Daytime TV in Latin America is dominated by soap operas. Despite their plots that defy belief and over-dramatised characters, the shows attract millions of viewers. However, in Argentina, the political landscape has shown a worrying resemblance to these shows of late.
The comparison stems from the government’s populist approach and lack of credibility, as well as its intervention in key economic sectors, its generally market-unfriendly stance, and its lax monetary and fiscal policies. This government activity is led by Cristina Fernández de Kirchner, Argentina's charismatic and outspoken president, whose predecessor and former husband Nestor Kirchner passed away in October last year. The Kirchners have been in power a combined total of eight years.
Editor's choice
The wrong kind of headlines
A few episodes are indicative of the Argentinian government's style. In 2010, Ms Fernández engaged in a public battle with then central bank governor Martin Redrado over the expropriation of some of the bank’s reserves to fund the country’s public debt. This led to the removal of Mr Redrado from the bank, followed by his reinstatement by a judicial court and then his resignation a few weeks later.
In 2008, Argentina's pension fund system was nationalised and years earlier, as a result of the financial crisis of 2001 that led to the country’s default on $100bn of external debt, a heavy set of subsidies and price controls were introduced. These measures altered a number of markets and the repercussions in the energy sector are still being felt today. As of the end of 2010, electricity rates paid by Argentinians were lower than those paid in neighbouring Paraguay and oil prices were about 30% lower than international levels. This, alongside structural bottlenecks, has deterred investments in the sector and has put the country at risk of shocks in energy supply and dependence on imports.
Roaring inflation continues to be a serious worry in the country and Argentina's official figure is widely discredited. Government statistics claim a 10% rise in prices for 2010, while private sector figures have it at 25% for the same year and predict a 30% rate for 2011. Despite having announced a revision of its calculations, criticisms of the public administrations in Argentina is hard to come by. A few professionals contacted about this article politely turned down our interview request amid concerns that they might upset the government.
The good news
This only serves to dent the country’s reputation, which only a century ago was one of the wealthiest in the world. But despite such concerns, there are positives. Argentina remains the third largest economy in Latin America and it has been expanding at a steady rate for the past few years, with a gross domestic product (GDP) that grew by 9% in 2010. While there are worries of a possible overheating of the economy, a deceleration to 6% is predicted for this year.
Beside the agricultural and natural resources sectors, Argentina's industrial sector is also growing quickly. This is in no small part down to the automotive sector, which, due to strong internal demand, is expected to grow by 23% by 2012. Larger exports to Brazil are predicted to give the sector a further boost.
After witnessing such fast economic growth, many Argentinians cite inflation as a concern, though many in the country say that more general worries are unfounded. Indeed, Argentina’s universities seem to be one of the main benefactors of the government's lavish spending. Gustavo Rossi, professor of computer sciences at Universidad Naciónal de La Plata, says that such levels of investment are unprecedented and that students currently participating in technology transfer projects can expect to earn the equivalent of about €1000 per month. Such spending on higher education is all-but unthinkable in all but a handful of universities in western Europe and North America.
Argentina has a highly qualified workforce by international standards, a situation that is set to remain while investment in academia is high. Its private sector is also well regarded in international circles, despite the widespread concern over the activities of the country's government.
“It is surprising to see how dynamic the industrial sector is despite the politics,” says one international financial markets expert. “Argentina is in the group of countries considered [to have a promising] future, but the problem is that the future never comes. Any financial activity is short term. Nothing is going to change as long as [Ms Fernández] stays in power.”
The country will face presidential elections later this year and it is widely expected that Ms Fernández will be re-elected. She has recently confirmed her plans to run again.
Test the market
One of the main obstacles businesses have to overcome in Argentina is financing. Banking loans make up about 16% of GDP, compared with about 50% in Brazil and 80% in Chile. At the same time, the outstanding public debt that Argentina still owes to foreign investors following its default in 2001 has isolated potential issuers from the international capital markets. The government hopes to settle its debt by the end of the year. Although 92.4% of the debt has been restructured, some figures show that more than $8bn is still outstanding, most of which is owed to Germany, Italy, Japan, the US and the Netherlands. Settling the debt would allow Argentina and its businesses to access the financing products provided by the export credit agencies of those countries.
Despite this background, Argentina has still attracted the attention of some fund managers who believe in the country’s economy, as well as recognising the challenges it faces, which are comparable to countries with a lower level of development. Its high-yielding businesses have caused firms such as Copernico Capital Partners, a Latin American specialist, to sit up and take notice. The firm launched an Argentinian equity fund in March this year.
The outcome of the planned listing of the shares of Santander Rio, the Argentinian subsidiary of Spanish bank Santander, on the New York Stock Exchange will provide a new assessment of international investors’ appetite for the country. Banco Galicia underwent a similar test earlier this year when the lender and its low-income credit card business, Tarjeta Naranja, placed two bonds on the international markets – the bank’s first in a decade. Investors secured high coupons, but they were relatively low by local standards, says Banco Galicia's chairman Daniel Llambias. He explains that this was possible because of the good performance of the bank and the banking system as a whole. In January this year, Tarjeta Naranja’s $200m notes due in 2017 offered a 9% coupon, then in May Banco Galicia placed a $300m bond due in 2018 at 8.75%.
“These coupons are quite high by international markets’ standards, but by Argentinian standards they are low,” says Mr Llambias. “The problem with Argentina is that the capital markets are very small – there are only few [institutional investors]. Banks’ funding comes almost in its totality from domestic deposits. The good performance of the financial system and Argentina’s [economy] has permitted that some issuers went to the international capital markets.”
Pushed on by economic growth and an appreciation in government debt paper, which accounts for a high proportion of many banks’ financial portfolios, lenders made a total net profit of more than 11bn pesos ($2.73bn) in 2010, according to the Argentine Banking Association. This was the best result in more than a decade.
Outside influence
Banco do Brasil is also an investor in Argentina. Last year, it bought Banco Patagonia to service the many Brazilian companies in the country – there are now about 200 Portuguese-speaking firms with about 100,000 employees, and they need loans in local currency. It was only natural that the bank would follow its customers and provide the long-term financing they need in a country where short-term deals are standard practice.
“Those companies come to us in Brazil asking to have [long-term] loans in Argentinian pesos and this [kind of loan] is not very [common] in that market,” says Eduardo Martins, general manager of Banco do Brasil’s international division. Banco Patagonia’s senior vice-president, João Pecego, says that despite its size, the lender’s deposits are growing, and so is its network which will help the bank to serve its customers further.
Deposit size and branch networks are important in Argentina, particularly considering the level of dollarisation still present in its financial system. This means that beside competition with the larger players, which have overwhelmingly large networks and high levels of deposits, the smaller banks also face the risk of having their smaller deposits changed from pesos to dollars, depending on the level of market uncertainty perceived by depositors. The chronic presence of US dollars is something the lenders have tried to diminish. “Deposits in pesos are growing; banks don’t promote dollar deposits,” says Mr Llambias.
IFC action
However, others have reported a different picture. The forced low valuation of the Argentinian peso encourages savers to switch to US dollar accounts, which banks can either deposit for a miniscule interest rate at the central bank or use to finance foreign trade. The International Finance Corporation (IFC) has picked up on this trend. Due to the level of dollars available in Argentina's banking system, especially by larger lenders, there has been a lower demand for the IFC’s support in pre-export deals, says Antonio Alves, the IFC's senior regional head of short-term finance for Latin America and the Caribbean. And it is not just supply that is skewed. The interest rate charged on those deals is very low – currently standing at between 1% and 3% – and therefore not comparable with one that a foreign lender would apply to a pre-export or trade finance deal in Argentina.
The excess of liquidity has meant that the IFC’s loans to the country went from $200m in export deals in 2008 to $100m in 2009 and $60m in 2010. However, the IFC has lent $50m until mid-2011, which might indicate a year-on-year growth by the end of December and the confirmation that working with smaller banks, with much lower levels of dollar deposits, is the right strategy.
Argentina is not as stable as we would like in terms of policy and political risk.
“Argentina is not as stable as we would like in terms of policy and political risk,” says Mr Alves. “We can’t predict what will happen and because of this there are contradictions: on one side you have high political risk and [worries about the] stability of trade policy, but on the other side you have high liquidity. So if an external bank wants to work in Argentina it needs to [price] at the market, because otherwise nobody will borrow money and basically ignore the political risk. You have lots of liquidity in the local market so if you don’t follow this pricing, you don’t do business there.”
Long-term view
Many suggest that the only approach a foreign investor should take in Argentina is a long-term one, for example, a foreign bank supporting its clients to expand in the country, or foreign governments wanting to secure natural resources and develop some influence locally.
Last year, state-owned Chinese oil company CNOOC entered into a 50-50 joint venture with Bridas Energy Holdings, a family-owned Argentinian company. The joint venture then bought UK company BP's shares in Panamerican Energy, giving it 18% of the company’s Argentinian oil and natural gas production. This year, the venture also purchased US-based Exxon Mobil's interests in the country, as well as its operations in Paraguay and Uruguay, which include a refinery and more than 700 service stations.
“China’s investments in Argentina have been focused on securing the delivery of natural resources – it has invested in railways to transport agricultural products to the ports and also in the extraction and refinery of oil through the venture between Panamerican Energy and CNOCC,” says Gloria Soresen, chief economist of Argentinian bank BBVA Frances. “China may also be interested in taking part in mining deals for copper and gold.”
Others add that foreign investments in the banking sector is expected to increase, by either Chinese investors or other large global players, especially considering the record year lenders had in 2010 and their relatively low valuation compared to banks in neighbouring Brazil.
The blessing of natural resources, a well-educated workforce and a reputation for good business acumen goes some way to counterbalancing the political challenges that exist within Argentina. While the global economic situation and the forthcoming presidential elections could be a cause for concern for the country, Mr Llambias says: “There is always some concern about the economic factors close to presidential elections. But we don’t expect a significant change in Argentina’s economy after the elections, that’s for sure.”
Mr Pecego at Banco Patagonia adds that the economy will keep on growing independently, regardless of the results in the forthcoming elections. The question seems to be not whether Argentina's economy will keep on growing, but for how long will it be held back by a political class that is accepted by local businesses, but is viewed warily by investors in many countries around the world.
