Below is an article written by Monica Ganley, the principal at Quarterra. Quarterra is a Buenos Aires-based consulting firm offering international strategic planning, research, and business development services to organizations and individuals in the agriculture and food space who are global or considering becoming so. Excellent insight into Argentina’s shifting investment climate, particularly in the agricultural sector. Find my areas of interest in bold and comments in [].
Argentina’s Agricultural Sector Open for Business? Prove it.
Since taking office on December 10th of last year, president Mauricio Macri has made a concerted effort to restore Argentina’s relevance on the global stage. Unlike his most recent predecessors, who attempted to insulate the country from international competition and shunned interaction with certain nations, especially the United States, Macri rapidly implemented a number of policies and measures designed to reinsert, and amplify, Argentina’s role in global commerce.
Many of these measures were well publicized. A few months after taking office Macri famously reached a settlement with the vulture funds that held Argentine debt left over from the country’s economic collapse in 2001. Shortly thereafter Argentina completed a vastly oversubscribed sale of $16.5 billion in government bonds, which according to the Financial Times was the largest bond sale ever from an emerging market [ I believe this speaks to how foreign investor sentiment is beginning to change for the positive towards Argentina. According to the Wall Street Journal, Argentina’s new 10-year bonds will yield 7.5%, compared with an average yield of 6% for the J.P. Morgan Emerging Markets Bond Global Diversified Index]. In addition, Macri has rid the country of its parallel currency exchange market and has generally taken measures to reduce bureaucracy and improve efficiency [When I was there in mid-2015, the difference in exchange rate between the official and the “black market” value was nearly 40%. That gap has now all but disappeared].
The agriculture sector has of course been the beneficiary of many of these changes as well. A reduction or elimination of the retentions (essentially export taxes) on key commodities has dramatically shifted Argentina’s possibilities for participating in global agricultural trade. As a result, many are feeling more optimistic than they have in recent memory and the general sentiment is that the country will now begin to move toward reclaiming its global prominence in everything from beef to row crops [In April 2016, Argentina’s beef exports were up 25% from the same time last year, likely due in large part to the USDA’s lifting of a 14-year old hold on the importation of Argentine beef products].
To further prove that Argentina’s attitude toward the world has fundamentally shifted, in mid September Macri’s administration hosted the first Argentina Business and Investment Forum. The event was attended by over 2,000 global business leaders and featured prominent speakers from both the public and private sector. The forum was very professionally produced and went a long way toward showcasing the seriousness with which Argentina is approaching the desire for increased foreign investment. Macri even opened the meeting by giving a greeting in English, a move that his predecessor would certainly never have even considered [While this may seem like a small gesture, I believe it was a powerful one that speaks to Argentina’s commitment to helping restore a level of comfort in Argentina for many US investors].
As one of the country’s key growth engines, agriculture formed a cornerstone of the event. Speakers included representatives from Brazil Foods, AgTech Innovator S4, Syngenta, Adecoagro, and Grupo Los Grobo, among others. One presentation that I found to be particularly poignant was that given by Juan Luciano, Chairman and CEO of Archer Daniels Midland. He said,
“I would say that [I look to the future] with a lot of optimism…There is a clear message from President Macri and the administration to reinsert Argentina into the global context…Companies like ourselves are always seeing Argentina and its possibilities. In the past maybe when conditions weren’t so supportive of investment one thought about investments from the point of view of efficiency. Now one begins to think more in terms of opportunities for growth in Argentina and how to add value.”
Mr. Luciano’s comments perfectly capture the sentiment of the moment. Many people are beginning to pay more attention to the opportunities that Argentina has to offer. However, there is still a long way to go before investors will have their faith in the country fully restored. From my point of view there are several key issues that the Macri administration will have to thoughtfully address if they hope to continue marching toward increased acceptance from the global investor community. These issues include:
- Transparency
- Follow Through
- Rule of Law
- Resilience
- Infrastructure
Transparency
A lack of transparency has long been one of the complaints waged against the prior administration which was notorious for manipulating statistics on everything from inflation to the percent of the population living in poverty. Macri and his team have already made some important changes when it comes to transparency. For example, they have rebuilt the national statistics bureau and have been regularly producing inflation estimates that are even more aggressive than independent industry experts. In addition, new tools have been introduced to monitor statistics specifically within the agricultural ministry [The government also plans to submit to economic monitoring by the IMF. While this is generally normal for members of the fund, Argentina has refused it since 2006].
While the changes to this point have been significant, it will be critical that the administration continues to emphasize transparency as a key element in future policy developments. While the government has managed to maintain a relatively strong reputation to this point, that will rapidly be undone if it is discovered that information has been misrepresented.
Follow Through
While Macri undoubtedly uncovered a bigger mess than expected once he took office, if he hopes to restore investor confidence, it will be very important that his actions align with his words and that promises made come to fruition. One area of concern related to follow through at the moment is related to the soybean export tax.
One of Macri’s first agricultural policies was to eliminate the export tax levied on corn and wheat. The soy tax, which originally stood at 35% was to be stepped down by 5% each year, in order to ease the transition of its elimination. However, there has been some noise recently of the government’s intention to reverse this decision and delay the next export tax reduction.
Although these rumors haven’t been substantiated, I feel that it is very important that the administration continue with the planned export tax deductions. While the absolute tax level is perhaps not that important, what is key is demonstrating the government’s resolve to be a consistent player [I believe this relates directly to the previous point about the need for transparency. It’s not enough to have one without the other]. Choosing to backtrack on this policy decision at this point will undermine the government’s attempt to demonstrate that they are a fixed variable in investment decisions.
Rule of Law
Ensuring that the country’s laws and institutions are respected will be very important for restoring investor confidence in Argentina. In the agriculture sector in particular many of these laws revolve around intellectual property. The most famous case of late is that of Monsanto whose proprietary, GMO seeds have become a magnet for intellectual property disputes. For a company such as Monsanto, that is making materially important investments in the country, the concern is whether the laws that exist will be applied in a fair and consistent manner. Macri’s administration will have to ensure that this is the case if they hope to bring additional dollars into the economy.
Resilience
For the purposes of this article, being resilient means staying the course, despite potentially extraordinary pressure from different stakeholder groups. This is perhaps one of the most difficult demands on the administration, as many of the country’s agricultural groups have become accustomed to making a fuss until their demands (usually a subsidy of some kind) are met [While perhaps one of the most difficult, I would argue that it’s the most critical aspect for a successful restoration of Argentina to her former glory days]. Similar to the other points, staying strong in the face of intensifying interest group demands will not be easy, but it is the only way if the government hopes to maintain its credibility.
Infrastructure
Finally, it is well known that Argentina’s infrastructure is sorely lacking. The proper and efficient movement of agricultural inputs and production are disrupted to a great extent by a lack of adequate transportation options. Investing in infrastructure is one way the government should get involved in the agriculture economy and this action can send a powerful signal. Producers will interpret the investments as a type of support while foreign investors can view such infrastructure investments as proof that the government is a true partner and is putting their own ‘money where their mouth is.’
Undoubtedly Macri’s administration is facing incredible competition for funds coming from a variety of sectors. However, I truly believe that making nominal investments in infrastructure improvements will instill new confidence in Argentina’s agricultural economy and will make a powerful statement to potential investors.
As the new president of Argentina who is trying to help the country shed its populist skin and adopt an attitude of interaction and collaboration with the global community, Mauricio Macri has an incredibly difficult role. While the job he has done has been largely commendable to this point, he and his administration cannot rest on their laurels. If they hope to continue restoring investor confidence and promoting the opportunities that the country offers, it will be imperative that they continue to emphasize Transparency, Follow Through, Rule of Law, Resilience, and Infrastructure.