Since Argentina's economic recovery began three years ago, it's been one pleasant surprise after another: GDP growth is still powering ahead, with estimates in the 7% range this year; inflation, though flirting with double digits, is manageable; central bank reserves are above $20 billion; the primary fiscal surplus is enviable – an estimated 4% of GDP this year; and the exchange rate has held stable at 2.8 to 3 pesos to the dollar. Macroeconomic policy has quieted the Jeremiahs.
Yet for all this jubilation, there has been one principal disappointment: investment. With the consensus benchmark for sustainable growth at 22–25% of GDP, Argentina remains, as it has historically, a laggard. After falling to 11.3% of GDP in the immediate aftermath of the crisis, it rose to 17.7% in 2004. But at only 14% of GDP in the first quarter of 2005, analysts fear a decelerating trend.
Miguel Kiguel, an economist and former vice minister of economy, still thinks that if there is a pick-up in the remaining months of 2005, investment could still claw its way into the 20% range. But, he says, "While encouraging, these numbers are below what is needed to sustain growth in the 5% range."
Puzzle
What's going on here? Argentines seem to be divided among those who are perplexed as they ponder why, given the sterling economic performance, the conclusion of the debt restructuring and the sunny perspectives for Argentine exports – to say nothing of a friendly exchange rate – the world's response has been so tepid.
Other more cautious or realistic analyses suggest that time will tell: it simply hasn't been long enough for Argentina to bury all the spectres raised by the political, juridical and economic nightmares of 2001 and early 2002.
Still another group of analysts and policy-makers thinks that one of the major effects of the crisis will be that Argentine business owners and government officials begin to think out of old boxes and embrace the discipline – the appropriate state policies and the risk taking approaches – that will tilt the economy towards more openness, competitiveness and, therefore, investor appeal.
For them, this is a period of transition where they claim to see seedlings sprouting that, if cultivated by higher levels of credit availability, significant improvements in national infrastructure and greater international market access, will yield the economic results that have eluded the country for so long.
Sure things
Whatever the reaction to current investment levels, a few elements are clear. First of all, the fear that hordes and herds of grasping foreigners would gobble up companies and assets, whose values plummeted in the over 70% devaluation, proved unfounded. It may be difficult to recall that concern over that possibility was a major sticking point with the IMF in 2002, when Congress refused to sign the new Bankruptcy Law which, it was assumed, would lead to a fire sale of indebted businesses. "These were concerns that didn't materialize," concludes Debora Giorgi, chief economist for the Union Industrial Argentina and former secretary industry.
In fact, several sectors of the economy have experienced some "renationalization", most notably in the financial sector and in the still conflicted public utility arena. Still, only one-third of the country's 500 largest firms are Argentine-owned, compared to double that figure a decade ago. In addition, as part of an international phenomena underscored by UNCTAD, firms based in other Latin American countries are increasingly active in Argentina. Brazil, Chile and Mexico have committed to approximately $5.6 billion in investment in the last three years.
Another perceptible trend is that investment has been limited to the expansion of installed capacity and in sectors with obvious export advantages. Daniel Marx, former international finance secretary who now consults to the private sector, says, "What we aren't seeing is important new investment, no matter what the origin." Companies that are already here and respond to internal consumption, which is robust if stabilizing, or those that are part of the commodities exporting sector, account for two of the three high growth investment areas.
The third and top sector is real estate which, according to Kiguel, represents two-thirds of current investment. Its dynamism helps explain the continued high participation of construction in GDP.
Even within this muted picture, the existing investments, Giorgi insists, point to the Argentine economy's strengths and promise. There are five expansion projects in the soy processing sector totalling over $400 million, she says, plus three in the auto sector and over $100 million in mining exploration in 2004, including mega projects like Pascua-Lama, a bi-national Argentine-Chilean project with Barrick Gold that is beginning with a $1.5 billion price tag. More importantly, according to Giorgi, there is a significant, if hard to quantify, amount of investment in small and medium-sized companies, through their own earnings and capital.
Credit Crunch
"Capital" may be the operative word when looking at the investment future, especially when looking at the banking sector – one of the most affected by the events of the last years.
Kiguel, who recently completed a detailed study of the banking system, notes that the sector is in much better shape than at any time in the last few years. In 2002 it lost $16 billion pesos, in 2003 $5.3 billion pesos and $530 million pesos in 2004. Still, it is unable to meet investment financing needs. "If it is to meet the desirable 25% or so of GDP, Argentina needs about $33 billion pesos in investment, and that can't come from the banking sector," he says.
The credit bottleneck is both on the demand as well as the supply side. According to Kiguel, the banks haven't been able to reach borrowers who can meet their own credit requirements or those of the central bank, even though the latter has relaxed its rules in recent years. "In spite of the fact that credit has grown at a 30% annual rate, bank financing to the private sector is barely 10% of GDP," he explains.
With investor enthusiasm still minimal, thanks to crisis-induced caution and persistent doubts about the rules of the game, the ministry of economy is trying to create mechanisms to encourage investment. For example, it is proposing mixed public-private investment in infrastructure. In mid-August, Leonardo Madcur, the ministry's secretary for technical coordination met with Credit Suisse First Boston which, according to reports, indicated strong interest in participating in such ventures.
The caveat, of course, is that the four year impasse on revising and regulating contracts and determining a reliable price and earnings structure in the energy sector must first be resolved. However, much like the postponed imprimatur of an IMF programme, there is virtually no chance of forward motion until after the legislative elections at the end of October.
Bank of England governor Mervyn King contributed to economic thinking earlier this year when he coined the term "Maradona Theory". The Argentine soccer champion, he said, confounded his UK adversaries not only by his good fortune, through "the hand of God"; he also trumped their expectations by running down the field in a straight line instead of zigzagging left and right. The big investment surge that Argentina is hoping for may depend on solid evidence that the government has learned that lesson.