Daniel Melhem, Managing Partner, Knightsbridge Partners

On what needs to be done to boost investments in Argentina

How interested are international investors in engaging with Argentina?

DANIEL MELHEM: Generally speaking, today’s investors find that expected returns in Argentina are still lower than in other emerging markets. Taxes still rank among the highest in the region, and labour costs are expensive. Thus, investing here remains a difficult proposition for institutional investors, ¬even for the most aggressive funds. However, stakeholders are recognising the progress being made by the new administration. The difficulties facing this administration in Congress are also well understood. At the end of the day, it is the Argentine voter who will decide how much the nation will be transformed.

Over the past year, investors have focused on certain sectors rather than on the economy as a whole. Regional online retail company MercadoLibre, for example, recently announced a $750m investment in their logistics and distribution infrastructure with support from a US investment fund. Industry and hotels are also attracting foreign investment into the real estate market. Potentially the most significant development is the government’s grand infrastructure plan that is already being implemented, which will benefit the economy by reducing logistics and operating costs, among other advantages. By far the largest investment in decades, the plan involves the construction and refurbishment of roads, highways, airports, railroads and ports, and establishes a new public-private partnership law to effectively attract investment.

Today, we have investors from the Middle East looking at acquiring controlling stakes in agricultural companies that produce alfalfa, wheat, beef and poultry. We have also dealt with investors looking into renewable energy and mining, but those investments won’t materialise on a grand scale until the existing regulations and macroeconomic indicators improve. Low-cost financing will also be vital for these longer-term projects.

To what extent does the current phase of economic integration compare to the privatisation period of the 1990s?

MELHEM: During the 1990s, the valuations of Argentine companies were low compared to peer companies in other countries. At that time, fears about the exchange rate were mitigated mainly by the dollarisation of the Argentine peso. This resulted in high levels of investment coming into the country because the valuation of local companies was adequate or cheap, and there was no risk of fluctuations in the exchange rate. The investments were promoted by large multinationals through the privatisation of public companies in energy, telecommunications and media, among others. Argentina, without being a former communist country, basically benefitted the same way as most former Soviet countries did in Eastern Europe. However, pegging the peso to the dollar eventually led to the 2001 crisis. 

Now, we are in a much different situation. We have a floating exchange rate, and Argentina is implementing structural changes with the objective of laying the foundations for sustainable and long-term economic development. President Mauricio Macri is gradually implementing changes and carefully opening the doors to international goods, while being more cautious in labour-intensive and less competitive sectors. 

How is inflation impacting the long-term performance of foreign investment indicators?

MELHEM: Argentina has started to understand that we cannot be competitive in certain industries, such as textiles or the automotive industry. Producing a car in Argentina costs 25% more than in Brazil and 50% more than in Mexico. Although the industry is strong with an annual capacity of over 1m vehicles, it only employs about 70,000 people. It is vital that we expand exports, but this cannot be done without lower inflation.

In what ways can Argentina re-establish confidence in contract sanctity? 

MELHEM: The government has done an important job in bringing greater transparency, but that does not mean the justice system in Argentina is working as it should. Despite a few high-profile politicians and businessmen being incarcerated for corruption, much more needs to be done. The rule of law is crucial in creating an acceptable environment for foreign capital and speeding up investments. Boosting transparency and enforcing the law are crucial to ensure sustained economic growth. As a nation, we should look to global best practices, possibly implementing an international arbitration to boost investor confidence. A good example is the Dubai International Financial Centre, which has its own arbitration court whereby any UAE contract dispute is resolved with international judges from Europe or the US.

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