Buenos Aires — Argentina’s inflation is expected to close the year at around 100% per annum and a three-digit exchange rate gap, but, paradoxically, the country has seen a surge in investment, which is approaching the record levels of 2008 and 2017, with the majority channeled into machinery and construction.
According to analysts consulted by Bloomberg Línea, the increase in investment obeys individuals’ and companies’ need to part with the devalued Argentine currency.
Despite the foreign currency limitations imposed and an apparent shift in the investment cycle, in August investment increased by 0.8% over the previous month. And in historical terms, the investment rate is still high, standing at 22.4% of GDP, according to a recent report by consulting firm EcoGo.
Record investments in Buenos Aires province
This week, the Secretariat of Production, Science and Technological Innovation of the province of Buenos Aires, the most populous in the country, published a report stating that investment in third quarter hit its highest level since 2018, “with an increase of announcements of investments at a national level of 29%, and a growth of announced amounts of 420%, with respect to the same period of 2021″, according to Argentine news agency Télam.
The report highlights that the increase is explained “by the type of sector seeing large investments in general, such as traditional and renewable energies, since 76% of the total announced at a national level is concentrated in traditional and renewable energy projects”.
Among the investments that drove the growth is the agreement between YPF and Petronas for the development of non-conventional gas, and the construction of a S10 billion LNG plant in the municipality of Bahía Blanca.
Why is investment increasing?
“The gross transfer of income that caused an exchange rate gap of 75% on average over the last three years also has a side effect: At the end of the pandemic, investment was the component of aggregate demand that grew the most, almost twice as much as the Latin American regional average, and the investment rate is returning to record levels of 2008 and 2017, and which is showing a composition of more machinery and equipment and less construction),” according to a report published this week by EcoGo and authored by economist Marina dal Poggeto.
According to the consulting firm, “the surplus of pesos in the economy is partly returned as investment, as investment financed with negative rates and/or dollars sold as a dollar bond becomes very cheap”.
Is this a bad thing? It’s bad, but not too bad, according to the EcoGo report. “The scheme is perverse, and not sustainable, but perhaps the jump in investment combined with the technical position of Argentines with dollars can lead to a faster exit if finally a stabilization program is advanced”, the report states.
Productive investment in Argentina in 2022
“With respect to productive investment, we see that while investment dynamics, as measured in the national accounts, have been good, in order to see a sustained path of growth, macro-stability and clear rules of the game that motivate the private sector to invest and create jobs will be needed first,” Juan Manuel Franco, chief economist at SBS Group, told Bloomberg Línea.
He added that “what may be causing the current dynamics is that the large number of capital market provisions lead some companies to prefer to apply pesos to investments in the real economy, although we reiterate that to see a sustained path of growth, a framework of stability will have to be provided”.
Artificial investment?
“Indeed, investment is at very high levels, it is at historic levels, above the fourth quarter of 2017,″ Emiliano Anselmi, team leader of Macroeconomics at Portfolio Personal Investments (PPI), told Bloomberg Línea.
“The investment does not stop being a reflection of the excess of pesos, or the flight of economic agents from the peso,” Anselmi he added, and said that “it is record investment, but it is not virtuous because it continues to be a reflection of the fall in the demand for money.”
For the PPI analyst, “if the investment is long-lasting, there will be a jump in productivity, but since it is not genuine, as soon as the exchange rate is dismantled, it is necessary to see where the investment in Argentina is, and today it is a quite artificial figure”.
