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A premium report on the changing face of Argentina by award-winning journalists and analysts.

This Week: 2018: Just Another Year in Argentina Graphic of the Week Buenos Aires Startups Celebrate Talent but Suffer from Lack of Investment Hulling Argentine Soy: A Look at the 2018 and 2019 Harvests Download a PDF version of this report. The Weekly Pulse YEAR IN REVIEW 2018: Just Another Year in Argentina By Scott Squires Argentina saw more ups and downs this year than most countries experience in a decade. Credit: Scott Squires. To call 2018 a difficult year for Argentina would be an understatement — the country has suffered more economic turmoil this year than most countries experience in a decade. But 2018 has shown that a year rife with financial crisis is just another year in Argentina. For our final issue of the year, The Essential looks back at the last rocky twelve months. 2018 left Argentina’s future uncertain, but also catapulted the Latin American nation to a new level of international recognition. Sowing seeds of doubt After sustained economic growth for the first half of market-friendly President Mauricio Macri’s time in office, analysts and economists held high hopes for Argentina’s 2018 performance. But a series of unfortunate events would throw Argentina’s economy into a tailspin, dashing any hope of growth. The first of these was a sweltering summer drought that withered Argentina’s soy, wheat and corn crops, wiping out any chance of a trade surplus. The drought cost Argentina an estimated $3.4 billion dollars, and was considered the worst drought in 30 years. Argentina’s twin deficits — a huge trade deficit, coupled with its already large fiscal imbalance — made the 2018 economic forecast look risky for international investors. Because Argentina holds around 70 percent of its national debt in foreign currency, the financial outlook shook investor confidence in the country’s ability to service its $13.3 billion in international debt set to mature in 2019 while still meeting its other financing needs. By March, firms on Wall Street had caught wind of Argentina’s precarious situation. As economists predicted high rollover risk in the short-term bond market, investors cashed in their peso-denominated Treasury notes, known as Lebac. The reverse of capital flows flooded the foreign exchange market with pesos, sending the currency’s value tumbling. The capital flight, spurred in part by US Federal Reserve interest rate hikes, created a perfect storm that sparked a run on the peso in May. Argentina’s dollar debts became even more expensive, which in turn increased investor jitters over a 2019 debt default. Meanwhile, Argentina repeatedly hiked its key interest rate in hopes of controlling the peso and reigning in runaway inflation, which is expected to end the year at 47.5 percent. The Leliq reached a jaw-dropping 60 percent — the highest in the world —  and sent lending costs skyrocketing, killing any chance of economic growth while prices continued to rise. Macri’s only option Left with few options, the embattled president resorted to the unthinkable. Macri turned to the International Monetary Fund for a bailout — a risky move given the Fund’s reputation among Argentines for its role in the historic 2001-2002 debt default. Many called the decision political suicide, maintaining it would severely limit Macri’s re-election chances in 2019. Sure enough, anti-IMF protests mounted throughout the Southern Hemisphere. Unions, civil society groups, and leftist political organizations staged strikes and massive marches, clogging Buenos Aires’ streets and shutting down ports, banks and public transit. Disaster struck again as the US continued to raise interest rates. Turbulence in other emerging markets — namely a currency crisis in Turkey — caused international investors to again flee the volatile peso for safer US dollars. A massive corruption scandal implicating dozens of politicians, including ex-President Cristina Kirchner, sparked further distrust among investors. To prop up the tumbling peso, Argentina’s central bank chief Luis Caputo began auctioning off US dollars — hundreds of millions per day — to capture liquid pesos on the foreign exchange market. But the strategy irked the IMF, which felt Caputo was squandering the Fund’s dollars. A day before Argentina announced an expanded $56.3 billion financing deal with the Fund, Caputo unexpectedly resigned. But Argentina’s currency crisis, high interest rates and continued inflation were only the beginning of the story. The economy officially entered recession at the end of the third quarter, and manufacturing and retail industries have continued reeling through the holiday season. Stabilizing the peso With new central bank president Guido Sandleris at the helm, the new IMF deal also abandoned Argentina’s exchange rate targeting policy for a plan to restrict growth in its monetary base and introduce a crawling exchange rate band for the peso. The measures largely stabilized the volatile currency, allowing the government to focus on other financing needs. But the IMF loan came at a price, and Macri had to speed up his fiscal belt-tightening measures in order to pass legislation to balance the budget in 2019. He levied painful taxes on grain exports, and continued to slash government spending by rolling back subsidies on public utilities, public transportation, and healthcare. The austerity measures met steep resistance. When a protest against Macri’s budget bill turned violent in front of Congress in October, police fired rubber bulletsand tear gas into the crowd. Winning up global support Despite Argentina’s economic turmoil and international embarrassment over fan violence during the Copa Libertadores soccer match, not all was lost in Argentina in 2018. The country saved face by hosting a successful G20 summit. Government officials avoided a security incident by placing the city on lockdown, and guided world leaders toward a last-minute consensus on WTO reform. At the summit, Argentina signed trade and infrastructure investment deals with China and the United States, and made progress in patching up diplomatic relations with the United Kingdom. Argentina’s fiscal crisis has settled, but its problems are far from over. Though Macri saw a boost in approval ratings post-G20, his chances at winning next year’s Presidential elections are slim at best. If the economy doesn’t rebound as expected next year, 2019 may prove even more difficult than 2018. But that’s just another year in Argentina. Graphic of the Week by Andrea Escandon and Demian Bio ENTREPRENEURSHIP Buenos Aires Startups Celebrate Talent but Suffer from Lack of Investment By Irene Caselli Buenos Aires Mayor Horacio Rodríguez Larreta and others at a 2017 IncuBAte launch event The startup ecosystem was excited in 2015 when Mauricio Macri took over as Argentina's president, promising to boost business and support entrepreneurs. Would Buenos Aires finally be crowned as the startup hub of Latin America? Three years later, as we approach another election year, progress has been slow. While the scenario remains promising, there is still a long way to go to meet initial expectations and, above all, to attract investment, especially from abroad. “I don't think Buenos Aires has become something as big as a startup hub,” says Nicolas Berenfeld. He is the Belgian co-founder of startups Trideo, a 3D printing service, and WeBio, which offers bioprinting for medical purposes and is one of the three winners of the 100K Latam entrepreneurship competition. “The big problem is that there is a lack of investment and private capital, a result of the country’s instability,” says Berenfeld, who has been living in Buenos Aires for eight years. Argentina lags behind when it comes to attracting foreign investment in Latin America. Between the beginning of 2017 and the middle of 2018, Argentina captured only 5 percent of the recorded venture capital investment of regional startups, says a report by the Association for Private Capital Investment in Latin America (LAVCA). In an email exchange with The Essential, LAVCA pointed out that over the longer 2013-2017 period, Argentine startups secured the third highest number of investments from non-Latin American headquartered investors, behind Brazil and Mexico. “It takes many years to build a venture ecosystem and Argentina is still at the beginning of that cycle,” LAVCA President Cate Ambrose told The Essential. “Despite a challenging business environment and limited support from the government over the last several decades, Argentina has traditionally produced some of the most successful tech startups. Macri’s efforts have only heightened that energy, bringing new momentum to the tech talent that already exists in the country.” To promote the local business ecosystem, the Argentine government approved the Entrepreneurship Law in 2017, which eased some bureaucratic burdens and paved the way for more public and private investment. The law created Simplified Share Companies (SAS), which can be set up in 24 hours (previously up to two months), at a lower cost and online. It also created the Fiduciary Fund for the Development of Venture Capital (FONDCE), through which the Argentine government can co-invest in a new company, together with accelerators, incubators and private funds, such as IncuBAte, NXPT Labs and Wayra, among others. Entrepreneurs say these were important steps forward, but there are still many, time-consuming legal and bureaucratic requirements to set up a startup. For example, they point to the high cost of hiring employees because of the heavy taxation system and high compensation for dismissals. Entrepreneurs also complain that there are no bank accounts designed for startups Argentina, while other countries offer cost-free first months for small businesses. Moreover, there are macroeconomic factors to take into account: the devaluation of the local currency, one of the highest inflation rates in the world, and economic instability. In 2018, despite Argentina securing the biggest loan in the International Monetary Fund’s history, at $57 billion, these factors were aggravated. Argentina’s business environment remains difficult. The country is ranked at 119 out of 189 economies in the Doing Business report of The World Bank, below the Latin American average. Brazil (109), Colombia (65), Chile (56) and Mexico (54) rank higher. “Since Macri took over, the process has become smoother, but the labor reforms and the Entrepreneurship Law did not go as far as the startups were hoping for,” says Pablo Ferreiro, the co-founder of digital education startup CoderHouse. “Startups have to think about generating money from the very first moment. We businessmen are positive, but we have to think in the short term, we cannot wait for a law to become successful,” Ferreiro told The Essential. The Buenos Aires City government recognizes these fiscal and financing difficulties. “Taxes are too high and that generates a serious competitiveness problem. The second drawback is the availability of capital: Argentina has not developed an adequate commercial financing system for many years. Although what is happening with entrepreneurial capital is auspicious, it is still very small compared to Brazil, Mexico or Chile, which have greater financing capabilities,” Juan Pedro Córica, Entrepreneurship Director in the City of Buenos Aires Government, told The Essential. He says that a labor reform is necessary, but elections will slow things down: “Next year is going to be complex from a political point of view, so I don’t know if there is going to be space for such a debate.” Argentina is recognized for its great talent and high level of education, including the highest English proficiency in the region. Four out of Latin America’s 13 unicornsoriginated here (MercadoLibre, Despegar, OLX and Globant). Moreover, since 2014, the city government has begun offering free entrepreneurship courses. “The talent is in Buenos Aires, but the market is not here,” says Ferreiro of Coderhouse. “There is no investment here, but we can find it elsewhere, in Brazil for example. There are many businesses that have their teams in Argentina, and then sell to the U.S., where the market is bigger. The challenge is that if you start up in Argentina, then you have to think immediately of a second market.” “Progress takes time,” Lisa Besserman told The Essential. She is the founder of Startup Buenos Aires (SUBA), whose mission is to create a support system for startups in the city. “If we were to isolate the talent, Argentina could be one of the strongest countries in the world, but there are still a lot of obstacles tied to the country’s history.” “The mentality of startups is to understand the unknown and brace instability,” she added. ECONOMY Hulling Argentine Soy: A Look at the 2018 and 2019 Harvests By Amy Booth Next year's soy harvest could feed Argentina's economic recovery As the curtain falls on a disastrous 2018 for Argentina, analysts are keeping an avid watch on everything from international bonds to agricultural production to sound out what 2019 could bring. In 2018, a drought-ravaged soy harvest deepened the country’s financial turmoil, prompting many to ask: would bumper output in 2019 spur an economic rebound? Soy is a fundamental part of Argentina’s export income; soy products have been Argentina’s largest export by value in recent years. Soymeal, oil and beans accounted for 29.6 percent of the country’s export revenues in 2016, and production volumes averaged 55.6 million tons between 2013 and 2017, FAO data shows. This has usually placed Argentina third in soybean production globally, after the US and Brazil. In 2018, disaster struck. The worst drought in 50 years wracked the Argentine pampas, devastating the soybean crop. Production dropped to 36 million tons. Other major agricultural products such as maize also took a beating. The Buenos Aires cereal exchange initially estimated overall drought damage at $3.4 billion, before revising upwards to $5.9 billion in June — nearly one percent of GDP. Rosario Board of Trade economist Emilce Terré reported that product had commanded a premium due to the poor harvest, but not enough to make up for the financial shortfall. At the time, high levels of dollar-denominated debt and inflation had already taken their toll on Argentine coffers. The drought added to the pain. Taken together, these issues pushed the country into recession and prompted president Mauricio Macri to turn to the IMF in June. The drought, though, was a stroke of bad luck, unrelated to economic fundamentals. This begs the question: could improved agricultural production in 2019 provide the Argentine economy with some blessed help? Early indications suggest production is likely to recover in the 2018/19 season as rains bring relief to parched fields. Planting continues through December and the harvest runs from April to June, so it is too soon to say. However, first projections are promising. In early December, the US Department of Agriculture forecast set Argentine harvest volume at 56 million tons, a slight downward revision based on reduced planting area, but a return to regular volumes nonetheless. When it comes to Argentina’s fortune on the global market, though, recovering production volumes are only one piece of the puzzle. A silver lining to Argentina’s currency crisis is that the devalued peso works in exporters’ favor, rendering their product more competitive on an international market priced in dollars. Complicating matters, the US and China both produce and consume soy, and their ongoing trade war is altering trade flows. Back in July, China applied punishing 25 percent tariffs to US soybeans, prompting a surge in demand for Argentine beans. Though Chinese soybean imports from the US have resumed since coming to a total halt in November, trade winds between the two giants remain uncertain for 2019. Terré told Reuters this development could raise Argentine soybean exports to China to record levels. The two are also in talks about shipping Argentine soy oil and meal to China; the latter usually imports beans for processing at its own facilities. While shipping its own beans to China, Argentina also began to import from the US, which had a glut of produce on hand after the Chinese levies were introduced. Amid this standoff, China will remain an appealing market for Argentina. The country is already a major trading partner and investor for Argentina, and the two deepened their ties during this year’s G20 summit. That said, China’s finance ministry announced on December 24 that it would be lifting tariffs on products such as rapeseed meal, cotton meal and sunflower meal. These are alternative feeds to soy, and the move could dampen demand. While likely to have a minimal effect, but the move serves as a reminder that those watching the soy market cannot afford to take their eye off the ball. Long-term, it is important to note the environmental impact of soybean cultivation in Argentina. Communities in the growing region around Villa Mercedes in San Luis province, for example, have experienced such severe deforestation and erosion that new waterways have begun emerging in the earth overnight. In 2016, the local government was forced to introduce a requirement for farmers to leave a percentage of their land as pasture or forest because the appearance of new rivers was threatening major infrastructure, the Guardian reported. If the industry faces more extensive regulation to mitigate such problems, soybean production could become a more complex undertaking. Recovering soy harvests alone will not be enough to rejuvenate Argentina’s economy in 2019. With new austerity on the way and unemployment running at 9 percent, questions remain over what will happen when IMF funding runs out in 2019. A victory for Macri may be synonymous with continued financing, but such an outcome is far from guaranteed. The prospect of an opposition victory and potential policy upheaval means that uncertainty lingers on. Strong soy production will at least provide an important block in rebuilding the economy.