Act III, Scene I
It’s a poetic evening in Buenos Aires. This Sunday, Argentines headed to the polls for primary elections for senators and congress members. The results allegedly give us a hint at which direction the winds of popular opinion are blowing, and whether or not continuing President Macri’s economic reforms will be politically possible to pursue. And so far so good – former president Cristina Fernandez de Kirchner did not fare so well in her efforts to become the Senator representing the Buenos Aires Province.
Cristina’s failure to garner significant support in the primaries is a positive sign for the economy – but that alone will not open a magical spigot of foreign investment in Argentina.
Attracting foreign investment is so central to Macri’s economic strategy that his administration has sometimes seemed less like a government and more like a roadshow of white investment bankers in suits hawking an endless slew of Harvard MBA powerpoint presentations. So at a first glance, the recent report from the Economic Commission for Latin America and the Caribbean (Cepal, for its initials in Spanish) that foreign direct investment (FDI) in Argentina contracted significantly from 2015 to 2016 seems like a pretty epic fail.
The Slings and Arrows of Outrageous Fortune
Foreign direct investment seemingly fell by 64 percent from 2015 to 2016. In 2015, US $11.76 billion flowed into Argentina, compared to a measly US $4.23 billion in 2016. Given that President Macri assumed office in December 2015 and almost immediately put in place pro-investment initiatives, it seems almost counterintuitive that FDI would fall so grievously.
FDI, you see, is measured as a flow rather than a static amount. And the same measures like currency controls and restrictions that kept investment out also kept a lot of money in that wanted to escape. When Macri took office, he made the following pro-investment changes:
- Allowed the Argentine peso to depreciate, aligning and effectively removing the parallel blue dollar rate
- Removed currency controls preventing repatriation
- Removed taxes on exports
- Removed laws requiring the reinvestment of earnings
There’s The Rub
This drastic fall in FDI flows demonstrates the backlog of earnings that companies no longer prevented from repatriating sent back to their home countries. Removing the restrictions led to a fall in reinvestment earnings. Companies also reduced the debts they incurred between parent companies and their local subsidiaries that had been tools to counteract the parallel currency exchange rate.
Even though the net flows (inflows – outflows) fell significantly, new capital inflows increased by 177 percent, totaling US $3.649 billion in 2016. The volume of cross-border mergers and acquisitions also increased.
If the investments announced in 2016 actually materialize, new inflows for 2017 could reach US $12 billion. Even if only a fraction of that number comes to fruition, from an investment standpoint the country is on the right track.
Perception of the current government both at home and abroad is still fragile. Cristina’s return to politics may provide the benefit of polarizing the local voting population, causing would-be middle of the road voters to get behind Macri’s coalition rather than return to the Kirchnerite kleptocracy. On the flip side, seeing the former President’s face on the cover of newspapers and back in international headlines does not do the Invest in Argentina mission any favors.
What Dreams May Come
Even though Macri’s pro-investment reforms have attracted an increase of 177 percent in new investment inflows, this can and will be painted as a technicality by his opponents who decry the drop in FDI. Argentina is at a critical point in its reform trajectory. This is a populist country where politics rewards the loudest voice who promises short term rewards. Macri and his team are involved in a precarious balancing act that must take into account domestic political machinery as well as an international landscape that is increasingly unstable and entirely out of their control.
To borrow a phrase from someone I know, it’s time for Argentina to bet the farm on Macri. He’s carried the country through a harrowing two years, and remains committed to achieving an Argentina that tells the truth led by a government that doesn’t seem to steal money. At least not like its predecessor.
And if Argentinians don’t bet the farm this time around, there might not even be so much as a garden left in 20 years. The country is trying to recover from decades of a boom-bust cycle, and sustaining another round of kleptocratic populism won’t leave much upon which to rebuild.