"Argentina Under Milei: A New Landscape for Investment
12 Questions to Guide Your Opportunities"
Abstract
Javier Milei, elected President of Argentina in November 2023, has embarked on a radical economic reform agenda aimed at addressing decades of economic mismanagement characterized by high inflation, fiscal deficits, and a bloated public sector.
His administration has implemented a series of measures designed to stabilize the economy, reduce inflation, and encourage foreign investment.
Milei's leadership has significantly influenced Argentina's international relations, marking a dramatic shift from previous policies. The country has moved towards a more ideologically driven foreign policy, prioritizing alliances with Western liberal democracies while distancing itself from traditional partners in Latin America and beyond. Milei advocates for aligning Argentina with what he terms "the free world," emphasizing support for liberal democracies and opposing authoritarian regimes. His administration promotes a doctrine of foreign relations focused on defending liberal values and fostering free trade.
Questions and answers
1. What measures has been already taken by Milei’s administration for controlling inflation and obtaining Fiscal Surplus?
Monthly inflation rates have decreased significantly from approximately 25% at the end of 2023 to about 3.5% by September 2024 (2,5% estimated October 2024). However, comparing with other economies, annual inflation remains extremely high at around 237%.
Milei projects inflation will drop to 104.4% by the end of 2024 and further to 18.3% by December 2025.
In addition, the administration has implemented severe and deep austerity measures, including slashing government spending and eliminating state subsidies. As a result of that, for the first time in years, Argentina has achieved a fiscal surplus.
2. How the currency and international trade barriers imposed by former Argentina government has been modified under Milei's leadership?
The Argentine peso was devalued by 50% shortly after Milei took office. This devaluation is part of a broader strategy to align the currency with market realities while maintaining a controlled depreciation rate.
As of October 2024, Argentina's foreign exchange control regulations remain complex and multifaceted, reflecting ongoing economic challenges and the government's efforts to stabilize the economy. The Central Bank of Argentina (BCRA) continues to enforce stringent measures aimed at controlling capital outflows and managing the value of the Argentine peso amid persistent inflation.
Argentina operates a system with multiple exchange rates for the U.S. dollar, including Official Rate, used for regulated transactions within the banking system and Blue Rate, an unofficial rate used by unlicensed money changers, typically higher than the official rate (currently + 15%)
As of today, certain bureaucracy on access to Foreign Currency still applies. It is mandatory to schedule the access to foreign exchange markets for various transactions, including payments to foreign creditors and suppliers (usually 30 days after the nationalization of the goods or services). It is expected a gradual easing of currency restrictions as the government aims for greater economic stability. A potential unification of exchange rates is planned for the first quarter of 2025, which could simplify the current system.
On the other hand, Javier Milei has implemented a series of transformative policies aimed at revitalizing and enhancing foreign trade, including but not limited to the elimination of Import Licensing. Milei abolished the previous import licensing regime (SIRA), allowing for greater ease in importing goods. This deregulation is expected to facilitate smoother trade flows and reduce bureaucratic hurdles for foreign businesses looking to export to Argentina.
Also, by reducing Export Duties, which have historically been a barrier to trade. This move is expected to incentivize exports by improving profit margins for exporters, thereby encouraging them to expand their operations internationally.
By adjusting the exchange rate and removing artificial barriers to imports, the government aims to improve the trade balance, which is essential for restoring confidence among foreign investors and trading partners.
3. What is the status of Argentina's relationship with the IMF and other multilateral bodies?
As of October 2024, Argentina's relationship with the International Monetary Fund (IMF) and other multilateral institutions is characterized by ongoing negotiations, fiscal restructuring efforts, and a complex economic environment.
Argentina is currently under a 30-month Extended Fund Facility (EFF) arrangement with the IMF, which was initiated to support the country's economic stabilization efforts. The EFF agreement includes a total commitment of approximately $44 billion, making it one of the largest agreements ever granted by the Fund. As of June 2024, the IMF Executive Board completed its eighth review of this program, indicating that Argentina has met several of the fiscal and monetary targets set forth in the agreement.
Argentina also maintains an ongoing relationship with the World Bank, which provides financial and technical assistance aimed at promoting sustainable development. The World Bank's focus includes enhancing agricultural productivity and supporting social protection programs for vulnerable populations affected by economic instability. The World Bank has been involved in projects aimed at improving infrastructure and promoting renewable energy sources in Argentina, aligning with global sustainability goals.
Argentina also engages with regional development banks such as the **Inter-American Development Bank (IDB). The IDB has committed to financing various infrastructure projects that are crucial for enhancing connectivity and economic growth within Argentina.
4. What significant legal reforms have been enacted under Milei? How do these reforms could impact on foreign investment?
Milei's government has pushed through significant legal reforms aimed at liberalizing the economy.
The administration passed an omnibus reform bill, "Ley de Bases y Puntos de Partida para la Libertad de los Argentinos" (Law of Bases and Starting Points for the Freedom of Argentines), with the primary aim to modernize the Argentine economy by promoting deregulation and reducing public sector involvement in economic activities.
“Ley Bases” was officially promulgated on June 27, 2024, following extensive negotiations in Congress. This comprehensive law includes over 200 articles addressing various aspects of Argentine life, including taxation, labor laws, public spending, and privatization of state-owned enterprises granting broad executive powers for deregulation and privatization initiatives.
5. What are the main goals of “Ley Bases”?
Privatization Initiatives: The law facilitates the privatization of several state-owned companies, although initial proposals were scaled back significantly from a broader plan to privatize dozens of firms. Key companies like YPF (oil & gas) and Aerolíneas Argentinas (airline) were excluded from privatization efforts but could be subject to other specifics regimes allowing the participation of private investors. This move is intended to reduce the fiscal burden on the government and attract foreign investment.
Labor Law Reforms: The reforms include significant changes to labor laws intended to make it easier for employers to hire and fire employees. In detail:
- Impact on workers' Rights, easier dismissals and employment elexibility, makes it easier for employers, including banks and corporations, to dismiss full-time workers at will. This change is expected to lead to a rise in the use of contingent labor, such as gig workers and temporary employees, effectively undermining job security for many workers.
- Limitations on collective bargaining, by including provisions that limit the right to strike, potentially weakening the bargaining power of unions. It abolishes penalties for irregular contracts and allows for longer working hours (up to 12 hours per day), which could lead to increased workloads without corresponding compensation.
- The law facilitates mechanisms that can suppress union activities, including restrictions on automatic dues payments from non-members (solidarity dues). This change threatens the financial stability of unions, making it harder for them to operate effectively and represent their members' interests
- Reprisals against strikers, including reprisals against public sector strikers, such as non-payment of wages, suspensions, and layoffs.
- Tax Burdens on low-income workers: The introduction of new income taxes for low-wage earners (e.g., single workers earning $2,000 annually) places additional financial pressure on already struggling workers, potentially exacerbating economic hardship and reducing their ability to organize or resist unfavorable labor conditions.
- Promotion of registered employment: The law encourages formal employment registration by providing incentives for businesses that comply with labor regulations.
Fiscal Package: Accompanying the Ley de Bases is a fiscal package that reinstates income taxes while lowering the taxable income floor. This measure is expected to generate additional revenue for the government amidst a backdrop of soaring inflation. Also, a new framework for taxation is established, including the modifications in personal property and internal taxes, and regularization programs for tax obligations to encourage compliance and investment.
Emergency powers: The law grants Milei special emergency powers for one year, allowing him to govern by decree in various sectors including economic and social matters. This has raised concerns about potential overreach and lack of legislative oversight. - The law declares a state of emergency in economic, financial, fiscal, administrative, social security, tariff, health, and social matters for one year. This allows the executive branch to govern by decree until December 31, 2025, facilitating rapid implementation of reforms without extensive legislative approval.
Deregulation measures: The reforms aim to reduce bureaucratic hurdles across various sectors, particularly in oil and gas, where previous strict export quotas are being lifted. This is intended to attract foreign investment into key industries, for instance, by lifting export quotas in agriculture and simplifying regulations for businesses to foster a more favorable investment climate.
Investment Incentives: The law creates an Incentive Regime for Large Investments (RIGI for its acronymous in Spanish), which includes tax breaks and legal protections for qualifying projects deemed to be in national interest. This aims to stimulate foreign direct investment in key sectors (specifically described in next questions).
6. Which are the eligibility conditions for applying to RIGI?
RIGI has the primary objective of provide long-term legal guarantees necessary for attracting multi-million-dollar investments, by stimulating economic development and enhancing competitiveness across various sectors, as well as to promote job creation and increase exports of goods and services.
RIGI is open to both Argentine and foreign companies that commit to investing a minimum of USD 200 million in qualifying projects. The RIGI was officially published on July 8, 2024, and companies have a two-year window to apply for its benefits, with a potential one-year extension. The regime is designed to be operational immediately upon publication at the Official Gazette. Specific sectors eligible for these incentives are described below:
- Forestry
- Tourism
- Infrastructure
- Mining
- Technology
- Steel
- Energy
- Oil and Gas
- For offshore oil and gas exploration, the minimum investment requirement is set at USD 600 million.
Recent updates to the RIGI have expanded its scope to include electric and hybrid vehicle production within the technology sector. This inclusion reflects Argentina's strategic focus on sustainable industries and aligns with global trends toward electrification.
7. How RIGI protects investors?
Under the RIGI several legal protections are offered to investors (local or foreign). These protections aim to create a stable and secure environment for investment, addressing concerns that international investors may have regarding regulatory changes and potential risks associated with investing in Argentina. The main measures are:
Regulatory Stability: 30-Year Stability Guarantee: The RIGI guarantees that the rights, protections, and incentives provided under the regime will remain stable for 30 years. This means that any newly imposed taxes or increases in existing ones will not apply to projects under RIGI, ensuring long-term predictability for investors.
Tax and Customs Incentives - secured rights over incentives: Investors have secured rights akin to ownership over tax and customs incentives. This protection ensures that these benefits cannot be altered by future regulations, providing a layer of security for financial planning.
Dispute Resolution mechanisms - International Arbitration. Choice of law and jurisdiction: In addition to the Treaties to Protect FDI already executed by Argentina, The RIGI allows disputes between Argentina and companies participating in the regime to be resolved through international arbitration freely agreed by the Parties. If a legal dispute cannot be settled within 60 days, companies can bypass national courts and go directly to independent arbitration bodies. This provision is crucial for investors who may fear biased treatment in local courts.
Protection against expropriation - guarantee against confiscation: The regime provides assurances that investments will not be subject to confiscatory or expropriation acts. This protection is vital for foreign investors who may be concerned about the security of their assets in Argentina.
Rights to repatriate profits. Free availability of funds: Investors have the right to repatriate profits, dividends, and interest without facing restrictions, if the funds have been settled through the foreign exchange market. This ensures that investors can access their returns without bureaucratic hurdles.
Legal protections for assets - Full availability of assets: The RIGI guarantees that all assets allocated to the execution of investment projects will remain fully available without restrictions, enhancing investor confidence regarding asset management.
Special provisions for Long-Term Strategic Export Projects: For projects classified as "Long-Term Strategic Export Projects," additional legal protections may apply, extending stability guarantees based on project timelines and milestones.
8 Which are other RIGI’s key benefits for investors?
Eased Currency Liquidation Requirements: Under the RIGI, foreign investors are granted flexibility regarding the liquidation of foreign currency earnings. For the first two years, projects under RIGI are required to liquidate only 80% of their dollar income in the official exchange market. This is a significant reduction compared to standard requirements, allowing investors to retain a larger portion of their earnings. After the initial period, the liquidation requirement decreases to 60% after three years and ultimately to 0% after four years. This means that after four years, projects will not need to bring any new U.S. dollars into the official exchange market, providing investors with greater control over their foreign currency.
Exempt from standard foreign currency obligation: Single Purpose Vehicles (SPVs) entities adhering to the RIGI are exempt from the obligation to enter and settle foreign currency through the foreign exchange market for specific percentages based on their operational timeline. For instance, they can retain a higher percentage of their foreign currency earnings as they progress through different stages of their investment.
Advance Collections and Financing: Advance export collections and pre-financings are also exempt from the obligation to enter and settle through the FX Market, allowing for more straightforward financial operations without stringent currency conversion requirements.
Free Availability of Foreign Currency: for local or external financing and repatriation of profits.
Reduced Corporate Tax Rate: Investors participating in projects under the RIGI will benefit from a reduced corporate income tax rate of 25%, down from the standard rate of 35%. This reduced rate is locked in for a period of 30 years, providing long-term stability for investors.
Exemptions from New Taxes. Tax Stability**: Projects under RIGI are exempt from any new taxes that may be introduced over the next 30 years. This provision ensures that investors will not face unexpected tax increases during their investment period.
Import Duty Exemptions: Capital Assets and Machinery**: Projects under RIGI are exempt from import duties on capital assets, machinery, and spare parts necessary for their operations. This exemption significantly lowers the initial costs for foreign investors.
Export Duty Exemption: Initial Period: Projects will be exempt from paying export duties for a period of 3 years, or two years for specially qualifying “strategic exports.” This exemption encourages export-driven businesses by enhancing profit margins.
Dividend Tax Reductions: The tax rate on dividends is reduced to 7% during the first three years of the project, further decreasing to 3.5% after seven years. This reduction enhances returns for investors on their profits distributed as dividends.
Accelerated Amortization and Depreciation: Depreciation Schedules: The regime allows for accelerated amortization and depreciation schedules, enabling investors to recover costs more quickly and reduce taxable income in the early years of operation.
Transfer of Net Operating Losses. Loss Transferability: Investors can transfer (sell) any remaining Net Operating Losses (NOLs) after the conventional five-year period from accrual, providing additional financial flexibility.
9. What sectors are taking advantage of RIGI?
The agriculture sector stands to gain significantly from the RIGI through enhanced export capabilities and reduced operational costs due to tax exemptions and duty-free imports of necessary equipment.
The energy sector, with Argentina's vast natural resources, particularly in oil and gas, is expected to attract substantial investments aimed at exploration and production. The special provisions for offshore projects signal a commitment to fostering growth in this critical sector. In this sense, TGS, Argentine energy company TGS presented a project seeking to invest USD 700 million in expanding a pipeline connecting Vaca Muerta with Buenos Aires, marking it as one of the first major investments under the new regime. Also Petrona’s representatives from Malaysian oil and gas company Petronas met with Argentine officials regarding potential investments aligned with the RIGI framework.
The mining sector, particularly lithium extraction crucial for battery production, is poised for growth under the RIGI. The incentives provided can enhance competitiveness and attract foreign investment.
The inclusion of technology-related projects under the RIGI presents opportunities for innovation-driven investments in areas like biotechnology, software development, artificial intelligence, and more.
10. What can be expected in terms of deregulation of the Economy?
Minister Sturzenegger, in charge of the deregulation minister, has outlined further reforms that are anticipated to complement Milei's initial legislative agenda:
Expansion of Deregulation: Proposed measures include further deregulation across multiple sectors such as energy, finance, transport, infrastructure and agriculture, aiming to enhance competitiveness and attract international investors.
Tax Incentives for Investment: New tax incentives are being discussed to encourage both domestic and foreign investments in strategic sectors like technology and renewable energy.
Social Security Reforms: Plans are underway to reform social security systems with an emphasis on sustainability while potentially reducing benefits for future retirees as part of broader austerity measures.
Continued Labor Market Flexibility: Additional proposals may include further amendments to labor laws that would enhance flexibility for businesses in workforce management while potentially facing pushback from labor unions.
Infrastructure Investment Initiatives: To address critical infrastructure gaps, there may be initiatives aimed at public-private partnerships (PPPs) to leverage private capital for public projects.
11. What the market expects from Argentina in the coming years?
The market expects Argentina to experience a challenging economic landscape in the short term, followed by a significant recovery, with growth projections indicating a rebound of 5% in 2025 after a contraction of approximately 3.5% in 2024. This outlook is supported by various sources, including the IMF, which anticipates that structural reforms and stabilization efforts under President Milei will lay the groundwork for future growth, driven by improved agricultural production and investments in the energy sector.
The OECD also echoes this sentiment, highlighting an upturn for the Argentine economy post-2024, contingent on successful implementation of fiscal adjustments and inflation control measures.
The World Bank also forecasts a contraction of 3.5% in 2024, similar to the IMF's assessment. They predict that economic recovery will begin in 2025, with growth projected at 5% driven by better weather conditions for agriculture and normalization in production levels after a challenging year.
BBVA Research predicts that Argentina will experience an average decline of 4% in GDP for 2024 but expects a rebound starting in the second half of the year. Their outlook suggests that after the initial phase of economic adjustments, Argentina could see significant recovery as fiscal policies stabilize and inflation begins to ease.
According to Trading Economics, the GDP growth rate for Argentina is expected to be around -1% by the end of 2024, with projections indicating a gradual recovery to approximately 0.8% in 2025 and 1% in 2026. These estimates reflect cautious optimism about Argentina's long-term economic prospects following necessary reforms.
In the same understanding, several articles were already published by international media, as Financial Times and Bloomberg,[1]
In addition, significant backing has emerged from influential tech billionaires, including Elon Musk and Mark Zuckerberg. Their support is crucial for promoting investment in Argentina, particularly in sectors like technology and renewable energy.
Elon Musk, the CEO of Tesla and SpaceX, has publicly expressed interest in Argentina's potential as a hub for lithium production, essential for electric vehicle batteries. His endorsement is seen as a critical signal to other investors about the viability of investing in Argentina's burgeoning lithium sector, which is rich in natural resources.
Mark Zuckerberg co-founder of Facebook (now Meta) has also shown interest in expanding technology investments in Latin America. His company’s initiatives to enhance internet connectivity and digital services align with Milei’s goals of fostering a more robust digital economy.
Despite short-term contractions, analysts remain optimistic about Argentina's long-term growth potential due to its vast natural resources, educated workforce, and strategic position within Latin America. The country’s rich agricultural base and emerging technologies are viewed as key drivers for future economic expansion.
12. What opportunities can Argentina offers to EU countries within the framework of the EU-MERCOSUR Agreement?
MERCOSUR, or the Southern Common Market, is a regional trade bloc established in 1991, comprising Argentina, Brazil, Paraguay, and Uruguay as its founding members. Venezuela's membership was suspended in 2017, while Bolivia is in the process of ratification. MERCOSUR aims to promote free trade and the fluid movement of goods, people, and services among member countries, enhancing economic integration and cooperation.
Within MERCOSUR, Common External Tariff (CET), applies to imports from non-member countries and ranges from 0% to 35%, depending on the product category. For most products traded within MERCOSUR, tariffs are significantly lower or non-existent. Approximately 80% of products traded between MERCOSUR members are exempt from tariffs due to the CET's implementation since 1995. Sensitive products, such as textiles and automobiles, may still face higher tariffs.
The Import Taxes for products with Certificate of Origin, has Preferential Tariffs: Products originating from MERCOSUR member countries benefit from reduced or zero tariffs when imported into another member country, provided they have a valid Certificate of Origin. This certificate confirms that the goods are produced within the bloc. While many goods may be exempt from import duties under the CET, additional charges such as Value Added Tax (VAT) and statistical fees may still apply. Products exported with a Certificate of Origin to other MERCOSUR countries typically do not face additional export duties beyond national regulations.
Negotiations between MERCOSUR and the European Union (EU) for a comprehensive free trade agreement began in 2000. The agreement aims to establish a bi-regional free trade area that encompasses three main components: (i) Political Dialogue: Strengthening political ties and cooperation on global issues, (ii) Trade and Economic Issues, reducing tariffs and barriers to facilitate trade, and (iii) Cooperation: Enhancing collaboration in various sectors, including technology, agriculture, and sustainable development.
The Key Benefits of the MERCOSUR-EU Agreement are so far:
Market Access: The agreement is expected to provide MERCOSUR countries with preferential access to the EU market, which is one of the largest economies globally. This access will enhance export opportunities for agricultural products, industrial goods, and services.
Economic Growth: By reducing tariffs on goods traded between MERCOSUR and the EU, the agreement could stimulate economic growth in both regions. For MERCOSUR countries, this means increased exports of key products such as beef, soybeans, and other agricultural commodities.
Investment Opportunities: The agreement is likely to attract foreign direct investment (FDI) from EU companies looking to establish operations in MERCOSUR countries. This investment can lead to job creation and technology transfer, further bolstering local economies.
Sustainable Development: a significant component of the negotiations includes commitments to sustainable development practices. The agreement incorporates environmental standards that align with international commitments, promoting responsible production methods.
Strengthening Ties: The agreement aims to deepen political and economic ties between two major regions, fostering cooperation on global challenges such as climate change, trade disputes, and social issues.
Diversification of Trade: For EU countries, engaging with MERCOSUR allows for diversification of supply sources and reduces reliance on single markets or regions. This is particularly relevant as geopolitical dynamics shift globally.
Status of the negotiations:
As of October 2024, negotiations between the European Union (EU) and the MERCOSUR are progressing with renewed momentum. Here are the key developments and challenges surrounding the negotiations.
Spanish Prime Minister Pedro Sánchez has indicated that the EU is "very close to closing" the long-delayed free trade agreement with MERCOSUR. He emphasized the importance of two upcoming events: the G20 summit in Rio de Janeiro on November 18-19, 2024, and a MERCOSUR summit in December 2024, as critical opportunities to finalize the agreement. The European Commission has expressed its determination to proceed with the negotiations, highlighting the economic and geopolitical significance of sealing the deal. Olof Gill, a spokesperson for trade issues, reiterated that the agreement is crucial for both regions.
Brazilian officials remain optimistic about concluding an agreement this year, reflecting a commitment to enhancing trade relations with Europe. The Brazilian Ministry of Industry and Trade has indicated that progress is being made in discussions. While some officials suggest that a signing during the G20 in Brazil in November 2024 summit is possible, others view it as "very hypothetical" given ongoing disagreements among EU member states regarding environmental protections and agricultural impacts.
[1] https://www.bloomberglinea.com/latinoamerica/argentina/que-necesita-vaca-muerta-para-superar-el-millon-de-barriles-segun-el-presidente-de-shell-argentina
