Argentina presents significant investment and trade opportunities, particularly in infrastructure, health, agriculture, information technology, energy, and mining. In 2018, President Mauricio Macri continued to reform the market-distorting economic policies of his immediate predecessors. Since entering office in December 2015, the Macri administration has taken steps to reduce bureaucratic hurdles in business creation, enacted some tax reforms, courted foreign direct investment, and attempted to implement labor reforms through sector-specific agreements with unions. However, Argentina’s economic recession coupled with the political stagnation of an election year have reduced the Macri administration’s ability to enact pro-business reforms and have choked international investment to Argentina.
In 2018, Argentina´s economy suffered from stagnant economic growth, high unemployment, and soaring inflation: economic activity fell 2.6 percent and annual inflation rate reached 47.6 percent by the end of year. This deteriorating macroeconomic situation prevented the Macri administration from implementing structural reforms that could address some of the drivers of the stagflation: high tax rates, high labor costs, access to financing, cumbersome bureaucracy, and outdated infrastructure. In September 2018, Argentina established a new export tax on most goods through December 31, 2020, and in January 2019, began applying a similar tax of 12 percent on most exports of services. To account for fluctuations in the exchange rate, the export tax on these goods and services may not exceed four pesos per dollar exported. Except for the case of the energy sector, the government has been unsuccessful in its attempts to curb the power of labor unions and enact the reforms required to attract international investors.
The Macri administration has been successful in re-establishing the country as a world player. Argentina assumed the G-20 Presidency on December 1, 2017, and hosted over 45 G-20 meetings in 2018, culminating with the Leaders’ Summit in Buenos Aires. The country also held the Financial Action Task Force (FATF) presidency for 2017-2018 and served as host of the WTO Ministerial in 2017.
In 2018, Argentina moved up eight places in the Competitiveness Ranking of the World Economic Forum (WEF), which measures how productively a country uses its available resources, to 81 out of 140 countries, and 10 out of the 21 countries in the Latin American and Caribbean region. Argentina is courting an EU-MERCOSUR trade agreement and is increasing engagement with the Organization for Economic Cooperation and Development (OECD) with the goal of an invitation for accession this year. Argentina ratified the WTO Trade Facilitation Agreement on January 22, 2018. Argentina and the United States continue to expand bilateral commercial and economic cooperation, specifically through the Trade and Investment Framework Agreement (TIFA), the Commercial Dialogue, the Framework to Strengthen Infrastructure Investment and Energy Cooperation, and the Digital Economy Working Group, in order to improve and facilitate public-private ties and communication on trade and investment issues, including market access and intellectual property rights. More than 300 U.S. companies operate in Argentina, and the United States continues to be the top investor in Argentina with more than USD $14.9 billion (stock) of foreign direct investment as of 2017.
Table 1: Key Metrics and Rankings
Brazil is the second largest economy in the Western Hemisphere behind the United States, and the eighth largest economy in the world, according to the World Bank. The United Nations Conference on Trade and Development (UNCTAD) named Brazil the fourth largest destination for global Foreign Direct Investment (FDI) flows in 2017. In recent years, Brazil received more than half of South America’s total incoming FDI, and the United States is a major foreign investor in Brazil. The Brazilian Central Bank (BCB) reported the United States had the largest single-country stock of FDI by final ownership, representing 22 percent of all FDI in Brazil (USD 118.7 billion) in 2017, the latest year with available data. The Government of Brazil (GoB) prioritized attracting private investment in infrastructure during 2017 and 2018.
The current economic recovery, which started in the first quarter of 2017, ended the deepest and longest recession in Brazil’s modern history. The country’s Gross Domestic Product (GDP) expanded by 1.1 percent in 2018, below most initial market analysts’ projections of 3 percent growth in 2018. Analysts forecast a 2 percent growth rate for 2019. The unemployment rate reached 11.6 percent at the end of 2018. Brazil was the world’s fourth largest destination for FDI in 2017, with inflows of USD 62.7 billion, according to UNCTAD. The nominal budget deficit stood at 7.1 percent of GDP (USD132.5 billion) in 2018 and is projected to end 2019 at around 6.5 percent of GDP (USD 148.5 billion). Brazil’s debt-to-GDP ratio reached 76.7 percent in 2018 with projections to reach 83 percent by the end of 2019. The BCB has maintained its target for the benchmark Selic interest rate at 6.5 percent since March 2018 (from a high of 13.75 percent at the end of 2016).
President Bolsonaro took office on January 1, 2019, following the interim presidency by President Michel Temer, who had assumed office after the impeachment of former President Dilma Rousseff in August 2016. Temer’s administration pursued corrective macroeconomic policies to stabilize the economy, such as a landmark federal spending cap in December 2016 and a package of labor market reforms in 2017. President Bolsonaro’s economic team pledged to continue pushing reforms needed to help control costs of Brazil’s pension system, and has made that issue its top economic priority. Further reforms are also planned to simplify Brazil’s complex tax system. In addition to current economic difficulties, since 2014, Brazil’s anti-corruption oversight bodies have been investigating allegations of widespread corruption that have moved beyond state-owned energy firm Petrobras and a number of private construction companies to include companies in other economic sectors.
Brazil’s official investment promotion strategy prioritizes the automobile manufacturing, renewable energy, life sciences, oil and gas, and infrastructure sectors. Foreign investors in Brazil receive the same legal treatment as local investors in most economic sectors; however, there are restrictions in the health, mass media, telecommunications, aerospace, rural property, maritime, and air transport sectors. The Brazilian Congress is considering legislation to liberalize restrictions on foreign ownership of rural property and air carriers.
Analysts contend that high transportation and labor costs, low domestic productivity, and ongoing political uncertainties hamper investment in Brazil. Foreign investors also cite concerns over poor existing infrastructure, still relatively rigid labor laws, and complex tax, local content, and regulatory requirements; all part of the extra costs of doing business in Brazil.
Table 1: Key Metrics and Rankings
Mexico is one of the United States’ top trade and investment partners. Bilateral trade grew 650 percent 1993-2018 and Mexico is the United States’ second largest export market and third largest trading partner. The United States is Mexico’s top source of foreign direct investment (FDI) with USD 12.3 billion (2018 flows) or 39 percent of all inflows to Mexico.
The Mexican economy has averaged 2.6 percent economic growth (GDP) 1994-2017. Mexico has benefited since the 1994 Tequila Crisis from credible economic management that has allowed the country to weather a period of low oil prices and significant global volatility. The fiscally prudent 2019 budget targets a one percent primary surplus, and the new government has upheld the Central Bank’s (Bank of Mexico) independence. Inflation at end-2018 was 4.8 percent, an improvement from 6.6 percent at the end of 2017, but still above the Bank of Mexico’s target of 3 percent due to peso depreciation against the U.S. Dollar and higher retail fuel prices caused by government efforts to stimulate competition in that sector.
The United States-Mexico-Canada (USMCA) trade agreement ratification prospects for 2019 and a historic change in the Mexican government December 1, 2018 remain key sources of investment uncertainty. The new administration has signaled its commitment to prudent fiscal and monetary policies since taking office. Still, conflicting policies, programs, and communication from the new administration have contributed to ongoing uncertainties, especially related to energy sector reforms and the financial health of state-owned oil company Pemex. Most financial institutions, including the Bank of Mexico, have revised downward Mexico’s GDP growth expectations for 2019 to 1.6 percent (Banxico consensus). Major credit rating agencies have downgraded or put on a negative outlook Mexico’s sovereign and some institutional ratings.
The administration followed through on its campaign promises to cancel the new airport project, cut government employees’ salaries, suspend all energy auctions, and weaken autonomous institutions. Uncertainty about contract enforcement, insecurity, and corruption also continue to hinder Mexican economic growth. These factors raise the cost of doing business in Mexico significantly.
Table 1: Key Metrics and Rankings