The FDI angle:

• Argentina has a new president-elect Javier Milei after a run-off held on November 19.
• Mr Milei has promised to take a “chainsaw” to Argentina's state and shake-up its economic policy making.
• Why does this matter? FDI and exports will be crucial for him to attract US dollars, but he faces an uphill battle in restoring investor confidence.

Argentina elected libertarian economist Javier Milei as their new president on November 19. Rising foreign direct investment (FDI) flows, largely into extractive sectors, mask a malaise over South America’s second-largest economy. 

Mr Milei inherits a highly regulated economy with a dire outlook amid spiralling inflation, debt and poverty.

FDI and export promotion will be critical for his administration to secure the US dollar inflows that will help stabilise the economy ahead of a promised dollarisation.

“The greatest challenge is to restore confidence among investors,” says Ramiro Alem, the CEO of InverTur, which promotes investment in Argentina’s tourism industry.

FDI malaise

Between 2021 and 2022, FDI flows to Argentina more than doubled to reach $15.4bn, according to the UN’s Economic Commission for Latin America and the Caribbean. A closer look at the make-up of these foreign capital flows paints a gloomier picture. 

More than 90% of that FDI was through inter-company loans and the reinvestment of earnings. Equity made up just 5.4% of Argentina’s FDI flows — its lowest share since 2014, when Argentina defaulted on its international debt for the second time this millennium.

This demonstrates “the inability of Argentine companies to tap into international markets to meet their financing needs,” says Jimena Blanco, the head of Americas at Verisk Maplecroft. Sources tell fDi it is virtually impossible in Argentina to get project finance, which is critical for long-term infrastructure and industrial investments.

Hyperinflation has long epitomised the inability of Argentinean governments to roll out sound economic policies. 

Annual inflation in Argentina hit an all-time high of 142.7% in October. Policies to limit devaluation of the Argentine peso, including currency controls, price freezes and import restrictions, have failed to stop the decline in international currency reserves. Argentina owes the IMF around $43bn — more than any other country.

These policies also widened the gap in the official exchange rate of around 350 pesos to the US dollar, compared to a black market rate that is as high as 900 pesos. Simplification of multiple exchange rates and easier repatriation of US dollars will be needed to attract FDI, according to Damian Tabakman, the president of Cedu, a chamber of Argentinian real estate developers.

“If we don't solve that problem, foreign investors obviously will not come to Argentina,” he says.

The end of the peso? 

With counting near completion, Mr Milei had received 56% of the votes, compared to 44% for his rival, Argentina’s current economy minister Sergio Massa. This brings an end to Peronism rule, a left-wing populist movement that has dominated Argentinian politics since the country returned to democracy in 1983.

Mr Milei, a self proclaimed “anarcho-capitalist”, campaigned on a promise to take a “chainsaw” to Argentina’s state. His pledges include scrapping the central bank, reducing public spending by 15% of gross domestic product and dollarising the economy.

“This model of decadence has come to an end. There is no turning back,” said Mr Milei in a speech on November 19. His promise to shake-up Argentina comes as the country’s macroeconomic indicators are off the charts. 

Dollarising the economy would require all people and businesses to swap pesos for US dollars, and would — at least on paper — shield the economy from further currency devaluations. Argentina would then follow in the footsteps of two other Latin American countries that dollarised their economies in the early 2000s: Ecuador and El Salvador. 

Land of opportunity

Provided fundamental economic and political reforms are implemented, Argentina’s resources — including lithium, hydrocarbons and agricultural land — position it well for the energy transition.

Large reserves of shale gas in Vaca Muerta have already attracted significant FDI. In 2022, Argentina also saw a $510m pledge by US-based Livent to expand its lithium operations as well as China’s Zijin Mining Group plan to invest $380m.

Observers believe that infrastructure, along with high human capital standards compared to the rest of the region, stand Argentina in good stead for the long-term. Nonetheless, short-term economic volatility is expected to continue.

The presidential transition period, between November 21 and December 10, will be “crucial to establish the basic governability agreements that [Mr Milei] will need to avert a crash,” says Ms Blanco. 

As Mr Milei comes to office with a strong mandate, many will be watching the speed and depth of his reforms, and waiting to see whether he can turn around the ailing economy.