Assurances that Argentina is ‘on the right path’ have been proven incorrect for years, going back at least a century or two. For that reason, what makes 2019 any different?
Companies relying on the export of services want, probably more than anything, a sense of true stability – both politically and economically. Yet one analyst we interviewed says 2019 will be a “complicated year” with high inflation rates which may force more Argentine providers to raise pricing.
2018 clearly turned out to be complicated also, and it’s exactly the kind of insecure environment that Nearshore providers loathe. Argentina has managed to stabilize its economy at the end of 2018, as the peso’s slide against the US dollar slowed in December but the challenges are not entirely finished.
Measures were put in place to prevent the peso from trading above 40 pesos to the dollar and reducing inflation by two percentage points, according to XinhuaNet. Accumulated inflation for the year was at 43.9% with year on year inflation at 48.5%. The peso’s fall, paired with the worst drought in five decades that damaged crops, led to losses of around $8 billion.
In mid-2018, Argentina secured a $50 billion loan from the IMF, one of the biggest bailouts in the organization’s history. This deal failed to calm the markets and was followed by devaluations in August and September.
Argentina then asked for the disbursement of the loan to be sped up, and at the end of September the bailout was raised to $56 billion.
The economy has also had a negative effect on the poverty rate, which is now at 33.6%, the highest in a decade, according to the Argentine Catholic University.
Uncertain Times Ahead
Sebastian Menutti, a Senior Industry Analyst at Frost & Sullivan, told Nearshore Americas that Argentina’s outlook for the year ahead is a very complex matter.
“There is a lot of uncertainty regarding how 2019 will unfold for Argentina. I think most people expect 2019 to be a complicated year with high inflation rates which will probably be around 25%, that’s what most people estimate nowadays but with high salary increases as well, probably close to that 25%,” he said.
Menutti mentioned that the IMF are forecasting a 1.6% decrease in GDP and predicts it will be a “harsh year” for the Argentine economy.
He said it will be a challenge for local providers and added that the government will introduce a new tax for exportations that all service providers that export services to foreign companies will have to face, which will be around ten percent of any revenue.
“That will hurt local providers’ international competitiveness in terms of pricing,” said Menutti.
He believes that companies will need to do something to adapt to the tax which includes changing their prices. However, he said: “Argentine providers change prices quite often because of the constant devaluation and constant increases in salary. I think it is a possible outcome for that tax but it is not going to be news for local providers, I think they are used to that.”
Menutti added that 2019 will be further complicated by the fact that there are presidential elections in October.
“That might be an issue for investors that usually appreciate a more friendly environment, more certainty regarding the near future,” he said.
Despite this, Menutti believes Argentina has strong advantages for providers who are thinking of establishing themselves in the country, such as a very large labor pool, highly educated people and a good number of universities with a constant flow of graduates.
The result of the elections might affect the economy, too.
Menutti said: “That could affect some decisions and expectations and that could even delay some investment into the country because it would add some uncertainty regarding if the business environment and rules are going to remain the same or they are going to change, maybe significantly. That’s always an issue for investors.”
Impact on Outsourcing
Inés Casares, the VP of Global Delivery at Softvision in Buenos Aires, talked to Nearshore Americas about the year ahead.
“Argentina has a long standing commitment towards growing and developing knowledge based industries, and particularly software development and new tech. I believe the current administration is on the right path because it is creating the necessary business environment for the sector to thrive, both for local companies and for foreign investors,” she said.
Casares also mentioned the industry benefits of being based in the country including its well known free public universities and the highest level of English fluency in the region. She mentioned the “interesting” programs and policy aimed at expanding the talent market, too.
When asked about if her company will have to raise pricing because of currency exchange, she said: “The specific space where we play is not so sensitive to price. If the right talent and product development capabilities are there, there will be no pressure to lower prices.”
Casares also has a positive outlook for the economy in 2019: “Since the country is achieving a gradual control of inflation and considering the fact that presidential elections are coming up in October, we are optimistic that we will see a moderate improvement in economy in 2019.”