Argentina’s delayed reaction
One year after electing a pro-business government, Argentina needs to move on from being Latin America’s ‘one to watch’ to attracting concrete investment commitments. Melodie Michel investigates the delay in Buenos Aires.
The ﬁrst year of President Mauricio Macri’s mandate has been one of sacriﬁce, as unpopular reforms needed to open the economy up resulted in a currency devaluation, high inﬂation and a drop in consumption. Gross domestic product (GDP) declined by around 2%, but it was all for a good cause: currency controls have now been lifted, the lawsuit that blocked Argentina from international capital markets has been settled, a bond (worth US$16.5bn – the largest ever in emerging markets) has been launched, import duties have been scrapped and laws restricting foreign access to the market have changed.
The latest advance, at the end of 2016, was the approval of a law regulating public-private partnerships (PPPs). The measure is expected to help boost investment into Argentina, and marks a shift from the previous regime, which managed private participation in public projects through a concession scheme.
“The idea is that with this new law there will be a lot of public-private collaboration on large projects. This legislation introduces very important aspects to the relationship between private investors and the government. In the infrastructure sector, the process is in deep [collaboration] between both sectors. There was no speciﬁc legislation [governing that relationship] until now,” Guillermo Ferraro, who heads the government and infrastructure department of KPMG Argentina, tells GTR.
Argentina’s National Investment Promotion Agency – a new body created by the Macri administration – estimates that the country needs about US$25bn of investment a year just to catch up with levels in the rest of the region. FDI promises abound, with carmakers, energy, mining and ﬁnancial services ﬁrms all pledging to grow their presence. But most of that money has yet to materialise: in the ﬁrst half of 2016, only US$1.3bn of FDI had entered the country, according to central bank ﬁgures.
“For now, the biggest change we have observed is the change in expectations. What we see is an Argentina that is selling itself: it goes out to international markets and is met with much interest,” says Marcelo Poncini, credit manager at Banco Galicia.
Argentine banks and corporates are overwhelmed with meetings and conversations about the opportunities: Poncini mentions an exchange with Banco Patagonia’s president on the sidelines of the Felaban conference in early-November, during which they proudly shared the number of meetings the two banks had had.
According to Ferraro, foreign investors are waiting to see what happens to domestic players before getting involved. “In all countries, foreign companies are more comfortable if the locals make the ﬁrst investments. Local companies have a detailed vision of the country and how things work,” he says.
Local ﬁrms have been active for years. As an example, six Argentinean companies have committed to invest in the Chihuido dam across the Neuquén River – a project that KPMG is advising on. But despite being announced at the end of 2014, with the support of Russia’s Vnesheconombank (VEB), the project has yet to reach ﬁnancial close.
The truth is, foreign banks are still wary of ﬁnancing Argentinean projects, and local banks just don’t have the money.
Painful change of strategy
Poncini explains that in the past 12 years, Argentinean banks’ proﬁts came almost exclusively from consumer ﬁnance, including credit cards, personal loans, etc. Now the government’s pro-trade measures are putting pressure on domestic consumption, affecting the banks’ revenues.
At the same time as the government is turning outward, banks are moving from very short-term consumption business towards more structured trade and investment business. “It’s a much larger market, but this is a process. At the moment, we are at the worst stage: consumption has been weakened and the capital markets and investment market haven’t quite picked up yet,” he adds.
Recent news bodes well: at the Felaban conference, Argentina’s ﬁnance minister Alfonso Prat-Gay hailed the recent surge in investments in the country, which jumped by US$10bn in a month, and the fact that local banks are starting to obtain credit lines, “which reﬂects the industry’s optimism about this new stage”.
In fact, Banco Galicia signed one of those credit lines at the Buenos Aires conference: a US$50mn loan from the International Finance Corporation (IFC) to support energy efﬁciency in Argentina.
This the second such facility Banco Galicia has received from the IFC in 2016 – the ﬁrst was a US$130mn loan to expand its long-term lending to small and medium-sized enterprises (SMEs) as well as support climate ﬁnance projects.
“Getting these long-term international credit lines at market prices allows us to offer all the products Argentina needs in order to catch up with the rest of the world in terms of infrastructure, energy, power plants, etc. So we need to secure funds from abroad, then turn around and start to provide longer-term loans to Argentinean companies in these sectors,” says Poncini.
A spokesperson for Banco de la Nación also tells GTR it has “received various credit lines to fulﬁl the objective of supporting Argentinean companies operating abroad”, and is also using them towards energy efﬁciency. In early-December, the bank set aside US$100mn for renewable energy projects in the country. The initiative was made possible by a 3% interest rate subsidy given by the Argentine Economic Development Fund (FONDEAR), based on Libor plus 5%. Loans will be given on a seven-year tenor and with 18 to 24 months of grace period.
The interest rate subsidy is crucial to kick-starting lending in the country. Current rates are unattractive for corporates to seek ﬁnancing, but government relief is currently very narrow, focused on dollar loans to the agriculture and energy sectors – industries that also earn in dollars. This is understandable: in December 2015, Argentina had about US$20bn of foreign currency reserves, not enough to sustain the four months of imports recommended by the International Monetary Fund (IMF) as a minimum.
The US$16.5bn bond issuance of April 2016, along with the reopening of the country’s trade sector, has brought some relief to the strained reserves, and as of October 2016, they stood at around US$32bn. The president is also offering a tax amnesty for the repatriation of funds held abroad – aiming to bring back up to US$400bn of unregistered cash into the ﬁnancial system.
Now that the dollar situation is improving, the central bank is trying to normalise peso interest rates, cutting them from around 30% at the start of 2016 to 24.75% in December. This is a tough balancing act between inﬂation, weak economic data and the post-election strengthening of the US dollar, but it is necessary.
“Today there is no demand from these companies,” Poncini explains. “The monetary policy is stabilising but the interest rates are extremely high for pesos. The central bank’s policy says that in order to lend dollars at a more reasonable rate, you have to lend to segments that create dollars. So we can only lend in pesos for other sectors, and with these high interest rates there is no demand. Once the peso interest rate lowers a bit more and the inﬂation rate goes down, demand will pick up. We expect this to happen in the coming year.”
The idea that things will ﬁnally happen in “the coming year” is a common theme in Buenos Aires.
At KPMG, Ferraro expects foreign banks to start getting involved in projects then. “Our country only began a normal scenario this year. We hope that the normal ﬁnancial structure will also begin in our market. At the moment, projects are mostly ﬁnanced by multilaterals and public funds, but no private bank, because there is no investment bank. The speed of the process will increase,” he says.
There is one more thing that could alter the path of progress Argentina is on, and that is popular discontent. Despite being widely seen as negative by the rest of the world, Cristina Kirchner’s populist policies were very popular at home, and the former president still has a lot of support.
Macri doesn’t have a majority in Congress, and despite strong co-operation so far, growing protests could create more tensions, or result in even less support for the president following the 2017 legislative elections.
“What people from abroad ask us is whether, politically, this government is strong and will remain in place in the year to come,” says Poncini. This is a natural concern: Argentina has a history of changing its mind about foreign participation in the economy. And politically, non-Peronist governments have had it tough: since 1973, all the elected presidents that were not part of the Peronist PJ resigned before the end of their term.
But Poncini believes this time is different. “When this government came into power, everyone knew that in terms of economics, there were many strengths in the cabinet, but there were many doubts about its political strength, because most of them came from multinationals and hadn’t participated in the public sphere before. The concern was around their ability to navigate the politics of the country,” he says.
“The truth is that they have managed it very well. Macri doesn’t have a majority in Congress, yet in the past year, 61 laws were passed. So I think there will be continuity, because there is enough proof of the government’s ability to negotiate with the opposition. We are also coming out of such a disastrous 12 years that no one wants to go back to the previous state. So because of that, we have various signs that we will continue in the same or a similar direction.”
Foreign investors may be waiting for the result of the legislative election for comfort, but barring an unforeseen change in politics, economic change is imminent: the OECD’s latest Economic Outlook forecasts a return to GDP growth for Argentina.take me back