Argentina’s economic rebound is so strong that economists say the country could be investment grade within a few years, marking a major turnaround from its default and devaluation only four years ago.
Daniel Artana, chief economist of the Buenos Aires-based economic consultancy, Foundation for Latin American Economic Research (FLAER), says: “Rule of law remains a problem in Argentina. Yet, the truth is that investment decisions are often made on things other than rule of law – such as economic growth.
“Look at the case of China – where the rule of law is definitely worse than in Argentina – but foreign direct investment has been pouring in on the back of strong economic growth.”
Argentine GDP grew by 10.1% in the second quarter this year and 9.1% in the first half of the year. In August, construction rose by 24.8% and the economy expanded by 8.9% last year.
Esteban Fernández Medrano, a partner at economic consultancy Macrovisión, based in Buenos Aires, says: “Foreign capital is returning to Argentina and it is not just portfolio investment. A change of attitude among international investors towards the country is being witnessed.”
According to the Ministry of Finance, foreign direct investment in Argentina was $4.08bn in 2004 against $1.57bn in 2003, $2.14bn in 2002 and $2.16bn in 2001. FLAER predicts it will be between $5bn and $6bn this year. It says that the current investment rate in Argentina is roughly 19% of GDP but this must rise to 23% to sustain economic growth at 4% a year.
Standard & Poor’s (S&P) currently gives Argentina a sovereign rating of B- while Brazil has a rating of BB-. Chile is the only country in South America with investment grade at the moment (rated single A).
Joydeep Mukherji, a Latin America analyst at S&P, says: “The Argentine economy is making a strong rebound. Only time will tell if we can one day rate the country as investment grade. For this to happen, it must show a more stable path; it must avoid a stop-go cycle.”
Quick comeback
This positive news seems a world apart from what happened in Argentina just four years’ ago when GDP collapsed from $268bn in 2001 to $100bn in 2002. The Argentine government and the IMF are among those surprised by the economic resurgence.
Manuel Solanet, president of the Argentine investment advisers Infupa, says: “This country has seen incredible growth rates over the past three to four years. Some sectors, like tourism and construction, have been booming. Not many of us predicted this growth.”
One of the main reasons Argentina seems to be on a much more stable trajectory is the large fiscal surpluses that the government has been running – this year the surplus is expected to be 3.6% of GDP. Huge fiscal deficits were one of the key factors behind the 2001 economic crisis.
Other factors that have helped the country have been high commodity prices – especially for soya, which has led to a boom in agricultural regions of the country. Argentine exports have also been aided by the weak peso: the government has managed to maintain the currency at about 2.9 to the dollar for the past three years.
Dr Artana says that the government is likely to continue with this exchange rate policy because it has become dependent on robust export taxation revenues. Export taxes amount to about 2.5% of GDP.
The strengthening economy is also improving the confidence of the banking sector. A spokesman for Banco Hipotecario, which provides one in three mortgages in the country, says: “This bank has seen the number of registrations of new deeds increase by 300% in the first quarter of 2005 against the same period last year.
“The market expects the number of mortgages originated in 2005 to duplicate 2004’s number. In 2006, we expect to approach market volumes akin to the year 2000 in terms of the number of new deeds registered.”
Consumer confidence
One of the key factors for the growing demand for mortgages is greater consumer confidence due to the favourable economic situation, says the spokesman.
For the first year since the 1990s, a number of banks feel comfortable lending long-term funds. Banco Hipotecario, for example, has introduced a 15-year mortgage with a fixed interest rate of 9.75% and a 20-year variable rate mortgage currently at 8.75%. Banco Ciudad, another major mortgage lender, is offering a 20-year mortgage at a variable rate of 8%.
The biggest obstacles in the way of Argentina being embraced by the international financial community are the 24% of bondholders who held out this year on its restructuring of $100bn of defaulted debt, as well as the country’s rule of law.
Some economists hope that after the Congressional elections on October 23 the government will become less populist and might reach new agreements with multilateral lending agencies. In addition, its relations with business might improve.
Intervention problem
“Corruption in the country is chronic. We had less corruption previously and I think this government creates the conditions where it takes root, by intervening so much in the economy,” says Mr Solanet.
He believes the government should consider partially privatising state-owned companies such as Banco de la Nacíon and Banco Provincia.
The recent decision by the French water provider Suez to surrender its 46% stake in the Argentine water utility Aguas Argentinas unleashed adverse publicity worldwide. It highlights the problem with contractual law in the country: in 2002 the government unilaterally converted water tariffs fixed in dollars to devalued pesos and froze them at those levels.
“There is uncertainty about the framework for planning in Argentina,” says Mr Mukherji. “However, this involves just one country and one transaction and that should not be forgotten.”
Rising inflation – currently at 10.3% annualised – is also of concern to economists and businessmen.
The Argentine government has a number of important issues to tackle in the next few years but the country’s strong economic growth is likely to attract a flood of foreign investment and an upgrade in its rating, possibly even to investment grade.
