Hopes dim in Argentina for investment-led economic recovery
Uruguay’s new government wants to offer tax breaks to entice wealthy Argentines to relocate across the River Plate to boost local investment, but the rich need little encouragement to leave.
Ever since Alberto Fernández took power in Buenos Aires in December and hiked taxes on personal assets, Argentines have been weighing the benefits of emigrating to escape what many see as confiscatory taxes. The tax rate on assets held abroad is now double the local rate — up to 2.5 per cent — which is triple the level under the previous government.
Any exodus of capital would be worrying. The leftist Mr Fernández is himself hoping to drive an investment-led recovery that would put an end to a recession in its third year. The economy shrank about 2 per cent last year and there has been scarce growth at all over the past decade in Argentina. Compounding matters is a looming sovereign default on about $100bn of foreign debt.
“When you have higher taxes, more economic controls and an [increasingly] overvalued currency, with these rules of the game investment is not going to happen,” warned a respected local economist, referring to the protectionist turn that Argentina’s economy has taken since Mr Fernández’s populist Peronist party returned to power.
“If you’re expecting an export boom after hiking export taxes, you’re probably dreaming.”
Taxes on soya products — Argentina’s most important export — have increased from 25 per cent to 30 per cent, and are set to rise further, while those on corn and wheat have risen from 7 per cent to 12 per cent.
Wealthy Argentines such as Marcos Galperín, the billionaire co-founder of the tech unicorn Mercado Libre that is the country’s most valuable company, have left. Businesses are also putting decisions on hold until the potentially messy and drawn-out debt restructuring has been resolved. Companies such as Amazon, General Motors and Nike have been reported in local media to be freezing investment plans. Some companies are analysing whether to leave Argentina altogether.
Meanwhile, head hunters have seen a marked increase in executives looking for jobs abroad. “This kind of thing tells you something, and it can’t be good,” said the economist.
The country’s most competitive sectors, such as agribusiness and energy — which the government is banking on to provide much-needed foreign currency from exports — have been hit by higher export taxes and caps on fuel prices. One senior executive at an international oil company doubts that the major investments it hopes to attract into the giant Vaca Muerta shale field will materialise: “My guess is they will just muddle through, with investment levels similar to the previous government.”
Economic measures implemented by the new government that aim to stabilise one of the highest inflation rates in the world include fixing the exchange rate and stricter capital controls, freezing utility tariffs, caps on credit card interest rates and clamping down on wage negotiations.
“None of these measures favours investment or exports. If they are just emergency measures while they solve the debt situation, well, maybe the government will be successful. But if they are all there is, it just looks like a repetition of recipes that we have already seen and in the past only led to growing challenges,” said Ignacio Labaqui, an analyst at Medley Global Advisors.
Analysts are especially concerned that the gap between the official and parallel exchange rates that has reappeared since the implementation of capital controls last year could continue to widen, fuelling inflation further and eventually leading to another devaluation.
Investors increasingly fear a messy debt default, given the government’s reluctance to implement austerity measures that would help it to repay its debts. That would be disastrous for inflation, say economists.
That in turn would complicate relations with trade unions fighting for higher wages for workers whose pay is already failing to keep up with inflation. Low wages have sent consumption through the floor: the amount of people eating steaks in the beef-loving nation is at its lowest level in the past 100 years.
“The strategic patience of union leaders, who are more tolerant of unpopular measures when they are implemented by Peronist governments, is going to wear out,” added Mr Labaqui, suggesting that social unrest could become a growing problem.
It is impossible to forecast how the debt showdown between Argentina and its private creditors will play out. But even if the government is successful, that will do little to fix broader economic woes, such as low growth, high inflation and a volatile exchange rate.
“Clearly, fixing the debt situation will not solve Argentina’s structural problems,” said Marina dal Poggetto, executive director of EcoGo, an economic consultancy in Buenos Aires, though it would at least remove the most urgent financial pressures facing Mr Fernandez’s embattled administration and enable it to turn its attention to the rest of its challenges. “For now, everything is on standby,” she added.