Argentina - Foreign investment

During the 19th century, Argentina offered a favorable climate for foreign investment and the basic development of the nation's transportation system and shipping facilities was financed with British capital. This system placed ownership of extensive properties in foreign hands, arousing the resentment of Argentine nationalists, who advocated a policy of reducing dependence on outside interests. The organization of a national petroleum agency, YPF, in 1922 was one of the first important steps in implementing that policy. The high point in the drive for nationalization came during the Perón era, when railroads were purchased from foreign owners and numerous state-owned enterprises were established. These measures led to substantially reduced foreign investment.

In 1958, President Frondizi negotiated contracts with a number of foreign companies, allowing them to join YPF in the exploitation of Argentine petroleum. He promoted a bill designed to attract foreign capital under close government supervision. As a result, foreign companies invested over US $387 million between 1959 and 1961, of which more than half came from the United States.

Between 1961 and 1966, direct foreign investment declined, with the question of foreign ownership constantly entering the political picture. After the military coup, President Onganía declared that his government would renew an "open door" policy and would provide legal guarantees to investors. Net capital inflow continued to grow through the late 1960s.

In the 1970s, government policies toward investors underwent a significant reappraisal. Foreign direct investment, according to a law enacted in 1973, required specific congressional approval if foreign capital exceeded 50% of the total in a company. Profit remittances and capital repatriation were limited and new foreign investments were prohibited in several major areas, including national defense, banking, mass media, agriculture, forestry, and fishing.

In the 1980s the economy was caught in the dynamics of the second oil shock and the third world debt crisis, fighting recurrent bouts of hyperinflation. In 1985, the austral replaced the peso at 1:1000, and then in 1991, the Menem administration replaced the austral with the new Argentine peso at 1:10,000, inaugurating the Convertibility Plan (designed by economy minister Domingo Cavallo) whereby every peso would be backed by at least one dollar in reserves. A currency board was created to maintain the peso's virtual 1:1 equivalency to the dollar.

In December 1989, the government eliminated all restrictions on the movement of capital in and out of Argentina, adopting a single foreign exchange market. By Decree 1853 of 8 September 1993, the government established an extraordinarily open foreign investment regime. Foreign companies could invest without registration or prior government approval on the same terms as national firms in virtually every sector, the few exceptions being real estate in border areas, air transportation (later lifted), ship building, nuclear energy, uranium mining, and some fishing. Foreign portfolio investment in the companies listed on the Argentine stock exchange required no government approval. The Argentinean-US Bilateral Investment Treaty (BIT), signed in 1991, came into full effect in 1994. The treaty provided for national treatment in virtually all sectors of the Argentine economy, although national treatment did not prevent numerous contentious and time-consuming investment disputes, particularly with provincial governments. Incentives were provided for investments in mining, shipbuilding, iron and steel, petrochemicals, forest industries, silo construction, wine, and maritime fishing. Corporate taxes were equal for foreign- and Argentine-owned companies. Argentine Law 24331 of 1994 authorized the federal government to create one free trade zone (FTZ) in each province and four others in border areas. FTZs, offering tax-free and duty-free importing and exporting, were located at Cordoba, La Plata (the most important, opened in 1997), Mendoza, Santa Fe, and Comodoro. Capital inflows were strong. Privatization generated a large source of US dollars. More than 60 state-owned enterprises were sold, most to foreign investors, raising about $10 billion in direct sales and more, counting cancelled debt and promised post-acquisition capital investments.

Accumulated foreign direct investment (FDI) in Argentina was an estimated $5.3 billion in 1980 rising only to $6.56 billion in 1985 and to $8.77 billion in 1989. However, under the liberalized investment regime, accumulated FDI reached $25.7 billion by 1995 and $36 billion by 1997. The rise in market capitalization on the Buenos Aires Stock Exchange (the BCBA, accounting for 95% of transactions on Argentine exchanges in equity shares, corporate bonds, and government debt instruments) was also dramatic, more than doubling from $18.6 billion in 1990 to $44 billion in 1993. Argentina does not keep records of foreign investment, but an accepted estimate is that total direct and portfolio foreign investment from 1990 to 1996 was about $49 billion

In 1997, annual foreign direct investment (FDI) inflow was over $9 billion, but fell to $6.85 billion in 1998 as the effects of the Asian financial crisis were felt. In 1999, FDI inflow soared to $24.1 billion, including about $15 billion from US investors, with most going to telecommunications, energy, petrochemicals, financial services, food processing, and motor vehicle manufacturing sectors.

In 2001–02, the Argentina economy went through the worst implosion in its history, much of it connected with the government's effort to attract foreign investment. In 2000, FDI inflow continued at a near-record total of $11.15 billion but then plummeted to $3.18 billion in the global economic slowdown in 2001. After the abolishment of the convertibility system in January 2002, FDI inflow fell $2.2 billion.

In terms of portfolio investment, the total market value of companies on the BCBA, which through the vagaries of the Mexican peso crisis in 1995 and the Asian financial crisis in 1997 was only 3% ahead of the 1993 value in 1998 ($45.3 billion), jumped to $83.9 billion in 1999, then to $165.8 billion in 2000, peaking at $203.5 billion in January 2001, a 4.5% increase since 1998 and an 11-fold increase since 1990. A rough estimate is that about half of the transactions on the BCBA are by foreigners. In 2001, average daily trading was $200 million (up from $11 million in 1990), 70% in government bonds, 20% in equities, and 10% in corporate bonds. In 2001, portfolio investment in Argentina by US investors amounted to $4.5 billion, 83.5% in debt instruments ($3.2 billion in long-term debt bonds and $344 million in short-term debt) and 16.5% in equity ($744 million). In 2002, although in pesos the market value of companies on the BCBA had risen to 250 million pesos, with the fall of the value of the peso to more than three to a dollar, total market capitalization of listed companies was only $75 million, of which all but $15 million was accounted for by three Spanish companies.

Argentina's economy, at first benefiting from the tie to the US dollar in quelling hyperinflation and attracting records levels of direct and portfolio investment, was then hurt by the tie, first when interest rates were raised in the United States in the late 1990s, making Argentina's borrowing costs and export prices uncompetitive, and then from 2001, when the dollar tie served a means of importing the US recession into Argentina's already contracting and heavily indebted economy. Government efforts to stem capital flight and shore up investor confidence in 2001 were caught between violent popular protests and a hardening of IMF policy. After "five presidents in two weeks" in December 2001 (the third one carried out the default and the fifth one abandoned the convertibility system on 7 January 2002, allowing the peso to float), with widespread bankruptcies and debt repayments far outpacing new loans, the economy has become even more dependent on foreign investment as a means of economic recovery.

The largest sources of FDI in Argentina have been the United States (36%, 1994–2000) and Spain (11.9%). Other important sources of FDI have been France (11%), Chile (9.8%), Italy (7.1%), the United Kingdom (6.2%), Canada, and Japan. The major destinations for FDI from 1999 to 2002 were the oil industry, telecommunications, supermarkets, the automotive industry, energy, construction, banks, insurance, chemicals, and the food industry.

Although Argentina remains a net recipient of FDI, Argentinean firms have recently begun making substantial outward investments regionally, in Brazil, Paraguay, and Uruguay. The peak year for the outward flow FDI was 1997, $3.65 billion up from $1.6 billion in 1996. In the recession that gripped the economy from 1998, outward FDI fell to $2.3 billion in 1998, to $1.3 billion in 1999, and $1.1 billion in 2000, according to the latest available UNCTAD estimates