In July 2020, as international businesses evaluated opportunities amid the chaos of a global pandemic, we wrote a blog post asserting “Argentina: Why Here, Why Now for International Investment.”
“This may seem counterintuitive given the country’s double-digit inflation, income inequality, and long history of political and economic turbulence—including today’s evolving story of debt renegotiation and default. Furthermore, how Argentina will handle the economic repercussions of COVID-19—like business closures, losses in tax revenue, and the possibility of even higher inflation from measures like lower borrowing rates—remains uncertain.
The answers to these questions are still unfolding. Despite the uncertainties, however, we believe Argentina has much to recommend it, particularly for investors with an appetite for risk: a tech-savvy population, broad-based resources, potentially favorable conditions for M&A activities and recovery, and extraordinary savvy and resilience among the companies that have prospered.”
Here we are, over a year later. What does the landscape in Argentina look like now? A snapshot follows, highlighting investor activity, key sectors, economic policy, and political developments to watch.
From vaccine administration to production
After administering 49 million vaccine doses, September 21, 2021 marked a milestone in Argentina’s COVID-19 fight. New daily cases dropped from a high of more than 41,000 in May to only 622. Also on this date, Health Minister Carla Vizzotti made an optimistic announcement: a plan to loosen border controls, allow more commercial activities, and stop requiring face masks outdoors.
“We are in a very positive moment, we know that the pandemic has not ended, we have to maintain care,” she said. “We are moving toward the full recovery of activities.”
These activities include mRNA vaccine development and production. In September 2021, the Pan-American Health Organization selected Sinergium Biotech, partnering with biotech company mAbxience, to be a regional hub for developing and manufacturing the vaccine’s active ingredients.
Still a deal magnet: Equity, mergers, acquisitions, and more
A summer 2021 research study interviewing 100 senior-level private equity investors revealed that 90% of US-based private equity firms are interested in doing deals in Latin America. And in August, unicorn Uala, creator of a personal financial management app, became the beneficiary of Argentina’s largest round of preferred equity financing to date: $350 million by Tencent Holdings and SoftBank, which propelled the company’s valuation to $2.45 billion.
In the M&A space, research firm Statista reported 61 M&A deals from January – July 2021 in Argentina alone. Some examples include:
- Brazil smart farming firm Agrosmart’s acquisition of Argentina-based startup BoosterAgro, which owns the main agrobusiness-focused weather app in Latin America
- Bank holding company Grupo Supervielle’s acquisition of 100% of foreign exchange brokerage Easy Cambio SA
- Grupo Supervielle’s capital contribution to acquire a stake in digital payment company Play Digital
Yet companies pursuing M&A deals in Argentina need to stay abreast of the rules. Updates to put on your radar include regulations related to merger control thresholds, fines, filing deadlines, and closing notifications, which international law firm DLA Piper noted in March.
Digital shopping, work, and play is here to stay
It may be an understatement to say that digital shopping boomed throughout the pandemic. In fact, during the first half of 2021, ecommerce invoicing in Argentina more than doubled against the same period the previous year, with more than 120 million products sold online via 92.3 million online purchase orders.
“We say that COVID-19 accelerated the future that technology companies have been building. What’s different about LatAm is the powerful behavioral change associated with bringing people into the digital economy for the first time,” Sequoia Partner Sonya Huang told Bloomberg Linea.
Ecommerce platform MercadoLibre reported a 103% currency-adjusted year-over-year revenue leap in August 2021, plus the acquisition of Kangu to expand its logistics in Brazil. “The data so far is encouraging as it seems to point to consumer behavior shifts toward online purchasing having staying power,” said CFO Pedro Arnt.
A sizable sector of these shoppers continue to earn their money through the digital economy as well. In our July 2020 piece, we talked about Argentina’s skilled and substantial IT workforce. Investors and innovators are recognizing this as a business—as well as a talent—opportunity. Buenos Aires-based remote education provider Digital House, which served more than 28,000 students in 2020, announced more than $50 million in new funding in March 2021.
Finally, online travel and recreation sales remain strong, even in the hardest-hit sectors. With lockdowns and travel bans worldwide, few industries suffered as much as travel and tourism during the pandemic. As vaccines continue to roll out and restrictions lift, restless travelers are packing their suitcases again around the world, with Latin America no exception. Research firm Statista predicts that online travel sales in Latin America will return to pre-pandemic levels, from a low of $9 billion in 2020 to $22 billion in 2022.
Money continues to move online
As commerce continued to go digital during the past year, so did currency. In the first half of 2021, Latin American crypto startups raised $517 million in announced VC funding. “In Latin America we [are used to] exchange rate volatility, costly regulations and untrustworthy currencies. In Argentina, a 10-year-old understands that there are different exchange rates,” Kaszek Ventures Managing Director Hernan Kazah told Coindesk.
In October, global Bitcoin mining company Bitfarms commenced construction of a production facility in Argentina. “Our new high-production facility in Argentina, which is expected to accommodate over 55,000 miners upon completion, will greatly expand our capacity and global footprint,” CEO Emiliano Grodzki told Yahoo Finance.
“The Argentina facility is planned to produce Bitcoin using power at the attractive rate of just US 2.2 cents per kilowatt hour, substantially reducing our already low cost of mining Bitcoin. Leveraging our expertise and corporate infrastructure, as well as that of our highly respected construction partners, is part of our strategy to grow faster and more efficiently by mining Bitcoin with improved profit margins.”
Ups and downs in natural resources and agriculture
When U.S. technology company Lilac Solutions and Australian miner Lake Resources partnered on the development of a lithium brine project, it was part of a larger trend: a boom to extract this vital metal to feed the increased production of electronic vehicles. International players abound in this sector. In October 2021, China’s Zijin Mining Group announced plans to buy Canadian firm Neo Lithium Corp for over $737 million.
In the world of agriculture, 2021 was marked by encouraging signs and obstacles. Wheat, corn, soy, and lemon production and exports were all up.
“Despite increases in agricultural input prices, farmers are continuing to make investments in improved seed varieties and agrichemicals to improve quality and yields, as they anticipate positive financial returns at current prices,” the U.S Department of Foreign Agriculture Service told World Grain.
Meanwhile, biodiesel production reported its worst year since 2016, with exports solely to the EU, due to a confluence of factors, cited in World Grain as: “a lack of enforcement of the existing mandates, changing policies that reduced blend rates in the first three months of the year, delays in updating official prices to match increased production costs, low diesel consumption due to the economic recession, and the implementation of the new Biofuels Law 27640 in the last part of 2021, which will reduce the official blend rate from 10% to 5% or even 3%.”
Argentina’s wine sector fared much better in 2021, with an “extraordinarily strong and surprisingly healthy” harvest following frost, labor shortages, unusually cool temperatures, and more, Decanter.com reported. “After a worrying beginning and a series of unusual climatic events, every region is forecasting excellent wines as the different terroirs demonstrate their adaptability.”
In the beef sector, the historic Liniers cattle market announced its plans to leave Buenos Aires for a more modern facility—and that was just one development shaking up the industry. A May 2021 ban on exports, implemented in response to rising domestic prices, extended through summer, then fall, causing tension with producers and farm organizations and opening up market share to competitors like the U.S., Brazil, and Uruguay.
The restrictions “are removing predictability from the producer and are creating an environment of mistrust in which farmers don’t want to invest,” said Jorge Chemes, president of the Argentine Rural Confederations.
Policies and programs for people and businesses
In July 2020, we mentioned the suspension of the Promotion Regime of the Knowledge Economy. Just a few months later, in October, Argentina enacted Law 27,570, which amended the promotional regime by imposing new requirements to qualify for the regime and modifying certain benefits. “The regime’s objective is to promote knowledge-based and digital activities in Argentina that result in the manufacturing of goods, the provision of services or the improvement of processes,” EY wrote about this development.
At the end of 2020, the government passed a wealth tax on the roughly 12,000 Argentines with assets worth more than $2.5 million. The Law on the Solidarity and Extraordinary Contribution of Great Fortunes—otherwise known as “the millionaire’s tax”—aims to collect $3.78 billion for schools, working class neighborhoods, the natural gas sector, and COVID-19 equipment and supplies.
In another area of social assistance, the government in August 2021 expanded benefits to women who worked outside of the formal labor market and were therefore excluded from the nation’s pension system.
“The programme, launched this week, marks the first time the role of an unpaid caregiver has been recognised by the Argentine state as something akin to work,” Al Jazeera wrote in its coverage of the topic. “The policy is expected to enable 155,000 more women to collect a pension immediately.”
Debt and taxes
So how is the economy doing overall?
At the beginning of September, analysts in a central bank poll improved their forecasts for economic growth, from 6.8% to 7.2% A draft budget released in September 2021 by the government was more conservative, predicting Argentina’s economy to grow 4% in 2022 and for inflation—a concern for several years—to hit 33%. According to President Fernandez, the budget assumes a deal with the International Monetary Fund to revamp some $45 billion in repayments. Negotiations have been in the works between the IMF and Argentina toward a new Extended Fund Facility program.
At the time of our July 2020 article, President Alberto Fernandez was working to recruit HSBC, Lazard, and Bank of America to help with debt restructuring. These efforts proved successful. BofA Securities, Inc. and HSBC Securities (USA) Inc. were dealer managers and Lazard was a financial advisor for new bond documentation that seeks “to strengthen the effectiveness of the contractual framework as a basis for the resolution of sovereign debt restructurings upon the support for such adjustments of the broader international community.”
The Wilson Center, however, noted Argentina’s “reluctance to keep up with its payments due to foreign governmental entities,” citing a payment of just over $2 billion to foreign aid and export-finance agencies represented by the Paris Club that was renegotiated to less than one-fifth of that amount, despite the fact that Argentina was earning on average $6 billion per month from merchandise exports during that time—tax revenues that could have covered the Paris Club debt. In an update to the export tax scenario, in September 2021, Economy Minister Martin Guzman announced that Argentina will eliminate its export taxes on services in the new year.
Taxes, of course, were top of mind for businesses worldwide over the past year as 140 nations signed on to move toward a 15% minimum tax, aiming to recapture the billions lost to government coffers by tax havens.
Argentina had already been working on tax reform. In June, the Argentine Congress moved to replace the 30% fixed rate with a progressive tax rate, lowering tax to 25% in many circumstances. The move is part of an effort to provide relief to smaller businesses—and to address the pandemic’s negative impact on tax revenues. What will the new global minimum tax rate decision bring? According to Argentina’s finance minister, 15% is too low, and the nation requires a rate of at least 21%.
All eyes on the November elections (including those of the IMF)
Argentina’s open primaries in September shook up the political landscape. The Juntos coalition received over 40% of the vote compared to 30% for the Peronists government, forcing Fernández, a progressive, to replace ministerial posts with more right-wing ministers.
What does this mean for Argentina’s debt restructuring? The Wilson Center predicts one of three potential outcomes after the November midterm elections:
- The government adopts an emergency economic stabilization and structural reform plan at the beginning of 2022 that both pleases the IMF and key legislatures who must by law approve it. Investor confidence improves, along with government access to voluntary capital markets, curbs on inflation, and the strength of the nation’s economic recovery.
- Talks between the Argentine government and the IMF break down and Argentina defaults on its payments.
- The IMF and leading shareholders approve a stabilization and reform program with more modest fiscal and monetary adjustments and structural reforms, keeping Argentina engaged and honoring its debts and buying time until October 2023, when the next national elections might bring a new administration.
Argentina continues to believe in–and invest in—the future
Our July 2020 piece concluded with quotes and stories from Argentine entrepreneurs, and it feels appropriate to conclude this update with a spotlight on innovation.
It’s interesting to note that Zoom—the application through which we have all conducted business over the past year and a half—has an Argentine connection. Santi Subotovsky, an Argentine immigrant to the United States, led the financing behind this now-ubiquitous videoconferencing service.
Even—or especially—during a crisis, Argentina’s business and technology leaders recognize the need to invest in innovation.
In August, early-stage venture capital fund Newtopia VC launched with $50 million to invest in tech startups based in Latin America. The fund’s leaders include Mariano Mayer, former national secretary for entrepreneurs and SMEs, and Jorge Aguado, former national science, technology and innovation secretary.
While the group has already invested in startups in Mexico, Brazil and Argentina, “We see a gap in investments in seed and road to Series A,” Mayer told TechCrunch. “We aim to help entrepreneurs in those stages. Newtopia started with conversations during the pandemic, and now we see a big momentum for transformation of traditional sectors and the talent to make businesses out of these opportunities.”
On the public sector side, Argentina announced plans to invest $288 million in science, technology and innovation over the next five years, with $230 million from the Inter-American Development Bank and the government funding the rest. As part of a federal program, this investment will fund science and technology infrastructure and the creation of consortiums and technology-based companies, as well as provide support for SMEs, regional economies, and technology centers to boost productive innovation.
These are just a few examples of how Argentina’s innovation ecosystem is comfortable moving forward under conditions that would daunt others. Our July 2020 article featured this quote from Gustavo Markier of travel website Plataforma 10.
“We have grown in Argentina, with the Argentina that we have — and we could grow much more. While most of the world contemplates with dread the economic destruction wreaked by the coronavirus, for many Argentine entrepreneurs it is just one more challenge to overcome.”
In conclusion, it seems fitting to look ahead to a new year with another quote from our initial outlook:
“We’re comfortable working with risk,” Alejandro Mashad with entrepreneurship nonprofit Endeavor Argentina told Inc. magazine. “It’s something we get used to from the day we are born.”
Ready to speak with specialized consultants and advisors who can help you evaluate the Argentine market for expansion, partnership, investment, and more? Contact us today.