The nemesis of Argentina’s capital market

Argentina’s capital market is small despite myriad attempts over the past three decades to beef it up. 

The current administration is the latest to have a stab as part of a wider push to get the country’s sputtering economic engine firing on more cylinders.

Among the main issuers in the market are hydrocarbons firms, including state-owned firm YPF. 

Others include gas pipeline operator TGN, which, after 20 years, recently placed 1.5bn pesos (US$20.5mn) in 18-month bonds. The placement attracted more than twice that figure in investor demand.

But what is hampering overall development of the market? To discuss this and more, BNamericas spoke with Marcelo Bastante, a financial services partner at the Argentine unit of professional services giant Deloitte. 

BNamericas: Argentina has a large economy but its capital market is relatively small. What are some of the mostly cited reasons for this?

Bastante: The main factors hampering development of the market concern the stability of the local currency – the peso – and the macroeconomic evolution of the country. These factors are structural, it’s a phenomenon that has prevailed for decades now. 

In periods of forex and inflationary stability the capital market tends to grow progressively. However, the recurrent crises spur investors to withdraw and, for issuers, placing securities is difficult in adverse macroeconomic conditions.

Although there were many changes in the regulatory framework over the past 30 years, growth or contraction of the capital market is associated more with the evolution of macro variables than regulations. You can observe this clearly if you look at the evolution of key macro variables – GDP, inflation, interest rates, exchange rate – and its correlation with the number of issuances in the market.

If one compares the reports on capital markets financing published by the national securities commission [CNV] outlining the number issuances by instrument type with the evolution of the exchange rate, inflation rate, etc, a strong correlation is seen.

BNamericas: The government of then president Mauricio Macri introduced a capital market reform. Have these efforts borne fruit?

Bastante: In line with the above, during 2017 and the first half of 2018 growth in the market was observed, something that corresponded more to macroeconomic stability than the regulatory framework. 

The reforms tended to generate conditions for long-term financing via instruments linked to the UVA consumer inflation index. These instruments are viable from the perspective of the issuer as long as inflation remains within expected parameters. As inflation rises, even though the instrument is appropriately regulated, the number of issuances falls since the debt becomes more expensive.

The same thing happened with issuances of dollar-linked instruments that took place from 2012 – and which are still valid today. The current regulatory framework allows for the issuance of trading securities that evolve in accordance with the dollar exchange rate but are payable in pesos.

The instrument works in periods when the exchange rate is stable or its future trajectory is visible. When there are devaluations, the use of this instrument falls significantly since it becomes very costly for the issuer.

BNamericas: What is the strategic agenda of CNV or the administration of President Alberto Fernández regarding the capital markets?

Bastante: In general, every administration over the past 30 years has aimed to grow the domestic capital market … the current CNV administration is no exception, announcing plans last month, revealing its strategic agenda to multilateral organizations.

Specifically, CNV affirms it is working on a plan to support new instruments that, while promoting the consolidation of a robust domestic market, can attract financing for sectors of the economy that are traditionally not accessed.

Among the main initiatives launched in 2020 is a project that promotes real estate development via collective investment, solidarity funds that have a social impact, and a scheme to spur venture capital. 

The strategic agenda indicates that CNV is working on projects related to energy, regional economies, non-traditional exports and infrastructure, which seek to connect the capital market with sectors deemed strategic under the government’s program.

BNamericas: In January-June, capital markets financing was 272bn pesos, up 102% year-on-year. Bonds saw growth of 188% and post-dated checks 94%. What could explain this increase and what is the outlook for the rest of the year?

Bastante: What has happened is that in 2019 issuance volume was unusually low, which creates significant year-on-year comparisons.  

In terms of bonds, one of the main issuers in the market is YPF, which accounted for 12% of all issuances in both 2019 and 2020. Also, in recent months, companies have taken advantage of a progressive reduction in rates spurred by the government via different instruments. 

Another important factor is that, given the small size of the market, if a company makes a significant issuance in a particular month this can create major statistical oscillation.

According to the latest capital markets financing report, total bond issuances in the first six months of 2020 were 91, up 44% from the 63 recorded in the same period of last year. This implies an average of 15 a month, a relatively low number in comparison with other Latin American markets. The only instrument that has shown sustained growth in recent years is the post-dated check.

BNamericas: How important is the capital market for the development of Argentina’s financial sector and wider economy? And is there a country in Latin America that could serve as a model to emulate?

Bastante: There is no doubt that the capital market is key for the development of the Argentine economy and the financial sector. 

The existence of a domestic market, with strong institutional investors that are willing to finance companies, SMEs and all types of economic agents, would permit an increase in investment with the objective of supporting economic development.

There are other countries in the region that have strong capital markets that could serve as a model – Brazil, Chile, Mexico. However, differences in macroeconomic contexts mean that many measures that prove successful in some countries are perhaps not so in others.

The fact that a measures has been successful in an emerging market does not guarantee that you can emulate it successfully in Argentina, basically because of macroeconomic differences.

Without expanding further, indexed loans or securities are products common in Chile and Mexico; however, in Argentina the experience has not been successful.  And not just UVA loans but also further back in time, such as Circular 1050 of [central bank] BCRA in the early 1980s [which indexed loans to market interest rates].