Argentina 2008 Investment Report Executive Summary

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The purpose of this report is to take an in-depth look at Argentina’s investment profile and performance during the period of 2003-2008 with a focus on the last year. A comprehensive understanding of …

The purpose of this report is to take an in-depth look at Argentina’s investment profile and performance during the period of 2003-2008 with a focus on the last year. A comprehensive understanding of investment behavior is a key element for the management and strategic planning
carried out by ProsperAr, Argentina’s National Investment Development Agency. This analysis provides an understanding
of the investment process, its strengths, and the challenges Argentina faces in the current context of international crisis. The 2008 Investment Report is a critical tool to draft
hypotheses about the future performance of the economy and the actions required to face the international crisis.
This document was produced by ProsperAr, Argentina´s Investment Development Agency.

If you need further assistance contact us at info@prosperar.gov.ar or use our website www.prosperar.gov.ar

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  • 1. 2008 Investment Report Argentina’s National Investment Development Agency
  • 2. Executive Summary OVERVIEW The purpose of this report is to take an in-depth look at Argentina’s investment profile and performance during the period of 2003-2008 with a focus on the last year. A comprehensive understanding of investment behavior is a key element for the management and strategic planning carried out by ProsperAr, Argentina’s National Investment Development Agency. This analysis provides an understanding of the investment process, its strengths, and the challenges Argentina faces in the current context of international crisis. The 2008 Investment Report is a critical tool to draft hypotheses about the future performance of the economy and the actions required to face the international crisis. A R G E N T I N A’ S N AT I O N A L I N V E S T M E N T D E V E L O P M E N T AG E N C Y - 0 0 8 I N V E S T M E N T R E P O R T 
  • 3. 008 Investment Report - Executive Summary Chapter 1: >> THE ROLE OF INVESTMENT Introduction While investment growth leads to the expansion of an economy’s production capacity, it goes even farther. Investment performance is closely tied to technological change, innovative activities and the development of new and increasingly dynamic businesses. The accumulation of capital and know-how play a complementary role in the long term as critical factors to ensure economic growth sustainability. Investment volume, as much as its breakdown, are key factors to the development process. In this context, productive investment stands out as a greater contributor to the process. Chapter 2: >> HIGH AND SUSTAINED ECONOMIC GROWTH Investment Performance After the 2001-2002 crisis, Argentina experienced an outstanding economic recovery. The 2003-2008 accumulated annual growth rate for the 2003 -2007 period was 8.8%, and 7.8% in the first half of 2008. As a result of this remarkable growth, Gross Domestic Product (GDP) in the second quarter of 2008 was 49.6% higher than in 2001 and 31.1% higher than the historic record of the 90s reached in 1998. >> INVESTMENT DRIVE After reaching its lowest point in the first quarter of 2002, Gross Domestic Capital Formation (GDCF) began to recover, and then grow. The recovery phase started in the second quarter of 2002 and continued through 2003 and 2004 at an extraordinarily high growth rate (over 35% per year at constant prices). An investment growth phase immediately followed to reach an accumulated annual rate of 18.1% between 2005 and 2007. This dynamic investment process continued through the first half of 2008, when GDCF grew 16% relative to the first half of 2007, reaching AR$226.44 billion (at current prices). Investment has grown steadily for five consecutive years and given data available for the first semester of 2008, it will most likely be six years running. This behavior is unheard-of in three decades. In spite of this, a shift in the international context and its impact on the Argentine economy could result in the deceleration in investment growth in the second half of 2008 and in 2009. A R G E N T I N A’ S N AT I O N A L I N V E S T M E N T D E V E L O P M E N T AG E N C Y - 0 0 8 I N V E S T M E N T R E P O R T 
  • 4. 008 Investment Report - Executive Summary >> INCREASE IN INVESTMENT SHARE IN GDP Investment’s strong performance has lead to sustained growth of its share in GDP, which climbed from of its lowest point at 11.3% in 2002 to 22.6% in 2007, both measured at constant prices. The uptrend held in the first half of 2008, when investment expansion again outpaced GDP’s growth rate. The growth dynamic was reflected in a 22.8% investment rate (GDCF / GDP), 1.6 percentage points (p.p.) above its share in the first half of 2007. The results are similar when the investment rate at current prices is taken into consideration. In this case, its recovery and growth over the last five-year period started from a 12% low in 2002 to reach 24.2% in 2007 and 22.8% in the first half of 2008. Based on these rates, Argentina’s investment to GDP ratio in current terms is among the highest of Latin American economies. >> 30-YEAR BENCHMARK The investment rate in 2007 was higher than in 1998, the highest level achieved during the 90s. Furthermore, taking into account consistent long-term series registered since 1950, the current investment rate is higher than benchmarks hit in other periods (1951, 1958, 1961, 1971, 1974, 1987) with the exception of historic highs in 1977 and 1980 (by just 1 p.p. of GDP). In conclusion, the current investment rate is the highest in the last 30 years. >> INVESTMENT: ONE OF THE DRIVERS FOR GDP AND JOB CREATION GROWTH The rapid growth of GDCF between 2003 and 2008 was one of the main drivers behind Argentina’s economic growth. Investment has been the most dynamic component of aggregate demand, contributing 44.1% of GDP’s growth between 2003 and 2007, and 34.9% of the expansion of aggregate demand in the same period. On the other hand, and unlike in the recent past, GDP and investment have grown parallel to employment since 2003. GDP growth, driven by job-promoting investment, was associated to improvements in equity, a critical element for achieving sustainable development. In fact, the GINI coefficient, which measures the degree of inequality in per-capita family income distribution, dropped from 0.537 in the third quarter of 2003 to 0.490 in the first quarter of 2007 (latest data available). A R G E N T I N A’ S N AT I O N A L I N V E S T M E N T D E V E L O P M E N T AG E N C Y - 0 0 8 I N V E S T M E N T R E P O R T 
  • 5. 008 Investment Report - Executive Summary >> POSITIVE SAVINGS - INVESTMENT GAP The sustained increase in domestic savings has been a key factor in funding this dynamic investment process. Gross Domestic Savings in terms of GDP increased significantly from a low of 14.2% in 2001 to 26.6% in 2007, a savings rate ranked among the highest in historic terms. This positive savings - investment gap was the result of twin fiscal and current account surpluses, a contrast with the model of high consumption and dependence on external funding (reflected in twin deficits) which prevailed in the previous decade. >> IMPROVEMENTS IN INVESTMENT BREAKDOWN Investment can be classified into two major components: durable production equipment— inclusive of machinery and equipment, and transport equipment—and construction. By 2002, investment was fairly biased toward construction. However, during the 2003- 2008 economic expansion, equipment demand climbed higher than construction investment, with accumulated annual growth rates of 32.2% and 21.2%, respectively. This translated into an increased share of durable production equipment in total investment to reach 42.4% in the second quarter of 2008. This figure is slightly higher than that for 1998 (42.0%), which represented the maximum level achieved in the 90s. >> PRODUCTIVE INVESTMENT LEADERSHIP Even when investing in durable production equipment is typically associated to greater increases in the global productivity of an economy, non-residential construction—public and private infrastructure—also brings about improvements in production capacity. For this reason, productive investment is defined as the sum of investment in durable equipment and non residential construction. Between 2003-2007, GDCF was mainly driven by productive investment, which grew at an accumulated annual rate of 26.8%, higher than the 22.4% accumulated annual increase in residential construction over the same period. In 2007, productive investment’s share of GDP reached 15.1%, higher than in any other year for which data is available (1993 - 2007). A R G E N T I N A’ S N AT I O N A L I N V E S T M E N T D E V E L O P M E N T AG E N C Y - 0 0 8 I N V E S T M E N T R E P O R T 
  • 6. 008 Investment Report - Executive Summary >> COMPLEMENTARY PUBLIC AND PRIVATE INVESTMENT A distinctive feature of the current investment process is that both private and public investment have grown simultaneously, complementing each other. Public investment, which had fallen in terms of GDP in the 90s, grew at such a pace between 2003 and 2006 (the latest data available) that it doubled its share compared with the average for the 90s, reaching 3.1% of GDP. This expansion was mostly due to the renewed drive of public investment in construction—which grew at an accumulated annual rate of 51.3% between 2002 and 2006—driven by new infrastructure works. In terms of private investment, durable equipment investment has been the most dynamic component and grew at an accumulated annual rate of 34.5% between 2002 and 2006. >> GROWTH IN LOCAL PRODUCTION AND DURABLE EQUIPMENT IMPORTS Domestic capital goods production was quite dynamic in 2003-2008. This sector expanded at an accumulated annual rate of 17.4% between 2002 and 2007. The domestic equipment investment rate downtrend suffered since 1977 underwent a reversal, although it is still far from levels reached in the 60s and 70s. On the other hand, capital goods imports experienced an even more remarkable recovery despite their initial relative appreciation after the 2002 currency devaluation. The accumulated annual growth rate between 2002 and 2007 was 53.9%. This strong growth places capital goods imports at a historic high in terms of their GDP share. >> CHANGES IN THE ORIGIN OF CAPITAL GOODS IMPORTS The breakdown of imported capital goods per country of origin has undergone changes over the growth phase that began in 2003. In particular, imports from Mercosur have gained relevance; Brazil stands out, representing 17.7% of capital goods imports in 1998 and 28.5% in 2007. In contrast, NAFTA and European Union countries now have a smaller relative share. The United States was the source of 29.1% of capital goods imports in 1998 and 16.7% in 2007. Countries such as Germany and Italy also reduced their share. China, on the other hand, which had a marginal role as capital goods supplier for Argentina (2.8% of the total amount in 1998) has taken a more relevant role (15.8% in 2007). A R G E N T I N A’ S N AT I O N A L I N V E S T M E N T D E V E L O P M E N T AG E N C Y - 0 0 8 I N V E S T M E N T R E P O R T 
  • 7. 008 Investment Report - Executive Summary Chapter 3: >> STRONG FDI GROWTH Foreign Direct Investment in The evolution of Foreign Direct Investment (FDI) following the convertibility crisis can be divided Argentina into two stages. The first stage was between 2002 and 2003 and corresponded to a period of recovery after the crisis, with reduced FDI flows. The second stage between 2004 and today registered a vigorous growth in FDI inflows. In 2007 FDI reached US$6.46 billion, in excess of the average annual inflow in the 90s net of privatizations (US$5.3 billion). The balance of payments data for the first half of 2008 show a 64.3% increase compared with the same period for 2007. Also, the exchange balance data published by the Central Bank of Argentina for the third quarter of 2008 (which only consider the category “contributions”) show a 40% increase when compared with the same quarter of 2007, thus confirming the positive FDI uptrend until that period. This high growth rate, however, may not hold in the fourth quarter of 2008, not in 2009, given the changes in international markets and their impact on FDI flows globally. >> IMPROVEMENTS IN FDI’S BREAKDOWN An improvement in FDI can be seen since 2004, mainly explained by foreign companies increasing their local production capacity, new international companies entering the market and new plants with greenfield investment. Equity contributions and reinvested earnings represented 51.5% and 29.9%, respectively, during the 2004-2007 period, up from 25.2% and 7.2% between 1992 and 2000. In contrast, mergers and acquisitions (investment changing hands) represented only 6.3% in the last four years, down from its 56.9% share of total flows received in the 90s. >> INTERNATIONAL POSITIONING When looking at FDI inflows over the last few years, Argentina ranks among a group of such varied and different countries as Portugal, Hungary and Finland, and above developed countries or recently developed countries like South Korea, Norway, New Zealand and Greece. Aside from the BRICs (Brazil, Russia, India and China) markets, which are both FDI destinations and FDI issuers at a global scale, Argentina is in the ninth position among the high growth emerging markets which prove most appealing in terms of FDI. Despite the strong FDI drive in recent years, Argentina lost part of its share of the Latin American FDI inflows (primarily due to the increase of FDI flowing into Brazil). A R G E N T I N A’ S N AT I O N A L I N V E S T M E N T D E V E L O P M E N T AG E N C Y - 0 0 8 I N V E S T M E N T R E P O R T 
  • 8. 008 Investment Report - Executive Summary >> HIGH PROFITABILITY OF FOREIGN INVESTMENT The high levels of profitability of foreign investment have been an outstanding feature of the current situation. Earnings as a percentage of FDI stock reached 8.9% on average between 2004 and 2007, as compared to 6.1% on average between 1992 and 2000. Also, profitability was a key factor that determined investment funding, supporting higher disbursements through reinvested earnings. The share of reinvested earnings by foreign companies with offices in Argentina recovered after the 2001-2002 crisis, registering an average 33.8% between 2005 and 2007. Chapter 4: >> INCREASED MAJOR BUSINESS INVESTMENT Investment from a ProsperAr’s investment database tracks investment at a microeconomic level based on Microeconomic accounting information from 369 major companies. In 2007, the Investment Database found Perspective investment increases in most economic sectors; the extractive industry, the services sector and the manufacturing industry registered the most dynamic investment behavior. A more detailed breakdown reveals that electric appliances and office machines, then metal and steel works—all of them part of the manufacturing industry—lead the ranking; followed by the media and entertainment industry in the services sector, and activities in the extractive industry. >> HIGH PROFIT REINVESTMENT The information produced by ProsperAr’s Investment Database also reveals the investment financing method used by businesses. The high corporate profitability found in 2003-2008 was a key factor to support the investment process, allowing higher disbursements through self- funding. The Investment Database shows that in 2007, 64.3% of the earnings of major companies operating in the country were retained by the companies themselves. A R G E N T I N A’ S N AT I O N A L I N V E S T M E N T D E V E L O P M E N T AG E N C Y - 0 0 8 I N V E S T M E N T R E P O R T 8
  • 9. 008 Investment Report - Executive Summary Chapter 5: >> THE ARGENTINE ECONOMY IN THE LIGHT OF THE GLOBAL CRISIS Perspectives and Challenges The country is currently facing an international scenario marked by an onslaught of negative shocks, which imply a drastic shift away from the favorable international conditions Argentina met in recent periods. However, the Argentine economy is entering the current global financial turmoil from a position of less relative vulnerability, compared with prior periods of international volatility, counting with a more solid fiscal and external position; less public debt; a more flexible framework of monetary and exchange policies; a substantial stock of international reserves; and a strengthened productive network. These factors make for a more robust country in the face of external upset. Less vulnerability, however, does not necessarily imply that Argentina can isolate itself from international turmoil. Different mechanisms through which international crisis is transmitted create—smaller or greater—risk and uncertainty in the domestic economy. Apart from a general decline in world trade, which would have an impact on Argentine exports, another contraction could come from the strong reduction in credit worldwide, resulting in scarce and more costly funding for both governments and businesses. Greater difficulties to access voluntary credit markets could deepen the impact of the international crisis on investment performance in the country’s private sector. >> THE LOCAL INVESTMENT PROCESS IN A GLOBAL CONTEXT OF FINANCIAL RESTRICTIONS. The Argentine investment process over the last five years was less dependent on external funding, a favorable condition for an economy facing volatility in world financial markets. However, the uncertain time span of the international lending retraction makes the efforts to maintain high investment levels more relevant than ever.. >> CHALLENGES TO ENSURE A STEADY INVESTMENT PROCESS In this context, while domestic efforts must be increased to consolidate the investment process and continue on the growth path (even when rates may not be as high as in the recent past), actions must be taken to build microeconomic capabilities and improve infrastructure, technology and labor training levels to support long term competitiveness of Argentina’s economy. These efforts also need to aim at the country continuing up the ladder of development, ensuring Argentina is a step ahead for when the international cycle reverts. Medium and long term collective strategic efforts to identify and leverage investment opportunities and challenges for Argentina in the new world scenario will need to be in the pipeline. < A R G E N T I N A’ S N AT I O N A L I N V E S T M E N T D E V E L O P M E N T AG E N C Y - 0 0 8 I N V E S T M E N T R E P O R T 
  • 10. Investment Report – Addendum Full data for 2008* Gross Domestic 2008 was the sixth consecutive year of robust economic growth and investment expansion Fixed Investment in Argentina. During this year, GDFI at constant prices grew by 9%, a significant growth rate, (GDFI) although somewhat below levels reached in 2006 (13.6%). The drive to invest in the Argentine performance economy continued the upward curve begun in 2003. The increase in GDFI during 2008 was the result of growth registered by both of its indicators: investment in durable production equipment increased by 16.3% while investment in construction did so at a rate of 4%. Investment rates In 2008, GDFI continued to grow faster than the GDP growth rate of 7%, which corroborated new increases in the rate of product-related investment, reaching a level of 23%. This figure not only exceeded 2007 figures (22.6%) but also set a new historical high in terms of the values recorded in the last thirty years. In current terms, however, the level of investment in 2008 was 23.2%, down from 24.2% in 2007. The difference between these rates—constant and current—is due to the disparate behavior of the costs of investment versus those of the average economy as a whole. In other words, this is due to the lower relative increase in the prices of investment assets compared with the GDP implicit price. Graph 1: Evolution of Rate of Investment, 1993-2008 As a percentage of GDP 30 GDFI / GDP at current prices GDFI / GDP at constant prices 24,2 23,2 25 23,0 23,4 22,6 20,6 21,1 21,5 21,6 19,9 20,5 19,9 19,8 19,4 19,1 19,1 19,1 18,3 18,9 17,9 19,2 17,7 20 18,1 18,0 17,9 16,2 15,8 15,1 14,3 14,2 15 12,0 11,3 10 5 0 00 02 03 04 05 06 07 08 93 94 95 6 7 8 99 01 9 9 9 20 20 20 20 20 20 20 20 20 19 19 19 19 19 19 19 Source: compiled by ProsperAr on the basis of data from the National Accounts Directorate, INDEC * Given that this Investment Report was drawn up on the basis of information available until the second quarter of 2008, this note synthesizes the final results of the years, thus complementing the analysis presented in the Report.
  • 11. Evolution of The pattern of GDIF for the second half of 2008 was not uniform. While GDIF grew by 8.5% in the Investment during third quarter (compared with the same period in 2007), the consequences of the global economic the Second and financial crisis made themselves felt towards the end of 2008. In the last quarter of the year, Quarter of 2008: GDIF fell by 2.8% compared with the same period during the preceding year, which was the first the first signs time that inter-annual investment figures had dropped since the last quarter of 2002. This change of the impact of was due to a tail-off of 2.4% in investment in construction and a drop in 3.4% in durable production the global crisis equipment compared with the fourth quarter in 2007. registered towards year-end Chart 1: Evolution of the Investment Rate in terms of GDP % variation GDIF/GDP GDIF/GDP Period (compared with the (in % at constant prices) (in % at current prices) same period in 2007) 1st quarter 2008 22.7 24.1 20.3 2nd quarter 2008 23.0 21.7 13.8 3rd quarter 2008 24.1 24.2 8.5 4th quarter 2008 22.4 23.0 -2.8 Average 2008 23.0 23.2 9.0 Source: compiled by ProsperAr on the basis of data from the National Accounts Directorate, INDEC Performance of During 2008, FDI continued the upward curve of growth and expansion begun in 2004. Thus, in Foreign Direct 2008, FDI totaled USD 7,979 million, an increase of 23.3% compared to the amounts recorded investment (FDI) the previous year. According to UNCTAD estimates, this growth rate was among the highest recorded at world level, above the average registered by the group of emerging economies (3.6%) and the regional average for Latin America (12.7%). FDI performance in Argentina during 2008 is all the more impressive if compared with FDI in developed countries, which fell by 32.7% over the last year. This expansion in 2008 was fundamentally due to new capital contributions which represented 43.5% of total FDI, while changes in ownership came to 8.9% of the total. This meant that the trend followed by foreign investment aimed at expanding productive capacity and acquiring new plants or Greenfield investments continued, in contrast to the trend for mergers and acquisitions which prevailed in the previous decade. Argentina reached third position in the 2008 Latin American Greenfield projects ranking according to the trade publication FDI Intelligence published by the Financial Times. Graph II: Total Foreign Direct Investment and net of privatizations 1993-2008 In USD millions 25.000 FDI net of privatizations Total FDI 20.000 15.000 10.000 5.000 8.268 8.899 7.979 6.369 6.859 6.473 4.496 5.372 5.265 5.537 3.499 4.125 2.087 1.858 2.141 2.149 1.652 0 * 00 02 03 04 05 06 07 92 93 94 95 96 97 98 99 01 08 20 20 20 20 20 20 20 20 19 19 19 19 19 19 19 19 20 * 2008 data are preliminary as they do not include FDI arising from debts with head offices and affiliates. Source: compiled by ProsperAr on the basis of data from the National Accounts Directorate, INDEC
  • 12. For more information: www.prosperar.gov.ar info@prosperar.gov.ar +54-11-4328-9510