Argentina’s new investment promotion regime: key points

A cornerstone reform in the government’s recently passed omnibus reform law is the creation of the Régimen de Incentivos para Grandes Inversiones (RIGI), an investment promotion regime. The RIGI provides generous tax, trade and foreign-exchange benefits for 30 years for projects worth more than US$200m in the forestry, tourism, infrastructure, mining, technology, steel, energy, and oil and gas sectors. EIU believes that the RIGI will encourage large-scale investments in Argentina’s most competitive sectors, but the impact will be limited as long currency and capital controls remain in place.

The government, led by Javier Milei of the far-right La Libertad Avanza (LLA), touted the RIGI as an important reform to rekindle private investment in Argentina, especially foreign direct investment (FDI). The RIGI started out with a larger scope, but the government was forced to narrow it down to cover eight sectors—covering many of Argentina’s fastest-growing sectors (particularly mining and oil and gas)—following negotiations with the opposition in the Senate (the upper house). The government hopes that the RIGI will boost FDI in export-oriented sectors, which are a critical source of financing, as the sovereign remains locked out of global capital markets. Although the RIGI will improve the business environment, investors are likely to take a cautious approach for as long as the government maintains strict currency and capital controls.

The RIGI offers generous terms…

The RIGI’s wide sectoral scope and its promise to maintain generous tax, trade and foreign-exchange exemptions for 30 years illustrate the challenges that Argentina encounters in encouraging domestic and foreign investors to commit to large-scale, long-term investments. Investor jitters are well founded, given Argentina’s history of seismic policy shifts, as well as debt defaults and violation of contracts.

To receive benefits under the RIGI, firms must commit to a project worth a minimum of US$200m, with 40% of the allocated capital being disbursed in the first two years. Firms must also create “vehículos de proyecto único” (VPUs, single-project vehicles), whose purpose will be to develop an investment project that complies with the RIGI’s conditions. The government will then either approve or reject the VPU. Additional benefits will be awarded for investments worth more than US$1bn in projects that are seen as strategic in that they will help to put Argentina on the map as a key supplier to global markets—a provision that is probably oriented towards critical-mineral and oil and gas projects.

VPUs that fulfil the RIGI’s requirements will gain several tax benefits. These include a reduction in income tax from 35% to 25%, a reduction of the 7% tax on dividends to 3.5% after the eighth year, accelerated depreciation for capital goods, the option to pay value-added tax using tax credit certificates, an exemption from import tax for capital goods, and an export tax exemption after the third year for all VPUs and after the second year for strategic exporters.

Meanwhile, foreign-exchange benefits include the total lifting of the compulsory sale of export earnings in the official exchange market after the fourth year, or after the third for strategic projects. There will be no capital controls on loans borrowed, on the repayment of loans or on dividends abroad. Nor will there be trade restrictions on imports or exports for goods that are used or produced by VPUs. The RIGI also includes a local-content requirement that obliges the VPU to source 20% of its total investment from local suppliers if they can provide competitive prices and quality. In a bid to increase investor confidence, the law allows firms to appeal to international arbitration courts if a dispute cannot be resolved amicably within 60 days.

The next step is for provincial legislatures to ratify the RIGI. We expect provinces run by centrist or centre-right governors—many of which have significant critical-mineral or oil and gas resources—to ratify the scheme. However, provinces run by left-wing Peronists are likely to promote their own investment regimes, which we believe will fail to attract investment. Río Negro was the first province to approve the RIGI. The provincial government ratified the RIGI quickly owing to a competitive bid with the province of Buenos Aires to be the location of a liquefied natural gas (LNG) terminal under a joint venture between YPF (the state-owned oil and gas firm) and Petronas (Malaysia). Although Buenos Aires boasts more developed infrastructure, the governor of that province, Axel Kicillof of the left-wing Peronist Unión por la Patria (UP), is unlikely to support the ratification of the RIGI. As a result, we consider it likely that Río Negro will win the bid to receive the new LNG terminal.

…but economic and political uncertainty will weigh on investment
The RIGI forms part of the assumptions behind our forecast that Argentina’s GDP growth will be firm after 2025 amid higher investment; however, our forecasts also assume that the government will lift currency and capital controls by end-2024 or early in 2025, which would spur greater FDI inflows. Should the government fail to lift these controls, investment would be lower than we expect. As a result, we would downgrade our GDP growth forecasts for the remainder of the 2024-28 outlook period. The longer the government fails to articulate a clear path towards lifting these controls, the more investors will push decisions back as they take a wait-and-see approach.

Argentina’s history of political instability and policy swings is also likely to keep investment below potential. The government’s failure to persuade members of the UP to vote in favour of the RIGI in Congress, as well as opposition from UP governors, highlights a lack of broad-based support for the incentive regime. This is a cause for concern, given the RIGI’s 30-year horizon. There is a risk that if the UP returns to power at the next election, or even after one further into the future, it may seek to change some of the RIGI’s generous provisions, which could invite international arbitration and scuttle confidence in Argentina. In this adverse scenario, Argentina’s long-term growth rate could be substantially lower than its potential.

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