Argentina’s reforms will create winners and losers

Cambiemos has already begun to flex their political strength following their convincing mid-term victory in October. The ruling coalition’s increased presence in Argentina’s congress will allow for Cambiemos to tackle more politically-sensitive structural reforms.

MNCs should understand these structural reforms carefully as they will significantly improve the business operating environment in Argentina. Furthermore, their approval will likely result in the execution of long-awaited foreign direct investment, which will result in sustainable economic growth. Below is everything that you need to know about the four main structural reforms:

  • The fiscal responsibility law will add credibility to the federal government’s pledge to shrink the fiscal deficit, which will reduce inflationary pressures. The main idea of this law would be to freeze expenditures in real terms at the federal, provincial, and municipal level. This is important in Argentina because many of the country’s fiscal problems stem from the fact the federal government has no ability to control provincial spending. Governors of 23 out of Argentina’s 24 provinces signed an agreement with the federal government on November 16 to commit to fiscal responsibility. Now the bill is in congress and is very likely to pass by the end of the year. In the short-term, this may hurt B2G companies as the government will be cutting expenditures across the board. Yet in the medium-to-long term, B2G companies will benefit as the provincial and federal governments will have more funds freed up as a result of budget tightening.
  • The capital markets reform will help develop Argentine financial markets. The most important element of the capital markets reform is an increase in financial transparency. This will be accomplished by stripping the country’s anti-graft watchdog, the CNV, of the ability to intervene in the decisions of company boards without consent from the department of justice. In addition, local SMEs will be able to access credit lines easier, offering growth opportunity for them and potentially boosting sales for multinational B2B companies targeting these SMEs. This reform has already been approved by the lower house and is pending approval in the senate.
  • Tax reform will reduce the tax burden for all MNCs will the exception of food and beverage companies. This will be one of the most important reforms to improve productivity in Argentina considering that the country ranks 137/137 in tax-rate competitiveness, according to the World Economic Forum. The main benefit for MNCs will be a gradual reduction of the corporate income tax rate from 35% to 25% in three years (30% in 2018 and 2019, 25% in 2020). However, producers of sugary beverages will be slapped with a 17% internal VAT (up from 8% currently). Furthermore, a VAT of 21% will be applied to internet services such as Spotify, Netflix, Amazon, etc. This reform will be more difficult to approve in congress. The financial sector and upper-class are against the new capital gains tax, while labor unions do not believe that the trickle-down effects of the corporate income tax rate will benefit ordinary workers. FSG still believes that a tax reform will be passed because all political factions believe that the current tax code is archaic. There may, however, be future changes in the reform’s content. Seeing that the government’s main goal continues to be to reduce Argentina’s fiscal deficit, tax reductions would have to be covered through lower spending (addressed with the fiscal responsibility law) and/or tax hikes elsewhere. As a result, companies should not count out further tax hikes in the future if the fiscal deficit goals are missed.
  • The labor reform could reduce labor costs by up to 35% if it is passed. The law grants companies an amnesty of up to a year to formalize their workforce by forgiving all costs associated with payroll and social security registration. In addition, regulations on layoffs and severance packages will be updated. In particular, a worker only has one year to initiate legal action against their employer for fire without cause (currently a two-year maximum). This law is likely to pass in congress by the first half of next year because the CGT – Argentina’s largest labor union – gave the government their seal of approval. However, more combative elements with the CGT and other unions have expressed their rejection to the reform. As such the labor reform will be very contentious (and subject to change) up until its approval.

Source: Frontier Strategy Group

Actions to Take  

When analyzing the elements of the reforms, consider taking the following actions:

  • Increase local labor force to capture increasing domestic demand. Contracting local labor will be a more streamlined process, while layoffs will carry less of a legal burden as they did in the past. Even though average wages are still very high for the region, this will be more convenient than outsourcing labor to other countries.
  • Consider targeting SMEs as potential clients now that they are more willing to leverage. B2B companies should begin profiling and targeting SMEs as a potential client base because they would have the ability to grow with credit. Carefully analyze the financials of smaller companies to determine their potential growth as well as their solvency.
  • Monitor the evolution of Argentina’s fiscal deficit. The ministry of treasury is very likely to meet its 2017 year-end primary fiscal deficit goal of 4.2%. However, 2018’s goal of 3.2% is ambitious. If the government perceives that it may miss this mark, expenditures could be cut further (negatively affecting B2G companies) or more VAT taxes could be introduced (possibly hurting B2C companies).

FSG will continue to monitor the progress of these reforms in congress and any significant changes to the current form of each reform. Clients should pay attention to analyst commentary which will provide you with the most up-to-date information.


For our latest updates and insights, FSG clients can visit the client portal or contact their Client Services Director for more in-depth briefings. Not a client? Please contact us to learn more.

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