Sat | Oct 21, 2017

Walter Molano | Argentina: Where are the Cranes?

Published:Friday | October 28, 2016 | 12:00 AM

Last week, Minister of Production Francisco Cabrera declared that a deluge of foreign investment was cascading into Argentina.

At a rudimentary level, he was right.

The Argentine government, along with the provinces and a handful of corporates, issued more than US$30 billion in Eurobonds and another US$15 billion in local-currency instruments since the start of the year. This represents about 8 per cent of GDP, and the country will finish 2016 with a debt ratio of almost 60 per cent.

Yet, only US$2 billion in foreign direct investment - FDI - has entered the country during the same time period. The huge difference between portfolio capital inflows and FDI underscore the varying outlook for the country.

The ministry of the economy has done a very good job of addressing several major problems facing the country. It removed the capital controls, settled with the holdouts, and started to normalise utility rates.

Yet, it has done nothing to address the bloated public sector or restart the Argentine economy. A glimpse out the hotel window says it all. While the skyline of most emerging market capitals is obscured by a forest of construction cranes, they are noticeably missing in Buenos Aires. The question is what is keeping them away?

The Macri administration is forecasting a GDP growth rate of four per cent year-on-year for the next two years. Yet, there are no signs that a recovery is around the corner.

An estimated 1.5 million Argentines descended into poverty since the start of the year. A study by the Catholic University found that a third of the population was now living in poverty, and the unemployment rate in the greater Buenos Aires area was 25 per cent.

With midterm elections about a year away, the government feels that it cannot afford to push for further fiscal consolidation, because that will lead to a reduction in social-assistance plans. Not surprisingly, the president's approval is slipping.

Biggest impediment

At the same time, former President Cristina de Kirchner and her band of militants continue to undermine the government. They are always staging protests, speeches and marches. Even though there is a pile of evidence that could easily land many of these individuals in jail, some analysts believe that the government keeps them around to keep her image fresh.

Yet, Cristina is one of the biggest impediments to FDI. Fear of her return is what keeps many long-term investors away.

Another problem for fixed investment is the lack of an overarching economic plan. There has been a hodgepodge of initiatives, from Plan Belgrano to the so-called mini-Davos. Although the Argentine economy would greatly benefit from an improvement in infrastructure, particularly bulk-cargo transportation, the Belgrano rail project appears to be bogged down in ministerial infighting.

Efficient, low-cost transporta-tion is the key competitive issue for any commodity exporter. One of the comparative advantages of the United States economy is its highly efficient rail system. The US may lack the sleek bullet trains that grace the rails of Europe, Japan and China, but its mile-long lumbering cargo trains are essential in hauling oil, minerals and agricultural products to ports and markets.

In addition to inter-ministerial differences in Argentina, there are powerful vested interests, such as the truck drivers' unions and port authorities that oppose the investment programme. Likewise, the mini-Davos was a great photo opportunity for local luminaries, but it promised very little in actual investment.

Argentina may have a plethora of human talent, but it lacks the legal framework and capital markets to support a true start-up industry. Argentina may boast about its handful of unicorns, but most tech entrepreneurs with a hot idea will still head for Silicon Valley, New York or London, rather than stay put.

Fortunately, renewable energy may prove to be a more promising source of FDI. The government recently awarded US$1.8 billion in contracts to build 1.1 megawatts of renewable generation projects.

More such projects are needed. Of course, the government is not entirely to blame. Commodity products, such as mining and paper and pulp, offer great opportunities for foreign investors, but the slump in raw-material prices is keeping many of them away. Yet, this is the type of investment the country needs.

Foreign borrowing to cover current expenditures is a recipe for disaster. Without addressing the structural fiscal problems, the government will need to return to the capital markets over the next few years.

The problem is that they may not be so accessible. The US Federal Reserve will most likely raise interest rates before the end of this year, and it will probably hike another four times in 2017. This will deter some of the portfolio capital inflows into the emerging markets.

Therefore, instead of looking for additional bond issues, the government should be looking for cranes to fill the Buenos Aires skyline.

- Dr Walter T. Molano is a managing partner and the head of research at BCP Securities LLC.

wmolano@bcpsecurities.com