, mountaineering, white-water rafting, canoeing, hydro-speeding, rides in 4WD vehicles, hang-gliding, paragliding, cart-sailing, and windsurfing. Other areas include: ecotourism, traveling to uncontaminated natural areas for tours and direct contact with nature; rural tourism, staying in ranch houses and participating in daily farm chores; health tourism, enjoying Argentina’s health spas and resorts; fishing; skiing; golfing; and wine tours.
Investment in Argentina raised the gross domestic product (GDP) significantly from 2003-2004. During that time of over 50% growth, the Economic Ministry released reports stating how investment had begun to rescue the economy once again. In those reports by the Industry Department of the Economic Ministry, recorded data showed that during that same time span, investment had increased 86%. Following the colossal collapse of Argentina’s economy after the peso was “unpegged” from the dollar in 2001, these statistics appear to be very promising. In coincidence with a recent report from the Center of Studies for Production (CEP), Argentina’s percentage of investment at 19.2% has not only recovered, but is on par with the other leading economic countries in Latin America. The average is roughly 20%.
More recently, the GDP growth trend has begun to stabilize thus reaching what can be considered a more sustainable level of growth. This is a positive sign, with many analysts agreeing that if demand growth had continued, the potential exponential rise in inflation could stunt future growth potential. The growth for 2006 is projected to be at around 8-9%, very close to the high numbers from 2003-2005. An extended promotion of demand is damaging to the present and future economy when looked at from the inflation perspective with regard to a degeneration of progress. Forbes.com had these resounding words on the issue at hand, “The economy at present remains expansive given that current fiscal policy is expansive, and any rise in public spending (and fall in the surplus) translates into higher activity levels.”
Increased research on the before mentioned matter has unearthed five possible obstacles to further short and long term increases in GDP. They are as follows:
1. Rising Prices
2. Distortion of Relative Prices
3. Fiscal Panorama
4. Energy Production
5. Pending Reforms.
Rising Prices are directly in line with rising inflation. Caging the economic beast is essential and, even more so, crucial to influencing the continued development of GDP. Investors want to avoid sectors that involve price controls, as they are counterproductive for both investment and growth.
Distortion of relative prices involves government regulation of inflation with artificial controls. A recent negative-effect example is when the government attempted to curb the domestic beef prices by prohibiting beef exports in March of 2006. This, in turn, directly affected export revenues and could further affect growth if the controls are sustained. An alternative would be the initiative within the energy sector. In lieu of rising energy tariffs with respect to their damaging effect on the consumer price index, a consumption tax to finance investments would monitor the rise in consumer costs and will not be reflected in the before mentioned index.
Fiscal Panorama is relevant to the recorded rise in public spending. A downfall of the recent and subsequent rise in salaries and pensions is that they cannot be reversed if the economy starts to default. Former Economy Minister Roberto Lavagna has been cited as stating the need for the “creation of an anti-cyclical fund” and that “the surplus was falling when it should be rising.” The matter is more complicated than simple and involves how inflation is tied to debt payments and public spending.
Something worth mentioning about energy production is the level growth of electricity generation. Amidst the present period of extended GDP growth, the electricity system continues to operate at capacity but cannot seem to increase output. Expensive fuels and obsolete equipment has hampered the production progress while the instability of energy prices has stunted investment projects. A growing demand must, at some point, be supplemented by accompanied growth in this sector.
Pending Reforms that are associated with labor legislation have aroused interest over future growth. Businesses for the most part are against restructuring said labor contracts, saying that doing so will only increase costs beyond fiscal reach. These prospects are due to be addressed in the upcoming presidential elections.
In conclusion, Forbes.com states it’s choice for the top risks for investing in Argentina; “The principal obstacles include the distortion of relative prices, clear investment rules, doubts over energy supply and lack of progress in pending reforms.”
Argentina Mining, 2006 http://www.argentinamining.com/site/default.asp
Argentina Turismo http://www.turismo.gov.ar/eng/menu.htm
Encyclopedia of the Nations; Argentina, Forestry http://www.nationsencyclopedia.com/Americas/Argentina-FORESTRY.html
Investment Guide; Invest in Argentina; Investment Promotion Agency of Argentina, February 2006 www.inversiones.gov.ar/documentos/guide_inv2006.pdf
Argentina’s GDP Growth Can’t Last, Oxford Analytica http://www.forbes.com/business/2006/06/06/argentina-growth-economy-cx_0607oxford.html
IT Landscape in Argentina; Information Technology Financing http://www.american.edu/carmel/gg7870a/financing.htm
SICE Foreign Trade Investment System; Treaty Between United States of America and the Argentine Republic Concerning the Reciprocal Encouragement and Protection of Investment http://www.sice.oas.org/bits/usaarge1.asp