Why it's the right time to invest in Argentina's ICT sector

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Tuesday, October 31, 2017

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Argentina's ICT sector is undergoing a moment of optimism and opportunities. The recent announcement of Amazon's arrival, the project to digitally transform the state, the depolitization of the regulatory framework and the resounding success of its 'unicorns' are proof that the health of this key industry is improving. 

What's more, the sector is benefiting from the country's new direction under business-friendly President Mauricio Macri, whose ruling Cambiemos coalition swept the legislative elections in October. 

For example, the Institute of International Finance (IIF), made up of the most important investment banks in the world, foresees that the entrance of foreign capital to Argentina will increase in 2018 with the end of the economic downturn and a fiscal consolidation. 

The changing attitude has also become evident by the market entries of Amazon, which plans to open three data centers through its subsidiary Amazon Web Services (AWS) to deploy its flagship e-commerce business; the highly popular TransferWise fintech, which provides low-cost international money transfers via smartphones; and the Telxius telecoms tower company, controlled by Spain's Telefónica.

The bullish mood pervaded the World Telecommunication Development Conference held by the International Telecommunications Union in Buenos Aires in October. It has been driven mostly by expectations that the Macri administration will create a new ICT regulatory framework, as well as labor and tax reforms that are much closer to becoming a reality after the Cambiemos victory in the legislative elections of October 22.

The 35% corporate tax rate and onerous employment regulations have discouraged a lot of investors, but the new political scenario will push through initiatives to create a more "friendly" environment for local and international investments, says Enrique Hofman, director of San Andrés university's master's degree program in technology and telecommunications.

"I think there are going to be more modern policies and laws, although they will take a while. But when they get a better handle on inflation, they'll be able to manage the dollar better, and that will immediately lower costs," said Hofman, who believes this is the right moment to invest in Argentina.

Sector reforms began the very first day of Macri's term in December 2015, when he issued a decree to modify the audiovisual communication services and Argentina Digital laws. That put an end to the uncertainty created by the conflict between the previous administration led by Cristina Fernández de Kirchner and the big media groups and telcos, allowing these to offer pay-TV services.

Macri's decree also created a commission to draft a convergent communications bill guaranteeing freedom of the press and legal security to encourage investments, while moving "towards the convergence between the different technologies available." However, the bill is currently in limbo, which has generated criticism from some sectors.

What is moving full speed ahead is the project to modernize the state. 

Aníbal Carmona, president of the Argentine chamber of software and computer services companies (Cessi), describes this modernization agenda as "very ambitious, more aligned with the digital transformation of the state than with the incorporation of technology." 

"It focuses on the experience of the user, generating effective access for citizens to fulfill their duties and exercise their rights, including giving more transparency to processes such as government procurement or its open data policy," he told BNamericas.

The project's nationwide scope has generated a significant demand for tech solutions from the private sector, Carmona adds. 

Meanwhile, the science, technology and innovation ministry is working on a smart cities program based on the internet of things and digitizing power grids.

HUGE POTENTIAL

Diego Molano, former ICT minister of Colombia and a consultant to the World Bank and McKinsey, highlights three factors that give the Argentine sector "enormous potential."

First, "an entrepreneurial capacity like no other country in the region, which makes it the leading producer of unicorns in Latin America," he says, referring to tech startups with a market value of at least US$1bn. While Argentina has four unicorns, Brazil and Mexico have two each.

Even more impressive is the fact that the Argentine unicorns - Mercado Libre , Despegar, OLX and Globant - "emerged under governments hostile toward private investment!" Molano told BNamericas.

The second factor is Argentina's market size and its purchasing power. "Any company would like to see its products and services here," he adds. Third, the talent. "Something that is needed throughout the world, particularly in this sector of the economy." 

An example of this is the Buenos Aires tech district created in 2008. Today it houses more than 200 companies and 11,000 people dedicated to developing export capacity in software, hardware, outsourcing, consulting and IoT, as well as tech services for the judicial, health and agro industries.

The major players in the global sector have known about Argentina's differentiating factors for some time, but their capex have only started to reflect it now that the Macri administration has opened the doors to opportunity.

However, there are still some missing pieces in the puzzle, such as policies providing legal and fiscal security for those seeking to invest and do business in the country, and more robust telecommunications infrastructure.

The good news is that experts such as Hofman, Carmona and Molano believe both challenges can be overcome soon, given that Argentina's current political and business leaders have the will to make it happen. 

Pictured: Boca Juniors supporters use their phones as their team enters the field.