World Economy

Argentina Economic Setbacks Delay Promised FDIs

Argentina Economic Setbacks Delay Promised FDIsArgentina Economic Setbacks Delay Promised FDIs

Despite more flexible rules, the foreign investment boom anticipated by the Argentinian President Mauricio Macri administration to reactivate the economy is far from the jumpstart initially expected.

Stubbornly high inflation and fiscal deficit and the larger than expected economic drop for this year have delayed the arrival of capital flows, experts agree, while claiming more time will be needed for projects to be carried out, Yahoo reported.

In the first half of the year, foreign direct investment reached $1.3 billion, according to Central Bank data. While the amount almost equals the annual investment for 2015, it only represents less than 5% of the $30.1 billion in investments announcements accounted by the finance ministry.

When looking at each sector, the $1.3 billion invested in the first six months of the year was focused on oil ($336 million), communications ($247 million), food, drinks and tobacco ($179 million) and the vehicle industry ($111 million). Another $900 million arrived in the country but only for bonds and financial assets investment.

The Central Bank said increase in foreign direct investment compared with 2015 so far this year was mainly because of the “opening of the capital account and allowing foreign companies to send their profits to their headquarters,” two of the measures implemented by the Macri administration soon after taking office.

  Investment Pledges

According to finance ministry figures, hundreds of companies have vowed to invest $30.1 billion until 2019. The investments would be nationwide, with $7.7 billion to be spent in the central provinces of the country and $4.9 billion in Patagonia. Salta would be the province to receive the largest investment flow, totaling $3 billion.

Most of the investment pledges were done by US companies, followed by Spain, Canada, China, Brazil and Chile. A total $8.2 billion would be invested in the industrial sector, followed by $7.7 billion on mining, $5.5 billion on transportation and communications, $2.5 on financial services and $2.4 on energy, natural gas and water supply.

Foreign direct investment in Latin America dropped 9.1% in 2015, the lowest level since 2010 due to a drop in natural resource investment and a regional economic slowdown, according to ECLAC. While in most emerging countries FDI represents about 30% of the total investment, the figure dropped to 15% in Argentina.

  Growth Lowered

The United Nations Economic Commission for Latin America and the Caribbean updated last week its economic forecasts for the region, saying the country’s economy will shrink by 1.5% this year, a greater contraction than initially expected.

The figure was in line with that of the International Monetary Fund, which two weeks ago also lowered growth forecasts for Argentina in 2016 to -1.5%. Earlier this year, the IMF was predicting 1% growth for 2016, while ECLAC was forecasting -0.8% change in gross domestic production.

The bigger economic contraction comes with an across-the-board consensus among economists that the annualized inflation rate won’t be below 40%, when the initial government expectations forecast a 25% inflation rate. At the same time, the public sector doubled in June its primary deficit, which accumulates a 27.4% increase so far this year.

Argentina’s industrial output contracted 6.4% in June compared with the same month last year, national statistics agency Indec said, underlining the nation’s difficulties in jump-starting a much-anticipated market turnaround.

Though economists widely believe manufacturing will remain in negative territory in the coming months, the June figure came in even below a Reuters forecast for a 5% drop.

In the January-to-June period, manufacturing fell a total of 3.3% compared with the same period last year.

Among the worst performing manufacturing sectors in June was the automobile industry, which registered a 21.6% drop in annual terms, Indec said.