Doing Business in Argentina

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Doing Business in Argentina

• June 2008

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Table of Contents

• Introduction
• Doing Business in Argentina
• Country Profile
• Economic Overview
• Socioeconomic Indicators
• Business Environment
• International Scenario
• Financial Markets
• Foreign Investments
• Taxes
• Labor Legislation and Social Security
• Market Outlook
• Ernst Young in Argentina

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IntroductionState of Alabama as compared to the
Republic of Argentina
Alabama
Argentina
Huntsville (158,216)
Birmingham (242,820)
Great Buenos Aires (13,700,000)
Montgomery (201,568)
Mobile (198,915)

• Population 4,447,100
• Area 133,915 km2
• GDP USD 170 billion
• Exports USD 14 billion

• Population 39,400,000
• Area 2,766,890 km2
• GDP USD 260 billion
• Exports USD 56 billion

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Introduction Argentina Snapshot

• Argentina is the third largest economy in terms
  of GDP in Latin America and ranks second in
  territorial extension, after Brazil.
• GDP per capita (US 6,600 in 2007) is the fourth
  largest in Latin America.
• President Cristina Fernandez took over in
  December 2007 elected by 45 of the votes,
  succeeding her husband, Nestor Kirchner, and
  continuing his political and socioeconomic plans.
• Agribusiness, construction and real estate,
  certain industrial products (food and beverages,
  chemicals, metals and automotive) and other hard
  currency generators are the largest contributors
  to the countrys GDP.

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Doing Business In Argentina Country Profile

• The Republic of Argentina adopted a
  representative, republican and federal form of
  government in 1853.
• Population is estimated at 40 million. About 46
  of the population and 57 of the GDP is
  concentrated in the province of Buenos Aires.
• There is a wide array of natural, mineral and
  energy resources as a result of the great variety
  in climates and topographies.
• In addition, the country has a solid base of
  qualified human resources with a high level of
  education and training.

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Doing Business In ArgentinaEconomic Overview

• Five years of steady growth at a compounded
  average rate of 8.7.
• Twin Surpluses fiscal and external.
• Growing exports and imports with a positive trade
  balance.
• Tight monetary policy.
• Substantial accumulation of reserves.
• High and stable foreign exchange rate.
• Farmers are claiming a reduction of the export
  rights since the Kirchner Administration
  increased the rates last March.

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Doing Business In ArgentinaEconomic Overview
Source BBVA, Central Bank of the Republic
Argentina (BCRA), Econviews and National
Institute of Statistics and Censuses (INDEC).
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Doing Business in ArgentinaEconomic Overview
Source BBVA, CEPAL, IMF
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Doing Business In ArgentinaSocioeconomic
Indicators
Source UNDP 2006 Report on Human Development.
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Doing Business In ArgentinaBusiness Environment
A brief history

• Argentina is experiencing a 5-year steady growth
  period fueled by high commodities prices and low
  leverage. These two factors were key to the rapid
  recovery of the economy after the 2002 financial
  crisis.
• The Convertibility Plan, which had basically
  pegged the peso to the US dollar for a decade,
  collapsed in 2002 as a result of the combination
  of a large fiscal deficit and a substantial
  decrease in commodities prices.
• The exit of the Convertibility Plan was not very
  well planned. Some of the actions taken implied a
  breach of certain contracts, including the bank
  savings and the concession agreements.

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Doing Business In ArgentinaBusiness Environment
A brief history

• The breach of contracts provoked cease of
  concessions in several companies privatized in
  the 90s, now being operated by either the
  government, labor unions and/or employees.
• Most dynamic sectors in the economy are
  agribusiness, mining, tourism, real estate and
  those generating hard currency.
• The July 2007 credit crunch negatively impacted
  on the MA activity in Argentina, which remains
  at low levels. In 2007, only 142 transactions
  were announced with a total value of only US 6
  billion.

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Doing Business In ArgentinaInternational
Scenario

• World growth slowing, with U.S. marked down.
• Low global interest rates.
• International trade declines, as the world
  economy cools off. However, demand for
  commodities is expected to remain high as it is
  dedicated to both feeding and alternative fuels
  (i.e. biofuels and ethanol).
• Favorable trade terms for Argentina based on
  record price of commodities.

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Doing Business In ArgentinaInternational
Scenario World Impact Inflation
Countries suffering by a profiting from commodity
price increases
Impact of increases
Source Financial Times
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Doing Business In ArgentinaFinancial Markets

• Access to long term financing is very volatile
  and limited to top tier names.
• Credits to the private sector only accounts for
  12 of GDP while in Chile and Brazil reach 68
  and 25 respectively.
• Furthermore, total credits only represents 14 of
  GDP.
• 85 of total credits are denominated in pesos.

• Market capitalization is very low.
• Argentina relies on international financial
  markets due to the lack of a domestic credit
  market.

Latin América - Market Capitalization
of GDP - Year 2006
120
120
90
66
60
43
42
41
41
24
30
9
0
Chile
Brazil
Peru
Venezuela
Mexico
Colombia
Argentina
Uruguay
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Doing Business In ArgentinaForeign Investments

• Argentinas capital markets are underdeveloped.
  Thus, profit reinvestments, inter-company loans
  and private funds are the largest sources of
  financing. Moreover, tighter tax regulations led
  to a historical record in profit reinvestments in
  2006.
• Several foreign companies exited Argentina in the
  beginning of this century as a result of the
  drastic financial crisis. However, many regional
  companies, particularly from Brazil, Mexico and
  Chile either landed or expand their operations in
  Argentina in the XXIst century.
• US companies are slowly and selectively returning
  to the country, as evidenced by the two
  significant Apache acquisitions completed in 2006
  with a total value of over US 1 billion.

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Doing Business In ArgentinaTaxes

• During the post-crisis years, Argentina reached
  its maximum level of tax burden. This became one
  of the pillars on which the fiscal surplus was
  sustained since 2003.
• One of the reasons was the introduction of export
  rights, which generated 9 of the AFIP
  (Argentine IRS) total collection revenues in
  2006.
• Other factors were the substantial increase in
  the collection of Value Added Tax (28 of total
  collection) and income tax (20 of total
  collection) as well as the generalization and
  increase on the rate of bank account transactions
  tax (7 of total collection).
• In summary, total collection revenues growth in
  the past years was due to improved tax collection
  efforts, economy recovery and higher inflation
  rates.

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Doing Business In Argentina Labor Legislation
and Social Security

• Argentina has a skilled labor force. However, a
  shortage of skilled labor is taking place as some
  areas are experiencing a substantial increase in
  the level of industrial activity.
• Non-wage labor cost is about 26 of the salary.
  While in US and Chile, non-wage labor cost only
  account for 8 and 3 of the salary respectively,
  this cost is even higher in other countries such
  as Brazil (37) and Sweden (32).

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Market Outlook

• The international economic scenario continues to
  play in favor of Argentina despite the economic
  downturn in the US.
• Record commodity prices led to high level terms
  of trade coupled with increasing harvests
  volumes.
• On the other hand, the commodity price boom have
  been delaying the required investments to follow
  the economic growth.
• As a result of the above, the most dynamic
  sectors continue to be agribusiness and other
  hard currency generators.
• Indeed, the lack of investments drove liquidity
  to the real estate market, promoting the
  construction business.

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Ernst Young in Argentina

• Ernst Young is a global leader in assurance,
  tax, transaction and advisory services. We make a
  difference by helping our people, our clients and
  our wider communities to achieve potential.
• We have 130,000 people in 140 countries, enabling
  us to bring together the right teams at the right
  time, wherever our clients are based. We have
  over 1,400 people in Argentina to serve more than
  1,500 clients.
• We continually invest in methodologies, training
  and technology to promote the delivery of
  seamless, consistent, high quality client service
  worldwide.
• Our professionals are specialized by industry,
  enabling us to offer our clients one-of-a-kind
  and customized solutions.

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Information in this publication is intended to
provide only a general outline of the subjects
covered. It should neither be regarded as
comprehensive nor sufficient for making
decisions, nor should it be used in place for
professional advice. Ernst Young accepts no
responsibility for any loss arising from any
action taken or not taken by anyone using this
material.