Share the article
twitter-iconcopy-link-iconprint-icon
share-icon

Argentina's season of change

Despite the twin threats of the worst drought to strike South America in decades and the continuing fallout from global financial crisis, Argentina's lenders have survived relatively unscathed. And now a debt swap offer could allow the country to access international credit markets. Writer Silvia Pavoni
Share the article
twitter-iconcopy-link-iconprint-icon
share-icon
Argentina's season of change

Not a favourite with international observers, Argentina has yet to prove that its economy and financial sector is ready for the attention of international investors.

Despite higher foreign direct investments in some sectors, such as agriculture, metal mechanics, biotechnology and, interestingly, television content creation, banking and the local capital markets are still convalescing from the country's default on its $95bn debt in 2001.

A successful end to the restructuring of Argentina's debt, through an offer to swap defaulted bonds for new obligations, would allow the country to tap international credit markets for the first time in almost a decade. Finance minister Amado Boudou has travelled extensively to present the offer to investors - receiving a mixed reception.

Government officials are, not surprisingly, optimistic about the results of the deal and announced in June that the offer reached a participation of 54% of the $18bn still outstanding.

Argentina's sovereign debt has been a no-go area for many investors, but the global financial crisis has changed everything. In an unexpected twist, it has encouraged some Argentinians to be more vocal about their solutions to deal with government defaults (including president Cristina Fernández de Kirchner's firm views on the fate of Greece) and put the effects of the country's 2001 crisis on banks in perspective.

"The world has given us all a very clear lesson," says Juan Carlos Fábrega, chairman of state-owned Banco de la Nación Argentina, the largest lender in the country. "When Banco de la Nación suffered the effects of the crisis in 2001, people thought we had very serious difficulties. Now you see what effects this international crisis has had on other banks."

A sense of optimism also comes from the country's economic figures. Gross domestic product (GDP) grew between 2003 and 2008 by 8.5% and there was some growth even in 2009, when the effect of the global financial crisis hit Argentina. GDP growth was then just under 1%, according to some government figures, although other estimates have it at -2.5%. Official figures for 2010 and 2011 forecast the economy to grow by 1.5% and 1.8%, respectively.

Unfortunately, the banking system has not mirrored such growth. This seems to be due to the diffidence of retail customers, in particular, towards the financial sector after the 2001 default.

"Despite the economic growth, what will be passed to the banking system is limited," says Banco Galicia chairman Daniel Llambías. He adds that banks can go back to the level of penetration they had at the end of the 1990s, but that this will take at least another five years to achieve.

Inflation concerns

Macroeconomic data is indeed encouraging for Argentina but a true sense of how well the country is doing, according to widespread consensus, can be found only by using a higher level of inflation than the one officially publicised.

The government's assessment of inflation is 10%, while private sector analysis put it between two and three times higher.

In June, Mr Boudou reiterated the government's position that the only inflation figure is the official one.

Disputed inflation data makes it harder also to assess the ability of Argentina to sustain its growth. The country's official data shows that the level of public debt as a percentage of GDP has come down to 50%. Maintaining this level will require a fiscal surplus of only 0.7%. The average fiscal surplus between 2003 and 2009 was 2.2%, so the government is confident this will be achievable.

Mr Boudou also rejects claims that the government's tax revenue figures, which have been breaking new records in recent months, have been boosted by inflation, instead insisting that they reflect growth.

He forecasts further GDP growth this year and predicts that the government will maintain the current levels of spending increases for the rest of the year. Government spending has been rising by about 30% a year in recent times, attracting criticism from some analysts, who argue that the pace is adding to inflationary concerns.

Furthermore, inflation needs to be considered when assessing banking products' growth. Credit card business through the Visa network grew 45% year on year this March. The percentage might change considerably if different rates of inflations are applied.

It is unquestionable, however, that lenders have had a good year, despite the imported financial crisis and the devastating effects on agriculture and farming in 2009 of the worst drought to strike South America in decades. Months of dry weather hit cereal farmers and ranchers in central and northern parts of Argentina, as well as neighbouring countries.

Banco Galicia, a leader in the agricultural sector, was affected by both events but still managed to close 2009 a healthy $301.5m in profit. Its credit card for the agriculture sector, Galicia Rural, retains more than 50% of market share in the sector. The bank even managed to close an acquisition at the beginning of this year with Compañia Financiera Argentina, a provider of personal loans to low-income clients. "We're talking about 1.4bn pesos [$357m of business], so it's not much, but these are clients that have good development opportunities and the company is good [and has a well-known] brand," says Mr Llambías.

cp/94/GET_boudou.jpg

Denial: Argentina's finance minister, Amado Boudou, says tax revenue figures have risen due to growth, not inflation

From crisis to drama

Soon after the end of the agricultural emergency, it almost seemed that other troubles could affect the economy. In this case, the origin was not severe adverse meteorological conditions, but the attraction of Argentina's politicians to drama and intrigue.

During the controversy between Argentina's central bank and government over reserves that Ms Fernández de Kirchner demanded to help repay the country's outstanding debt, which ended with central governor Martín Redrado leaving his post, bankers momentarily feared that their clients would switch their accounts to US dollars. Thankfully for them, as the controversy did not lead to a full-blown political crisis, this did not happen.

However, locals remain sensitive to any news that might affect the stability of the country and, as a precaution, buy dollars.

"Economically, Argentina is doing well but our main concerns are political," says one banker. "The foreign exchange has remained very stable for a few months now but [during] the farmers' crisis last year, retail customers started to buy more dollars. Here in Argentina you think in dollars, not in pesos. If the world is crashing down and the dollar is crashing down, here in Argentina it still goes up [against the peso]."

Capital outflows are still an issue for the Argentine financial system. It is believed that for every 100 pesos held in the country there are 300 pesos or 400 pesos abroad. These are savings that have proved hard to repatriate as people are reluctant to bring money back to a country that is still perceived as unstable, despite the higher risk levels reached recently by other previously 'safe' markets such as the US and the eurozone.

Fight for market share

In a banking market that is relatively small in value but highly populated, gaining market share requires significant effort. Banco de la Nación Argentina has the strongest presence in the country and, as Mr Fábrega describes it, also plays a driving role in the market. Thanks to government support, it is able to offer particularly advantageous products and low interest rates to its clients. These create a benchmark to which private-sector banks tend to get as close as possible.

Banco de la Nación enjoys the highest level of loans and deposits in Argentina, with about 28% of the deposit market and 23% of the loans market as of April this year, and so competing with state-owned banks is hard for private sector players. Competition within the latter group, however, might increase in the future, particularly among the smaller players.

Banco Macro, the second largest in Argentina by Tier 1 capital, has been growing in recent years through a series of acquisitions. So has Banco Patagonia, which has itself recently been acquired by Banco do Brasil. The Brasilia-based state lender is expanding outside its home country and is also looking for an acquisition in the US to target Brazilian and Latin American expatriates.

"Banco do Brasil is making a big bet on Argentina with the purchase of Banco Patagonia," says Mr Fábrega. "This is interesting and important for all the Brazilian companies in Argentina, and for the rest of us, as it will force us to improve our [strategy so that we do not] lose market share."

Banco do Brasil has paid almost $480m for the 51% stake in Banco Patagonia, which mainly serves individuals and small and medium-sized businesses.

Banco Santander Río also recently expanded its presence by acquiring the retail network of BNP Paribas in Argentina, in a deal that closed in November last year. The deal, whose value is believe to have been limited, looks a sound addition to Santander's retail and affluent client portfolio and will give the Spanish bank an additional 17 branches.

"Differentiation between banks is low among the large banks. Santander, BBVA and Galicia are very similar," says Mr Llambías. "People don't switch between banks. To gain market share, we need to expand and get business from smaller banks or from state banks, which don't offer as many products."

cp/94/GET_kirchner.jpg

Making headlines: the controversy over president Cristina Fernández de Kirchner's demand for reserves nearly led to a full-blown political crisis

Local capital markets

The as yet unresolved sovereign debt restructuring and a self-imposed absence from the international capital markets have not helped the development of Argentina's local debt markets.

The nationalisation of private pension funds at the end of 2008 did not help either. The decision unsurprisingly fuelled fears in global financial markets that Argentina may default on its debt payments again. On the other hand, the 10 privately owned pension funds had by then attracted criticism for themselves due to their low returns and exorbitant commissions. Between their creation in 1994 and their move into public hands, the funds had saved 96bn pesos for retirement accounts while pocketing 36bn pesos in administration fees.

Whatever the reason behind it, the nationalisation of the pension funds took away a big chunk of potential institutional investors and contributed to limiting the options for local issuers. If interested in an Argentine investment, institutional investors tend to go to the stock market for existing American Depositary Receipts or bonds. In a vicious cycle, given the lack of depth of the local debt markets, it is difficult for institutional investors to gain access to new issuances. These tend to be smaller and therefore new issuances tend to be allocated with private long-term investors, away from the capital markets.

"There are few foreign investors, which tend to be private banks, and very limited institutional investors [in the local capital markets] because the transactions are small and there isn't a secondary market - it's difficult to create a secondary market with issuances of $60m," says Mr Llambías.

Obtaining a high level of acceptance for its debt swap offer is clearly Argentina's top priority at the moment. Once this goal is achieved, the country's politicians will then have to focus on implementing clear and transparent policies to convince the wider international community that Argentina is once again a safe bet.

Was this article helpful?

Thank you for your feedback!

Silvia Pavoni is editor in chief of The Banker. Silvia also serves as an advisory board member for the Women of the Future Programme and for the European Risk Management Council, and is part of the London council of non-profit WILL, Women in Leadership in Latin America. In 2019, she was awarded an honorary fellowship by City University of London.
Read more articles from this author