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Argentina welcomes foreign investments, and its laws governing foreign investment are among the most liberal in the world. In general, Argentina encourages investments through a free-market policy and low income tax rates rather than through subsidies. The basic attitude towards foreign capital is very positive; all previously existing requirements concerning prior government approval of foreign investments have been eliminated. Argentina has traditionally been very hospitable to foreigners. The Argentine government is making active efforts to attract foreign investments. Foreign investments obviously have also played a very important role in the privatization process, referred to below. Domestic capital resources are not sufficient for economic development; the government therefore encourages the inflow of foreign investment. Because Argentina formerly followed a protectionist economic policy to promote inward development, economic activity was excessively regulated. Under a new strategy to encourage foreign trade, rules that obstructed foreign trade have been modified or eliminated. Further, permission is no longer required to import goods, the import tariff structure has been simplified and tariffs have been reduced. Taxes on exports have been almost eliminated. All restrictions and procedures that in the past slowed down the entry of capital and technology from abroad have been abolished. Changes in foreign investment regulations have eliminated obstacles to the inflow of capital into Argentina. RESTRICTIONS ON INTERNATIONAL INVESTMENTS. All restrictions on foreign investments have been lifted and foreign investment does not require any prior approval from the Argentine authorities. Although some remain in sensitive areas such as defense, telecommunications, and oil and gas. Profits may be freely transferred. Special incentives for certain activities and tax reimbursements on exports, among others, are granted under identical conditions to nationals and foreigners. Foreign investors are not required to obtain government permission to invest in Argentina. Foreign investors may wholly own a local company, and investment in corporate shares listed on the stock exchange requires no government approval. Argentina generally does not impose exchange controls or restrictions on the flow of capital or profit distributions abroad. At present, some companies do still enjoy tax privileges attained in the past, but gradually these are running out and it is not to be expected that new tax facilities or privileges will be granted. Taxes are levied at three levels: national, provincial and municipal. National taxes, especially value-added-tax (VAT), which are collected by the federal government and distributed to the provinces, yield most of the revenue. The provinces levy taxes primarily on gross business receipts (turnover tax) and on real estate and, jointly with municipalities, they levy charges for services. For many years Argentina taxed on a territorial basis. All Argentine-source income was subject to Argentine income tax. Foreign-source income, such as the profits of a foreign branch of an Argentine company, was not subject to Argentine income tax. A tax reform, effective as from 1998, established that residents (whether individuals, corporations or any other type of entity) are taxed on worldwide income. Non-residents continue to be taxed only on Argentine-source income. A tax credit is allowed for similar taxes paid abroad, up to the amount of the Argentine tax on the foreign-source income. All profits of local companies are taxable, including any kind of capital gain such as those from sales of depreciable assets, shares and real property. An Argentine company is allowed to deduct from gross revenue the expenses incurred in producing taxable income, including a percentage of royalties, technical assistance fees with some restrictions and interest payable to beneficiaries abroad, regardless of whether these are economically related to the paying entity. Some restrictions apply related to transfer prices, the thin capitalization rule, deductibility of interest depending on whether they are paid before the annual tax return is filed, etc. Income tax at a 35% rate on amounts paid to non-residents (e.g. interest, technical assistance fees, royalties, etc.) is applied to deemed net Argentine source income. The deemed net Argentine source amount may vary depending on the nature of the payment. In addition to income tax, the federal government imposes value-added tax, excise taxes, tax on assets, tax on presumed minimum income, tax on interests and custom duties. The Argentine labor force is about 14 million people (37% of the total population). The unemployment level is about 15% in 2000. Argentina offers a well-trained labor force and especially an important pool of well-motivated and reliable people for managerial positions. Labor costs are higher in Argentina as compared to other Latin American countries. There is no availability of soft financing for foreign investors (or for anybody else). As regards loans in local currency, years of very high inflation have played havoc with the Argentine financial system, for which reason the monetization of the economy is still comparatively low, even when steady progress is being made in this field. Banks normally do not offer local currency loans, except for relatively short terms (roll over up to 180 days) and at rather high rates. Loans in US Dollars are available, but also at rates which generally are above international levels. In recent times, the possibility to issue and list medium term commercial paper on the Stock Exchange has been opened for Argentine companies. This possibility is of course only open to companies of a certain size. The country has traditionally had a self-contained economy. Raw materials are available within the country in adequate supply to meet domestic needs and have a surplus to export. Argentina has ample supply of natural gas, largely unknown mineral resources and, of course, a very important and efficient agricultural industry. Industries based on raw materials derived from these sources would seem to be well positioned in Argentina. While agricultural and livestock production is still of paramount importance for the Argentine economy, industrial production is also well developed. Mineral resources appear to be rather significant, but as explained above, are still in the initial stage of development. Oil production amply exceeds local consumption and has become an important export item. Production of natural gas covers 100% of the consumption and proven reserves are sufficient for many years of consumption; there are projects being implemented to export natural gas to neighboring countries. In the past the government participated strongly in manufacturing, commerce, banking, insurance and other industries, but current policies have reduced the level of government involvement. The participation of the public sector in the Argentine economy was considerably more than 50% until 1989, but since then it has decreased dramatically. Certain former state-run activities have been opened up to the private sector, including foreign investors since 1990 as part of a sustained privatization process. Argentina now has an economy based on free-market principles. The industrial sector grew approximately 30% between 1990 and 1998. This growth is stimulating infrastructure development and the renovation of productive facilities. The agricultural sector accounts for a large share of the Argentine GDP. The service sector has become an increasingly important component of the GDP growth. To reduce production costs and thus encourage competition in all sectors of the economy, the government has pursued a policy of deregulation. This Policy has been implemented through a Deregulatory Decree promulgated in November 1991 and the creation of the Deregulation Technical Advisory Committee. The data about Argentine trade balance and inflation in recent years are the following: (billions of US$) 1996 1997 1998 1999 2000 Import 22.2 28.5 29.5 24.1 25.14 Export 24.0 26.4 26.4 23.3 26.29 Difference 1.8 - 2.1 - 3.1 -0.8 1.1 INFLATION RATE (consumer price index) ECONOMIC, FISCAL AND MONETARY POLICIES Until the end of the eighties, Argentina had shown a disappointing economic performance, falling farther and farther behind, not only in comparison with the most developed countries, but also with respect to countries which, in the past, used to show a similar stage of development. This has occurred in spite of the high cultural level of its population and the considerable natural resources of this country. This dismal economic performance did come to a climax, culminating in a hyperinflation process. The wholesale price index grew in excess of 220% per month and of more than 5,000% for the twelve-month periods ended both in July and December 1989. In other words, prices soared more than 200 times in that period. A great number of different theories have been advanced in Argentina about the reasons for this unsatisfactory development, normally reflecting the political position of the commentator. Certainly, also as a consequence of the anguish and frustration produced by the hyperinflation, a consensus has developed in Argentina that the government has had a considerable responsibility for this state of affairs. Either by trying to control the economy by prescribing prices, salaries, interest rates, exchange rates, etc., thus discouraging new investments, or by managing inefficiently a significant part of the Argentine economy that used to be owned by the state. As from 1989, the government has carried out a remarkable program consisting of a combination of fiscal discipline, sound monetary and financial policies, rescheduling of the foreign debt and structural changes in areas such as trade liberalization, privatization and deregulation, which have strengthened the Argentine economy. Inflation and interest rates have fallen dramatically. Annual inflation measured in consumer prices fell from 84% in 1991 to -1,8% in 1999. Salary increases must be consistent with increases in productivity. Industrial production increased by 23.4% between 1990 and 1995. Regarding the country’s monetary policy, in April 1991 the Argentine government enacted a convertibility law as the starting point of a strict stabilization program. This law requires that local currency be fully supported by foreign reserves and gold at a ratio of 1:1 (one peso per one U.S.$.), makes indexation not legally enforceable, and allows contracts to be entered into and legally enforced in foreign currency. The “Peso” became the legal currency. A stable and hard local currency virtually eliminates the risk involved in contracting in foreign currency. Legal protection for contracts made in foreign currency gives even greater security to investors. They can either contract in local currency, knowing that if the free-market exchange rate exceeds 1 peso for US$1, the government is committed to sell US dollars at the fixed relation of 1:1, or they can contract in foreign currency. Another important area of reform is the pension fund system: optional private pension funds were introduced, where contributors become stakeholders in an investment fund managed by private operators. While over time this will become an important factor for increasing the saving rate of Argentina and is expected to offer recipients reasonable retirement benefits, this change of course does not by itself solve the problem of the pensioned people and of people approaching their retirement age. However, important improvements have been introduced, by increasing the retirement age and by capping the pension benefits. Nevertheless, this is a politically sensitive area the government finds most difficult to control. At present, a very significant portion of the national budget is being spent on benefits for the aged. As things are, it will probably take a decade before the combined effects of people opting for the private scheme, the higher retirement ages and the natural attrition of the number of present pensioners will lighten this burden on the national budget. The fiscal policy of the Government is trying to keep receipts and expenditures more or less in balance. On the expenditure side, apart from the benefits derived from the privatization program, the Federal Government has been reducing the number of staff employed as well as pushing as many services as possible down to a state (provincial) level, where it was hoped they would be carried out more efficiently. So far, this appears not to have worked as intended, as most provincial administrations continue to be very weak. On the receipts side, tax collection efforts have been stepped up and a tax reform has been enacted. Periodically, the downturn of the economic cycle has negatively impacted the tax receipts. During 1998, the tax on fuel was stepped up and the marginal rate for the income tax has been increased. In recent years, in spite of all these efforts, the budget is showing a persistent if limited deficit and it is expected that it will take several years before the deficit can be totally eliminated. (The deficit agreed on with the IMF for 2000 is equal to about 1,6% of the GDP). The privatization program has led to the transfer of airlines, telephone systems, railroads, water supply, sewer systems, public utilities, etc. to private owners or operators and the bulk of its implementation has been completed. During 1992, Argentina reached an agreement with its foreign bank creditors for a rescheduling and reduction of its old debt within the framework of the "Brady Plan". This agreement has been implemented during 1993, entailing a formal debt reduction and also a reduction in the interest cost. By this agreement, Argentina finally achieved a solution to the foreign debt crisis that had clouded its economic outlook for almost 20 years. Argentina's estimates of foreign investment projects for 2001 come to around US$9,400mil, the lowest investment in the last five years, with a drop which could reach 25% in relation to 2000. In the first 8 months of the year, foreign investment came to almost US$6,300mil according to information from Fundacion Invertir. Last year, investment was of more than US$12,500mil. Mining is one of the sectors affected by the lack of investment with less than US$100mil. Telecommunications continue to attract most of the foreign investment as in August Fundacion Invertir registered foreign projects in this sector of almost US$1,400mil followed by the electricity sector with US$1,100mil. The main project this year corresponds to the US$1,000mil that Petrobras is spending in exchanging assets with Repsol YPF to take over the petrol stations. The main countries which invested in the country this year are France, the United States and Brazil, concentrating over 95% of the operations. Examples /reading in the investment history in Argentina** Telefonica freezes investment in Argentina. The group Telefonica has frozen its investment in Argentina. The group might have to adjust more its finances to adapt to the devaluation of the Peso. With the new exchange rate of Pesos $2 per dollar the earnings of the group in Latin America will be reduced by another 3-5%. The Latin American business represents around 40% of the profits before tax of the group and 33% of its sales. Telefonica will reduce its investment in Latin America to represent not more than 11% of its turnover in the period 2002-2005. Investments will be reduced from Euros 3.022bil (US$2.65bil) in 2001 to not more than Euros 1.5bil from this year and for the next 4 financial years. The margin over sales will be reduced from 13-15% in 2001 to 11-13% in 2005. Telefonica predicts a growth of between 7-9% annually in its earnings and profits before tax in Latin America until 2005. Wal-Mart has benefited from this operational structure with regard to its stores in Argentina, a country where economic instability has derailed both the profits and growth of this 6-year-old start-up. Argentina fell into a recession in mid-1998, and it has not been an easy road back. Concern over the country defaulting on $128 billion in public debt still exists despite repeated assurances to the contrary by finance minister Domingo Cavallo and the availability of a $40 billion bailout package. It is certainly not the outcome Wal-Mart was looking forward to when it entered the country in November 1995. At the time, the International Division's operations were confined to North America, so Wal-Mart couldn't be considered a truly global player until it stepped off its home continent. It did just that in late 1995 with its entry into Argentina and Brazil, a move signaling Wal-Mart was indeed serious about broader global expansion. Early organic growth in Argentina suggested Wal-Mart was highly committed to achieving success. The arrival of a recession in 1998, escalating interest rates and the resulting slowdown in consumer spending halted store expansion at 10 supercenters and three Sam's Clubs. Wal-Mart added no new supercenters in 1999, and it stepped cautiously back into the market with one store opening last year. It was never able to get the Sam's Club format to work, even after remodeling clubs and altering its strategy. So last year it sold the units to Home Depot. Despite a lack of financial success, Wal-Mart has received other benefits from the experience of entering Argentina. Valuable lessons were gained regarding the importance of cultural sensitivity, as well as how to approach store management and vendor relations when entering a new market from scratch. Argentina has also been a source of best practices, especially as it relates to food merchandising, fresh departments and operating in an inflationary environment. For the time being, the outlook for Argentina is bleak largely because of the nation's economy, not to mention Wal-Mart's lack of scale. As a result of its commitment to organic growth strategy in Argentina, Wal-Mart lacks the size of more entrenched operators and others that expanded via acquisition. Another French player, Casino, entered the market in 1998 with the acquisition of Libertad and its eight hypermarkets. Royal Ahold also has a large operation; the Dutch retailer is joint owner of 235 Disco supermarkets. Any improvement for Wal-Mart in Argentina rests on its ability to increase its size substantially and on the economy improving; the outlook for the latter is still suspect. The economy performed worse than expected last year and the outlook for this year, according to the International Monetary Fund, is for 2.5% gross domestic product growth. Interest rates have fluctuated wildly, but the prime lending rate was still in the upper teens at press time.The government has attempted to institute reforms that will stimulate the economy and restore growth. Howell, Llewellyn D. and Chad*censored*, Brad, "Models of Political Risk for Foreign Investment and Trade," Columbia Journal of World Business, Fall 1994a. Levy, John B. and Yoon, Eunsang, "Methods of Country Risk Assessment for International Market - Entry Decision," Institute for the Study of Business Markets (ISBM), Report 11-1996. ** CNN- News Net Work/ business & Finance * McGraw-Hill; International Business. e7th; p.191 ### Fast reading in the Economist / Agentina news/ 2000-2001 Bibliography: Word Count: 3126
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