September 18, 2020

Latam

ARGENTINA: Concerns over business climate to persist

BY Nicholas Watson

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The announcement this week by the Chilean department store chain Falabella that it intends to withdraw from Argentina highlights a series of issues that foreign companies face in the local market. The Covid-19 crisis is clearly a contributing factor in Falabella and other companies’ moves to reduce their local footprint or withdraw entirely from the country. However, the reality is that regulatory and legal uncertainty has increased markedly in recent months, exacerbating an already-complex operating environment. The difficult economic outlook, combined with government interventionism, suggests the situation is unlikely to improve and that business and investor confidence will remain low.

As elsewhere, the retail sector has suffered significant losses because of lengthy Covid-19 lockdowns. The Covid-19 crisis also explains recent retrenchment moves by various airlines in the local market. These include Latam’s decision to give up on its domestic network in Argentina, as well as the withdrawal of Qatar, Norwegian, and Air New Zealand in recent months. However, for both retail and the air industry, there are underlying pathologies that have contributed to the withdrawal decisions.

  • For retail, the Covid-19 crisis comes on the back of two years of recession, a sustained loss of purchasing power among customers, import difficulties, and a bounce-back capacity that is seen as limited. The economy is seen as contracting by as much as 12% this year, with the government projecting growth of 5.5% in 2021. Meanwhile, inflationary pressures persist even if massive monetary emission over recent months has so far not led to a major spike in inflation; that said, August’s monthly rate of 2.7% could be a sign of a sustained rise in the rest of this year.
  • Union militancy and high labor costs remain a headache beyond the airline industry; for example, the e-commerce giant Mercado Libre has had to contend with blockades of its storage and distribution facilities this year by truckers’ unions.

These – and other – issues have fed into other companies’ recent decisions to withdraw, downsize, or restructure to reduce their direct exposure to local challenges. Examples include Axalta (US), Basf (Germany), and Saint-Gobain Sekurit (France) in the auto-parts sector, and Pierre Fabre (France) in the pharma sector. Meanwhile, the Mexican company Alsea, which owns the local Starbucks and Burger King franchises, issued a statement yesterday, 17 September, denying that it was considering selling up.

To make matters worse, government interventions tend to exacerbate complications for business. The most recent example came this week when the Central Bank (BCRA) on 15 September introduced new, tighter forex restrictions which include obligations for certain companies to refinance their debt obligations to reduce USD outflows. This is on the back of the August telecoms price freeze and a parallel government decree establishing that telecoms and cellphone services are now “essential public services”, and before that, the Vicentin expropriation order, which was later canceled. Currently, a new wealth tax is under discussion alongside other possible tax changes to be tabled later this year, at the same time as a highly suspect judicial reform takes precedence over more pertinent issues such as bankruptcy reforms.

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