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November 2016 Newsletter


“After 15 years we are open for business”

What actually is a quote by U.S. Exim Bank Chairman Fred Hochberg, announcing the bank’s resumption of operations in Argentina during the Business and Investment Forum, recently organized by the Argentine government in Buenos Aires (see www.argentinaforum2016.com), could just as well be the motto for the new direction Argentina has taken.

President Macri, elected in December 2015, promised to again make our country friendly towards business and foreign investment, and slowly but surely, this promise is starting to bear fruit. Protectionist regulations, in effect during the 12 year Kirchner reign, are being repealed and new policies aiming for liberalization and integration into global markets are put in place. Currency restrictions have been loosened, import restrictions almost fully abolished, export taxes either lowered or fully annulled. The currency exchange regime has been standardized and the Argentine Peso exchange rate now freely floats. Institutions like the Central Bank and statistics institutes have regained independence; in this respect, last Wednesday November 9, the IMF lifted the censure motion that weighed on the country since 2013, when the IMF had decided to sanction Argentina under consideration that country statistics under Néstor and Cristina Kirchner were being manipulated. Much before, in April 2016, the long-pending dispute with U.S. fund creditors – the so-called “holdouts” – was finally settled, allowing Argentina to again enter financial markets.

The general opinion – both internal and external – is that rule of law has been strengthened, and in spite of the great burden that a long period of Kirchner populism left Argentina with, the first 11 months of the new administration allow a positive outlook on the investment opportunities that Argentina has to offer. And these opportunities are numerous: The infrastructure sector, namely transport and energy, offer large investment projects in the coming years. Especially renewable energies have a lot to offer – already, Argentina is the world’s leading producer of biofuels. But also the banking sector offers numerous opportunities, with a number of FinTech companies emerging.

High expectations are also put into the tourism sector. Antarctica cruises from the southern town of Ushuaia are at a record high. Late September, President Macri signed an executive order that allows foreign tourists to be refunded value-added tax paid on hotel services, which is estimated to bring some 120,000 new tourists into the country.

As a sign of deepening friendship between China and Argentina, as well as an effort to boost tourism, Chinese tourists no longer need visas to visit Argentina.

The newly-found friendly investment climate is starting to show. To name a few of a long list of examples, U.S. industrial conglomerate General Electric pledged USD 10bn in investments at the referred Business and Investment Forum into infrastructure projects over the next decade, after having already invested USD 1.2bn into power plants and the state-run airline Aerolíneas Argentinas. Shortly before, German industrial group Siemens had pledged USD 5.6bn, with CEO Joe Kaeser noting “I would urge everyone to think about it twice before waiting because tomorrow it may be too late”, and commenting on the country’s “fabulous opportunities in solar and wind energy”.

President Macri’s new course has been noticed and is receiving praise from international actors, the visits made by U.S. President Obama and French President Hollande being worth mentioning.

Much thanks to the new administration, the EU-Mercosur trade deal is moving forward and according to some parties could see daylight before the end of 2017. Most recently, an IMF mission started a round of meetings with the purpose of rebuilding relations with Argentina, frozen for over a decade. Notwithstanding their recommendations to tackle inflation, both the IMF and the World Bank praise the measures taken and project successful years for Argentina: the latest IMF growth forecast for 2017 is as high as 2.7%.

These extensive positive developments are reflected in the country’s rapidly improving legal and regulatory system in a number of ways. It is clear to Argentine authorities that creating an investor-friendly climate requires a flexible and effective regulatory environment. Pursuant to this, President Macri has won the opposition’s support for over 70 important draft bills, in spite of his party only having a minority representation against the Peronist party. Last week, the 2017 budget was passed, providing for growth and decrease of the fiscal deficit in line with IMF predictions. Additionally, a law that brings public-private partnership (PPP) to a modern standard was passed and hopes to facilitate the coming extensive infrastructure projects. A further major example is the planned extensive rework of the capital markets law that paves the path for private banking to return to Argentina.

Yet another example of important legislation, aiming not only to welcome foreign investment, but to also attract the large amounts of capital that Argentines hold overseas – sources estimate amounts of more than USD 230bn – is the recently passed tax amnesty law. It provides for a partial or full tax amnesty for unregistered assets held both locally and overseas if declared before the end of the first quarter of 2017 . It allows declaring funds without bringing them into the country, but also promotes repatriation by giving further benefits to investments into Argentine treasury bonds or long-term infrastructure projects. The bill does however come with a threat: because it brings Argentina closer to OECD standards and allows for tax information sharing agreements with countries like the U.S. and Uruguay, the Argentine tax authority will soon have the instruments to find overseas assets without voluntary declaration.

A further big change is the draft anti-trust law that is expected to soon be sent to Congress. The amendments contemplated under the bill are considered to be very welcomed: on one hand, they aim to simplify M&A deals by reducing or streamlining regulatory filings, and on the other hand provide stronger protection for investors against monopoly abuse. The institutional framework is overhauled with a new, independent and more effective antitrust agency, as well as a court chamber of appeals specifically for antitrust matters. Long awaited, the draft bill proposes a preliminary antitrust control mechanism, allowing to calculate the antitrust law risks prior to closing a deal.

Furthermore, the setup of companies by foreigners is to be simplified, and the old unclear import license system has been replaced by a new system, which provides for automatic import licenses for a majority of all customs tariff positions.

While positive signs are seen and heard from all sides, making Argentina investment-friendly remains a challenge and fundamental changes cannot be reached in one day or even one presidency term. President Macri’s administration inherited from the Kirchnerist populism a ticking time bomb that forced it to take severe measures, met with criticism by the Argentine population, such as cutting energy subsidies or floating the currency exchange rate. It is however certain that in this year of economic recession, with high inflation during most months and notable increases in average prices, social acceptance of the President’s policy remains at around 56 – 58 %. These numbers, both positive and surprising, reflect a return to normality in the political landscape, within a society tired of conflict and populist corruption.

With a simple and sincere rhetoric, President Macri has built optimism for the future, much more so than mere satisfaction with the present.

Unfortunately, the international environment is the opposite of welcoming: main trade partner Brazil is in deep recession, interest rates in the U.S. are likely to be risen and China’s growth numbers are falling. Nevertheless, Argentina has taken all the right steps to be successful in the near future. A strong infrastructure, rich natural resources and well educated population offer an excellent backbone to a competitive economy, attractive for foreign investment. It is not unjustified to expect 2017 to be a bright year for Argentina and bring with it a stable, growing and open economy.

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We remain at your disposal for any comments and questions you may have, and would be happy to provide more information on the subjects above described, as we keep closely following the developments in the legal and business environments in Argentina.

With kind regards,

Alberto Navarro