Consulado y Centro de Promocion Argentino en Shanghai

ARGENTINA ECONOMIC OVERVIEW Nº 26

(March 2004)

INVESTMENT OPPORTUNITIES IN ARGENTINA

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* With the economic and financial emergency next following the collapse of the convertibility system having been overcome, the government's economic program is now aiming at generate a favorable atmosphere for investment.

* Moreover, the structural conditions in Argentina, one of the most sophisticated countries in Latin America, favor the creation of business and investment opportunities.

* In this context, the significant increase in the real exchange rate facilitates business opportunities in tradable goods and services, in labor-intensive sectors as well as in sectors related to natural resources.

* However, there is still a long way ahead to consolidate macroeconomic stability and to assure a predictable legal framework, indispensable ingredients for the achievement of sustainable growth.

* As pending challenges are overcome, the investment environment will be strengthened, and the development of the potential inherent to the Argentine economy will be more and more feasible.

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With the economic emergency in 2003 having been overcome (with a 8.7% GDP annual growth), the current stage of the economic program aims at consolidate stability and predictability of the economy, on the basis of four principal pillars, namely, fiscal solvency, monetary prudence, exchange flexibility and aggressive export policies, all of them designed to achieve a still unsecured goal: sustainable growth with social inclusion.

Although it is true that the economic projections for 2004 do not differ much from those of 2003 (GDP strong growth, trade surplus, exchange and inflation stability, moderate decline of unemployment rate), the path to sustainable growth has not been sufficiently cleared so far: unemployment and poverty still reach unacceptable levels for Argentina (14.5% and 51.7% respectively), fiscal solvency is not consolidated (a significant portion of the public debt is in the process of restructuring and distortive taxes explain most of the primary fiscal surplus), the legal framework of public utility companies is not definitively defined, long-term bank loans are stagnated and the dynamism of exports may face certain offer restrictions (low investment levels).

As a matter of fact, the 2004 economic policy agenda will define the scenario for the next years. While the restructuring of the public debt seems to be the key factor to consolidate fiscal solvency, the tax and social security reforms, as well as the new law on tax revenue sharing with provincial governments will determine not only the size and functions of the public sector but also the incentives to private investment. On the other hand, plans are being made to secure price stability through flexible exchange rate and the implementation of an inflation targeting schedule. Also, the negotiation of legal framework with public utilities companies, the regularization of the banking system (return of long-term credit) and the continuity of international negotiations oriented to the expansion of trade opportunities (MERCOSUR, FTAA, European Union, Andean Community, WTO, plus the bilateral agenda, among others), will be important.

In this context, the per capita income in Argentina (USD 3,500) appears clearly "devalued" compared with the average income of the last three decades (USD 6,000 per capita, with periods of a strong exchange appreciation that were combined with others of a marked depreciation). Unless an unexpected phenomenon emerges, this level of per capita income could be achieved in the short run (that is, neither the USD 2,500 registered in 2002, nor the USD 9,000 of Convertibility times).

BUSINESS AND INVESTMENT OPPORTUNITIES IN THE NEW ECONOMIC CONTEXT (THE NEW SECTORAL MAP):

The structural conditions of Argentina favor the generation of business and investment opportunities. Such conditions, supported by the natural and human resources, the infrastructure and the legal framework available in the country, make Argentina one of the most sophisticated nations in Latin America. As pending macroeconomic difficulties are overcome, the atmosphere to the development of new businesses will be strengthened, and the development of the potential inherent to the Argentine economy will be more feasible.

The change of the macroeconomic regimen also led to modifications in the sectoral map. Tradable goods and services that compete with imports in the domestic market or that are traded abroad have been particularly favored by the change in relative prices. Furthermore, from the point of view of the inputs used in different activities, the larger benefits have been harvested by labor and natural resources intensive sectors as well as by those demanding local inputs.

In this context, multiple business opportunities are emerging in the primary sectors related to natural resources as well as in the chains associated to agricultural and industrial products.

PRIMARY SECTORS RELATED CHAINS

Forestry | Fats and Oils Wine Chemical Products

Mining | Diary Products Fruit Petrochemical

Fishing > Flour Paper & Cellulose Iron & Steel

Energy | Meat Textile Products Plastic

Agriculture | Vegetables Shoes Furniture

Also, favorable business opportunities generated by the new economic reality and the potential inherent to the Argentine economy could be found in the services sector, such as in the areas of receptive tourism, software, TV and advertising industries. The same applies to the telecommunications sector, through the expansion of activities related to call centers for Latin America, cellular telephony, the development of e-commerce tools for export and the design of web pages and other Internet contents.

FAVORABLE DOMESTIC STRUCTURAL CONDITIONS FOR INVESTMENT:

Beyond the present economic situation, Argentina counts with structural conditions that are attractive to investment and new business opportunities in a large variety of economic activities:

1) NATURAL RESOURCES: Argentina offers clear competitive advantages for investments in a number of activities related to natural resources. Its wide land surface suitable for farming purposes (250.000 km2), makes it one of the main manufacturers and exporters of food products (edible oil, meat, grains, fruit and vegetables). Its territory also includes a large surface suitable for lumbering and forestry purposes, of which only the 4% is currently developed. In the case of fishing resources, its vast coastline on the Atlantic Ocean (4.725 km. long) provides the country with a wide variety of species. Furthermore, Argentina not only produces enough oil and gas to cover domestic demand, but also sells part of such production in international markets. Finally, Argentina ranks sixth in the world as far as the availability of mining resources is concerned (gold, copper, lead, zinc, natural borate, bentonite, clay and ornamental stones), with 75% of the land potentially rich in mining resources still undeveloped.

2) HUMAN RESOURCES: the training of the labor force is higher than the average in the region. In this sense, the illiteracy rate in Argentina, one of the lowest in Latin America, is only comparable with those of some developed countries (2.6%, vs. an average 10.8% in other Latin American nations), while attendance to primary schools reaches the 98%. The higher qualification of the labor force in Argentina finds its roots in a superior educational system, with public institutions and an ample offer of private universities throughout the territory. Furthermore, the Argentine population also excels its regional peers as regards healthcare. The life expectation rate in Argentina is among the highest ones in Latin America (74.3 vs. an average of 70.7 years of age). Its children mortality rate is among the lowest ones in the region (16.0/1,000 vs. an average 27,5/1,000 ratio) and it has one of the highest ratios of medical doctors and hospital beds per inhabitant.

3) INFRAESTRUCTURE: the domestic infrastructure is suitable for the development of economic activities and new business opportunities. Such infrastructure was streamlined and its efficiency increased during the 90s. This applies to transportation (roads, railways, river and maritime ports and airports), as well as to electricity, gas and telecommunication services, the last ones with tariffs among the lowest ones not only of Latin America but also of the developed world (adjustments are expected in the course of 2004, though).

4) LEGISLATION: the legal framework currently in force favors foreign investments. Argentina is more open than other countries in the region to capitals from abroad. To this regard, foreign investors require no previous authorization to invest in the country, are given the same treatment offered to domestic investors and are allowed to create any of the business organizations contemplated in the domestic legislation. There are no restrictions as to the nationality of the employees engaged by companies. Foreign capital inflows are under no obligation to remain in the domestic market for the term of 180 days. There are no restrictions whatsoever to the transfer of liquid, realized profits (as long as they correspond to closed, audited balance sheets) or of the invested capital funds, which may be transferred back to the country of origin at any time.

SIGNIFICANT RECOVERY OF INVESTMENTS IN 2003 AND FAVORABLE OUTLOOK FOR 2004:

After the dramatic drop in 2002, investments showed a remarkable recovery last year, with a 40% annual growth in real terms. Investment expenditure reached 19 billion dollars (vs. 11,5 billion dollars in 2002); the third part of which was allocated to the purchase of machinery and equipment, and the rest, to construction projects. Despite this good performance, the gross formation of capital as a percentage of GDP is still low: a 14% ratio in 2003 vs. the 21% peak attained in 1998.

In the beginning of 2004, investment-related indicators kept showing a significant expansion: last January, the imports of capital goods grew at a 210% annual rate, while the annual growth of the construction sector reached 30%. Analysts consensus estimates that investment expenditure will grow 22% annual this year. In this sense, a number of companies of different economic activities have recently announced significant investments, namely:

* AGRICULTURE: Aceitera General Deheza, an edible oil manufacturing company, has invested 25 million dollars in the construction of a storage complex in west Santa Fe; Cargill, the American cereal company, will invest 200-270 million dollars from 2003 to 2005 in soy processing operations and fertilizer unloading gates; while Molinos will expand its soy milling plant with and investment of 80 million dollars.

* COMMERCE: Cencosud, the Chilean supermarket chain, will invest 60 million pesos in the Province of Tucumán for the construction of Easy and Jumbo facilities, as well as of a shopping center with 120 stores. Wal-Mart has announced a 30 million pesos investment in the inauguration of branch offices at the city of Trelew, in the Province of Chubut.

* FISHING: Iberconsa, the Spanish fishing company, will invest 20 million dollars in the addition of 9 vessels to its fleet.

* FRESH FRUIT: Expofrut, the leading fresh fruit exporter in the country, will invest 1.7 million dollars to double the capacity of its cold storage plant at Lamarque, in the Province of Río Negro and 3.8 million dollars in new plantations.

* NATURAL GAS: Gas Atacama, owner of one of the two gas pipelines in the northwestern region, has announced that its transportation capacity to Chile will be expanded through a 25 million dollar investment.

* HOTELS: projects for the construction of 90 hotels will capture investments for 745 million pesos from the current year to 2006. The hotels will be built in the cities of Buenos Aires, Rosario and Salta, as well as in the Patagonia region (specifically, at El Calafate and Villa La Angostura).

* MINING: Cerro Vanguardia will invest 3.5 million dollars in the exploration of new areas adjacent to its gold and silver deposits in the Province of Santa Cruz; while Barrick Gold, the Canadian mining company, will invest 15.5 million dollars in the construction of facilities for the development of Veladero, its gold deposits in the Province of San Juan.

* OIL: Repsol-YPF announced the implementation of an investment plan from 2004 to 2007, for the amount of 6 billion dollars; while Chevron San Jorge will soon be investing 150 million dollars in the oil basin located in the Province of Neuquén.

* MEAT INDUSTRY: Swift will invest 20 million dollars to increase the slaughtering capacity of its two plants.

* CELLULAR TELEPHONY: the cellular telephone company owned by América Móvil and Techtel will install a GSM (Global System for Mobile Communications) network in the Province of Córdoba; while Motorola will invest 6 million dollars in its software development department in the same Province.

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