Market monitor: Argentina

Economic overview

Argentina’s economic performance between 2002 and 2015 is best described as populism with resources. High commodity prices allowed the government to increase state spending, reduce unemployment and freeze energy prices. But this ultimately led to a fiscal deficit, inflationary pressures and shrinking international reserves. The resulting volatility stifled economic growth.

Since his 2015 election, President Mauricio Macri has implemented reforms to promote private investment, develop important economic sectors and reduce the economy’s reliance on government and consumer spending.

Argentina’s economy contracted by 2.4% in 2016, but growth is expected to return in 2017. Consumer spending is gaining some momentum, as a labor market recovery promises wage growth. Plus, Argentina’s largest trading partner, Brazil, will exit recession this year, economists predict. This should help boost exports, particularly from the manufacturing and automotive industries. Oxford Economics believes this will support a 2.5% expansion in Argentina’s economy in 2017.

Business travel industry insight

Fewer travelers from overseas have arrived in the country in recent years, so the international travel market has relied on Argentineans traveling abroad to fuel growth. By 2020 they will account for two-thirds of all international trips. Locals’ overseas trips drove Buenos Aires’ airline passenger departures to record levels over the last two years, even as international arrivals dwindled. Chile and Brazil are the most popular destinations, and the latter is expected to attract even more Argentineans this year as it recovers from recession and increases bilateral trade.

Most of the US$11.5 billion spent on business travel in 2016 went toward trips within Argentina. After adjusting for inflation, total spending averaged growth of 3% per year between 2010 and 2015. An anticipated increase in outbound international business travel should fuel 4% annual growth through 2020.

State-owned airline Aerolineas Argentinas accounts for 60% of all scheduled flights (international and domestic) from Buenos Aires and close to 80% of domestic services. But government plans to liberalize the aviation market threaten Aerolineas’ dominant position. Five airlines have already expressed interest in competing for domestic routes.

Hotel demand fell in 2016, largely because international travelers were staying away. In a bid to attract more foreign visitors, the government now refunds a 21% value-added tax on hotel stays. The government’s efforts to eliminate obstacles to foreign investment have attracted interest from international hotel chains. Wyndham Hotel Group’s recent purchase of Fen Hotels has added 16 properties to its portfolio in Argentina. Other global brands and investors are also taking a closer look at the market.

Opportunities

  • Argentina’s growth prospects are encouraging. President Macri’s policies and the economic recovery of key trading partner Brazil promise to promote expansion.
  • Aviation liberalization will increase airline supply and choice, and plans for the country’s first low-cost carrier should help drive down domestic fares. Aerolineas Argentinas will have to compete on fares to retain existing business.
  • As more international hotel chains move into the country, corporate travelers will have greater access to their preferred accommodation partners.

Challenges

  • Argentina suffers from high inflation, and price increases are likely to continue as wages and energy costs rise.
  • Macri’s reforms are designed to attract more foreign business investors and leisure travelers. Their move into the market could squeeze availability of flights and hotel rooms, unless suppliers respond with more capacity.
  • As Aerolineas Argentinas restructures its business to prepare for increased competition, the resulting schedule changes and potential worker actions could lead to travel disruptions.

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