Openness To Foreign Investment
Argentina remains open to foreign investment. Four consecutive years of real GDP growth over 8 percent have attracted considerable U.S. and other international investor interest in exploring opportunities in the Argentine market. The government of Argentina, in turn, has signaled its desire tosee foreign direct investment (FDI) expand significantly to enhance the nation’s productive capacity and sustain high levels of real GDP growth. However, legal uncertainties concerning creditor and contract rights and frequent and unpredictable regulatory changes diminish the attractiveness of some sectors for foreign investors.
In 1991, the government of Argentina (GoA) pegged the Argentinepeso to the U.S. dollar at a 1:1 exchange rate (“convertibility”) with the aim of breaking the back of hyperinflation and adopted far-reaching market-based policies, including dismantling a web of protectionist trade and business regulations, and reversing a half century of statism by implementing an ambitious privatization program. Argentina subsequently received significant increases ininvestment, with FDI inflows among the highest in Latin America through most of the 1990s. While convertibility defeated inflation, over time its permanence, combined with lack of fiscal discipline and poor governance, undermined Argentina's export competitiveness and created chronic deficits in the current account of the balance of payments, which were financed by massive borrowing. The contagion effectof the Asian financial crisis of 1998 precipitated an outflow of capital that contributed to a 4-year recession that culminated in a financial panic in November 2001. In December 2001, the government ended convertibility and defaulted on $82 billion in debt, the largest sovereign debt default in history. A number of bondholders are actively seeking redress.
In February 2005, investors holding 76percent of Argentina's defaulted principal accepted a government offer of approximately 30 cents per dollar face value of old debt in what became the largest sovereign restructuring in history. Argentina owes approximately $7.2 billion to official government creditors (including $359 million to the U.S. government), of which over $3.5 billion consists of arrears and past due interest. The GoA hasindicated interest in normalizing its relationship with official government creditors. As of this writing, however, the GoA has declined to deal with private bondholders who chose not to participate in the 2005 restructuring.
The surge in Argentina’s real GDP growth over the past four years was largely due to a boost in domestic aggregate demand stimulated by the government’s fiscal, monetaryand income distribution policies. Argentina posted real GDP growth of 8.8 percent in 2003, 9.0 percent in 2004, 9.2 percent in 2005, and an estimated 8.4 percent in 2006. This impressive economic recovery, which has led to improvements in key socio-economic indicators, can be attributed to a number of factors. First, following reforms in the 1990s, Argentina’s economy was fundamentally soundexcept for the high level of indebtedness. Second, the move away from convertibility combined with favorable international commodity price, interest rate and global growth trends were catalytic factors in supporting Argentina's growth. Third, the government has worked hard to maintain a primary fiscal surplus and continues to accumulate reserves. Argentina should continue to perform well in 2007 withGDP growth projected in the 7 percent range. Nevertheless, slowness in addressing the post-crisis re-negotiation of public service contracts, capacity constraints, potential energy shortages in the face of high growth and distorted energy prices, inflation and the government's policies to contain it (including pressure on the private sector to maintain price controls) pose potential obstacles to...