“Argentina’s economic outlook is becoming increasingly easy to analyse: it is more and more dependent on a single economic variable – international reserves,” states a research note by Citi, dated from early August 2013. In other words, the country's economic situation is increasingly worrying.
Editor's choice
Gross international reserves in Latin America’s third largest country have shrunk by $5.9bn to a six-year low of $37.1bn between the end of 2012 and the beginning of August 2013, according to Citi. This is bound to get a few investors’ hearts racing; the government relies on the central bank’s reserves to service its foreign currency debt, as it still does not have access to voluntary debt markets because of unresolved issues with holdouts from its $95bn default in 2001.
Default worries
With $5.8bn-worth of sovereign bonds up for redemption in 2015 – and an unlikely intervention by the International Monetary Fund (IMF) as lender of last resort – the country’s chances of defaulting come down to its international reserves. According to local investment bank Puente, if reserves go under the equivalent of one-and-a-half-months of net imports, Argentina will default on its foreign debt obligation. Citi’s benchmark level for a bond restructuring is slightly more generous at 1.6 months or $9.5bn-worth of net reserves after having serviced debt.
The chances of this happening, however, are still relatively contained. Puente gives it a 19% likelihood by 2015 and 23% by 2017. “Those probabilities reflect the chances of default occurring at some point during the whole period, assuming no access to foreign lending to roll over debt – a strong assumption,” says Alejo Costa, head strategist for fixed income at Puente.
“In our view, default chances are about 20% until 2015," he says. "But we expect the next government to find some way to either borrow abroad or attract additional FDI [foreign direct investment], increasing foreign inflows and hence reducing the chances of international reserves falling into a crisis zone.”
A lifeline?
It is unlikely that Argentina's next government will be run by current president Christina Fernández de Kirchner, as she would have to change the constitution to allow herself to run for another term. But the chances are that her party, the Peronist Front of Victory, will lead the government again, as the 26% of votes that the party won in the country’s mid-term elections in August 2013 – which are essentially meant to test the electorate’s sentiments – were higher than those of the opposition parties.
Regardless of the outcome of the next election in October, however, it is obvious that FDI will have to be a key priority for Argentina's next leader. “FDI could be easily attracted to Vaca Muerta shale resources. According to some estimates, Vaca Muerta would give Argentina the world’s fourth largest reserves of shale oil and second largest of shale gas – the recent YPF-Chevron deal goes in that direction,” says Mr Costa.
Shale oil and gas reserves were first discovered in the Vaca Muerta field in western Argentina by Repsol-YPF in 2010, shortly before the government renationalised YPF, which had previously been majority owned by Spanish multinational oil and gas company Repsol. A year on from the renationalisation, YPF has struck a deal with California-based oil company Chevron to develop the shale deposits in Vaca Muerta.
“The potential from such resources, in conjunction with low levels of debt, would allow any government to borrow abroad at low rates, assuming policy adjustments are made along the way and Argentina’s position in front of hold-outs and the Paris Club [the group of sovereign creditors from Argentina’s 2001 default] is normalised somehow. Both the government and other potential candidates have indeed given signals in that direction,” says Mr Costa.
Treading carefully
Argentina is still battling with hold-out creditors. The IMF recently withdrew its proposed backing of the country’s legal case over its defaulted debt against US creditors because of opposition from the US, the IMF’s largest shareholder. So what does this mean for banks?
From a macroeconomic point of view, the situation is not rosy. Sergio Garibian, Standard & Poor’s senior director and analytical manager for large Latin American banks, points to the country's credit rating of BB-. “Argentina could enter into a [technical] default with the US courts," he adds. "The distortion that inflation has been creating [affects] efficiency in all segments. In banks, a big part of the costs is labour, and year after year unions have been fighting for a 30% increase in wages." Private sector estimates put Argentina's inflation at between 25% and 30%.
Looking at banks' profitability indicators, however, shows another side to the story. Return on assets are high for almost all of the country’s 10 largest banks, led by Citibank’s impressive 7.64% ratio, followed by Banco Patagonia’s 5.53% and Banco Santander Rio’s 5.5%. Furthermore, according to analysis by S&P, non-performing loans hover between 1% for corporate clients to 2% in consumer lending, while the cost of funding is relatively cheap and is based on sight deposits.
There are fears that this performance may start to drop off, however, if the potential restructuring of the country's sovereign bonds triggers a run on dollar deposits, which currently stand at $6.9bn, according to data from the banks. Dollar deposits have decreased over the past few years, and now represent just 6% of total deposits, which according to S&P, is an indication of a lack of trust in the banking sector by the people of Argentina.
“[The banking sector] is completely linked with Argentina’s political scene. In our view, one of the major risks of the system is the deposits market and the lack of confidence in the banking system," says Mr Garibian at S&P. He notes that dollar deposits have been in decline since the government introduced controls on foreign exchange in 2011.
“People withdraw dollars because the perception is that eventually there could be a political measure to take those deposits [as happened in the past crisis],” he says.
Remaining optimistic
A further indication of the tension in the market is provided by the fact that most lenders contacted by The Banker for this article declined to comment. However, one bank that was willing to share its views, Santander Rio, offered an optimistic outlook.
Luis Aragon, the bank’s strategic planning manager, maintains that even if depositors have been taking out dollars, they still are confident that they will not be prevented from doing so in the future. “As customers decide to withdraw [dollars], deposit levels are low, half of what we had two years ago, but customers feel confident that when they need the dollar they can obtain the dollar," he says.
Mr Aragon also says that there are good business opportunities in the Argentinian banking sector as levels of deposits and loans to gross domestic product are only 18% and 16%, respectively, which can only be improved. At the same time, there is a large pool of savings not captured by the financial system, which Santander estimates at being more than twice the size of bank deposits.
Furthermore, the term for deposits tends to be between 30 and 45 days, and more than 40% of loans are for less than one year. “The time-frame of the economy is very low, it reflects expectations on the economy. But the banking system’s upside is large because of the potential to increase financial intermediation,” says Mr Aragon. “This system has been in this transactional [mode] for the past decade, and has been used [by customers] mainly to manage the collection of payments.”
Santander’s senior economist, Rodrigo Park, shares this optimism. “Most economic agents don’t have currency mismatches because, as opposed to 2001/02 [when Argentina defaulted], most of them have assets in pesos and liabilities in pesos. That’s very important," he says.
Onwards and upwards?
According to Mr Garibian, most economic agents do not have long-term investment plans, as the future seems so uncertain. “Long-term [loans] would be used to buy equipment, but the truth is that the level of investment has been reducing significantly. We’re not seeing demand. Corporates are not issuing in the capital markets, none of the corporates are looking for long-term investment and long-term funding," he says.
S&P believes that banks are feeling increasingly nervous about credit cards and personal loans as the economic situation continues to be uncertain. Consumer finance currently represents 32% of banks’ assets, against 28% in corporate loans.
This has not deterred Santander, and the bank is betting big on the country. Mr Aragon says that the lender is now fleshing out its 2020 strategic plan, which includes a larger physical presence throughout the country. “We are opening new branches at a very fast rate. Some branches had more than 10,000 customers, so we decided to build new ones to facilitate operations in those neighbourhoods or cities," he says.
Optimism is an important component in any business venture. But, in the case of Argentine businesses, many may be excused for lacking it right now.
