Brain drain and low confidence challenge Argentina’s economic growth

In October, Argentina's central bank was considering another potential interest rate hike following successive increases each month this year aimed atn countering inflation that is set to reach over 100% by the end of 2022. The government is struggling to fund itself with ever-increasing domestic debt and low net international reserves. Political infighting ahead of an election next year has left observers pessimistic about government’s ability to shepherd reforms to bring down inflation. Strict currency exchange controls are deterring foreign investment, and the government’s difficulty in funding itself is raising fears among bank analysts that an economic recovery will take years.

Argentina has struggled to get a balance with a business environment many have felt is hostile due to being heavily regulated with strict foreign currency controls. One of the more controversial new regulations that the business community feels is destroying confidence was the recent changes to import payments. In October, the government brought in a new system that includes verification that the size of an importer's request is consistent with its financial resources; requiring importers to designate only one bank account for foreign trade and more precise timing for importers' purchases of hard currency from the central bank. Given limited central bank reserves of US dollars, the government wants to make sure that hard currency is used for approved imports that increase domestic output. In Argentina, the dollar is worth 88% more in Argentine pesos in alternative financial markets than under the official rate, which is used to pay for imports.

While many segments of the business community may complain about the amount of regulations the Argentinian government likes to impose, it has been the making of the local accounting industry, forcing demand for accountancy services to remain high. The accounting services industry is highly developed in the country, with a predominance of small accounting firms providing comprehensives services dedicated to serving SMEs. “The increase in government and professional regulations has resulted in a growing participation of the different professional activities of public accountants in the field of business, in services such as tax consulting, prevention of money laundering, special compliance reports,” said Ignacio Rodríguez Spuch, partner at Casal, Vecchi, Rodriguez Spuch y Asoc. SRL, an MGI Worldwide member firm. “In our profession, there is significant competition in terms of fees, and the need to make various adjustments to them throughout the year due to the impact of inflation entails a challenging environment in this regard. We consider of great importance the investment in technology to carry out routine tasks, which allows a more efficient use of our professional team, focusing on providing more consulting services; as well as promoting the atomisation and diversification of activities that clients demand we develop, in order to successfully go through the different national and global economic cycles. In order to track our performance, the use of business intelligence tools and the measurement of indicators of the different business processes is extremely useful in order to have an adequate follow-up in terms of our compliance and quality. It is also beneficial to make alliances with strategic and/or complementary providers of IT, legal and notarial services.”

The brain drain the country is currently suffering is beginning to impact on the level of client demand, however. Argentines are leaving the country in their thousands. Poor job prospects, rocketing inflation and a government that is struggling to restore public confidence appear to be driving Argentines abroad. Spain received 33,600 Argentine-born citizens last year, the most since 2008 and three times more than six years ago, according to Spain’s national statistics institute. These figures are considered an underestimate because many hold European passports by descent. Foreign companies are following them as they cannot find enough staff.

“Many international companies are leaving the country or reducing their activities and local ones are reducing costs and waiting for better times to decide new investments,” said Esteban Basile, managing partner of Canepa, Kopec y Asociados S.R.L, a Crowe Global member firm. “Therefore, customer demand has been lower than in previous years. At the same time, with a yearly inflation rate of around a 100% there are significant difficulties in translating it into clients’ fees, reducing the real value of income. Regarding staff recruitment and retention, the situation is similar to previous years: talented people are difficult to find and there is a significant turnover rate. Staff with computer skills are tempted by international companies to work abroad with higher salaries than local companies can afford.”

“In relation to the recruitment and retention of staff, in our country there is full employment in our sector,” said Spuch. “We must work especially on retaining talent and keeping them motivated, not only in terms of monetary compensation, but also with different tools such as the possibility of working in a hybrid mode, labour flexibility under a focus based more on productivity and objectives than on compliance with working hours, providing permanent training and opportunities for professional development in the organisation with new and constant challenges, and even the possibility of creating association agreements.”

Recruitment and retention of suitable staff has never been so difficult for a number of reasons, according to Noemi Cohn of Abelovich, Polano & Asociados S.R.L., a Nexia member firm. “The amount of people who choose to study accounting at university decreases year by year,” she said. “Of that small pool of people, most of them prefer to work for a big multinational company or for a Big 4. That leaves very few recruits left for the rest of the industry. The Big 4 in Argentina opened a Shared Service Centre Department, which services their branches abroad or their international clients directly. This new area absorbs a lot of professionals. Nor can we ignore the high inflation rate, which is rising at a monthly average of 6% for the last six months. Employees are either constantly searching for new jobs with higher salaries or constantly negotiating high salaries with current employers. In medium term salaries are matched to inflation, but in reality, it is like a monthly race to match levels between employers.”

Fees are also very competitive despite demand, and their value is linked to the inflation and/or US Dollar devaluation, according to Rafael Faillace Partner, Partner at MGI Jebsen & Co. But despite this, his firm has seen a spike in demand for BPO and tax services over the last 12 months, principally because international companies are moving their internal accounting and tax departments to companies who specialise in these services. Cohn has seen an increase in audit services, as clients move from the Big 4 to medium sized audit firms as they chase lower fees. Spuch has noticed an increase in the demand for services in the last year linked to professional compliance procedures by companies, in terms of foreign exchange and foreign trade regulations. “Likewise, the hours allocated to tax consulting and linked to the settlement of salaries and social charges have also increased,” he said.

The country seems to be in a holding pattern as it eagerly awaits presidential elections at the end of 2023. “Any potential change in the economic course could raise the opportunity of foreign investments,” said Cohn. “This could raise demand on M&A, advisory services and due diligence.” Faillace is confident that growth will continue for the accounting and tax sector for the next year, regardless of the outcome of the elections. His firm is choosing to double down by developing and strengthening its IT systems, applying it to all business processes in the firm and improving the knowledge and training of staff.

Spuch does not foresee a significant change in his firm’s activity for the next 12 months but he is hopeful that the outcome of the elections, whatever it may be, will be a breath of fresh air for the business community. “I think the elections will bring an improvement in the business environment that impacts the growth of both local and foreign private investment,” he said. “I am also hoping for greater possibilities of carrying out the necessary structural reforms, reduction of regulations for companies, improvement in competitiveness, access to foreign currency, inflation and foreign trade problems.”

That is a big wish list. But Argentina needs something big to bring back the foreign direct investment (FDI) it so desperately needs. Although it is one of the largest economies in Latin America, Argentina has struggled to attract FDI due to soaring debt and the effects of Covid. Its GDP contracted by 16.2% during the second quarter of 2020, the largest fall in the country’s history. In 2020, FDI in Argentina fell by 47%, according to the UN Conference on Trade and Development’s (UNCTAD) Investment Trends Monitor. The country’s business environment is one of the barriers to FDI in Argentina, but it has been working to modernise its FDI regime in order to attract more foreign investors. FDI in Argentina is expected to be USD 79 million by the end of 2022, according to Trading Economics global macro models and analysts expectations and is projected to trend around USD 80 million in 2023. FDI in Argentina reached an all-time high of USD 734 million in February of 2019 and a record low of USD 18 million in November of 2014.