The future of Argentina's capital market

Friday, July 6, 2018 - BnAmericas

Argentina made the financial news in May when the lower house voted into law a capital market bill that is seen as crucial for developing the country's economy and financial sector.

The Argentine capital market is relatively small compared with other major Latin American countries and its development is a key ingredient in the ambitious and market-friendly reform program of President Mauricio Macri.

Argentina made the financial news again last month when global index compiler MSCI announced the reclassification of the MSCI Argentina index to emerging markets status from frontier market.

To find out what to expect in terms of impacts from the reform and the reclassification, BNamericas spoke to Marcelo Bastante, who is a partner and financial advisory services lead at Deloitte Argentina.

BNamericas: In general, why is the recently approved capital reform seen as something so important, almost historic, for Argentina?

Bastante: The capital market reform was expected since the government of Mauricio Macri came to power [in December 2015] and due to different circumstances it was not approved until 2018. The law has a series of initiatives that are very positive for the development of the local capital market and financing, which are within the framework of the actions that the government is taking to get closer to the OECD and also as the current host country of the G20. It is a law that creates a new range of capital market products, simplifies existing products, eliminates bureaucratic obstacles, and makes certain
transactions more attractive.

BNamericas: Will the reform have positive effects for foreign investors or is it more focused on domestic investors?

Bastante: In general, the measures are beneficial for both foreign and domestic investors. The reform created a new electronic billing mechanism for micro, small and medium-sized enterprises [MSMEs], which is something that was designed for the domestic market because they are short-term financing instruments that favor MSMEs. But the reform also introduced trusts, mutual funds, corporate bonds, and transactions with derivatives that are expected to be beneficial for domestic as well as foreign investors.

BNamericas: In what areas will the reform have an impact on the banking sector, and on the financial system as a whole?

Bastante: For the banking sector, the securitization of mortgage loans that are inflation-adjusted through the UVA mechanism is facilitated. The UVA mortgage loans saw the highest growth of all types of loans last year and banks had been looking for alternatives to finance these long-term loans. One of the financing alternatives is trusts, but the legislation before the reform did not allow loans that were securitized to be adjusted by inflation. So the reform should affect banks in a positive way as they begin to participate in the capital market through different products.

BNamericas: As a result of the reform, is it now possible to expect a major development in the local asset management industry?

Bastante: The new law improves the conditions, so without a doubt it is a big step forward. It's a necessary condition but not sufficient. The development of both the asset management industry and the capital market is tied to the Argentine economy having stable macro conditions. Events of extreme volatility, such as high inflation and the depreciation we have seen in the last few weeks, is a threat to the development of these markets. In particular, the asset management industry was very well positioned with investments in LEBACs, which are peso-denominated bills issued by the central bank at high interest rates. However, the financial volatility seen in recent weeks prompted many foreign investors to sell their LEBACs and the local asset management industry saw a significant outflow of funds.
The sustained development of Argentina's asset management industry must be driven by domestic savings. The reform has provided the appropriate legal framework for this to happen but conditions of price and exchange rate stability are also needed.

BNamericas: What will happen with private equity and venture capital financing?

Bastante: Although the reform is mainly focused on public offerings, one of the products that are included is the possibility of making private placements to qualified investors, which is similar to the regulation 144A in the US. In terms of private equity and venture capital, until 2015 there was very little activity. During 2017, and even during the first quarter of this year, the private equity and venture capital market grew because LatAm-based regional funds saw opportunities in middle-market companies in some segments, such as consumption, energy and pharmaceuticals. There was not huge activity like in the 1990s, but there was much more activity than in previous years. However, investors are now on hold due to the financial volatility in June.

BNamericas: What impact do you foresee for the local capital market in terms of having been upgraded from frontier to emerging market by MSCI?

BNamericas: In what areas will the reform have an impact on the banking sector, and on the financial
system as a whole?

Bastante: For the banking sector, the securitization of mortgage loans that are inflation-adjusted through the UVA mechanism is facilitated. The UVA mortgage loans saw the highest growth of all types of loans last year and banks had been looking for alternatives to finance these long-term loans.
One of the financing alternatives is trusts, but the legislation before the reform did not allow loans that were securitized to be adjusted by inflation. So the reform should affect banks in a positive way as they begin to participate in the capital market through different products.

BNamericas: As a result of the reform, is it now possible to expect a major development in the local
asset management industry?

Bastante: The new law improves the conditions, so without a doubt it is a big step forward. It's a necessary condition but not sufficient. The development of both the asset management industry and the capital market is tied to the Argentine economy having stable macro conditions. Events of extreme volatility, such as high inflation and the depreciation we have seen in the last few weeks, is a threat to the development of these markets. In particular, the asset management industry was very well positioned with investments in LEBACs, which are peso-denominated bills issued by the central bank at high interest rates. However, the financial volatility seen in recent weeks prompted many foreign investors to sell their LEBACs and the local asset management industry saw a significant outflow of funds.
The sustained development of Argentina's asset management industry must be driven by domestic savings. The reform has provided the appropriate legal framework for this to happen but conditions of price and exchange rate stability are also needed.

BNamericas: What will happen with private equity and venture capital financing?

Bastante: Although the reform is mainly focused on public offerings, one of the products that are included is the possibility of making private placements to qualified investors, which is similar to the regulation 144A in the US. In terms of private equity and venture capital, until 2015 there was very little activity.
During 2017, and even during the first quarter of this year, the private equity and venture capital market grew because LatAm-based regional funds saw opportunities in middle-market companies in some segments, such as consumption, energy and pharmaceuticals. There was not huge activity like in the 1990s, but there was much more activity than in previous years. However, investors are now on hold due to the financial volatility in June.

BNamericas: What impact do you foresee for the local capital market in terms of having been upgraded from frontier to emerging market by MSCI?

Bastante: In the medium term, the upgrade will without a doubt be a positive development for our capital market as global investors will have a larger share of Argentine assets in their investment portfolios. In the short term, however, the impact since the upgrade has been a drop in prices of local assets due to financial volatility related to the strong depreciation of the Argentine peso and a flight to quality in international markets.