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Argentina'sbanks have been reluctant to provide long-term loans over the past few years, but that is expected to change.  Here Torre Galicia in Buenos Aires, headquarters of Banco Galicia. (Photo: Elsapucai)
Wednesday, February 3, 2016
Perspectives

Argentina Banks: Outlook Improves


Argentina’s banks set to improve under Macri’s presidency, experts say.

BY FINANCIAL SERVICES ADVISOR
Inter-American Dialogue

Argentina’s central bank is moving ahead with an initiative to increase the country’s mortgage lending as part of President Mauricio Macri’s pledge to offer one million mortgages during his term. The plan is among the latest moves, which include the lifting of currency controls, that the government has made since Macri took office in December aiming to reverse years of heterodox economic policy. How will boosting the level of mortgage loans affect the country’s financial sector? To what extent do Argentines trust banks, and how may that level of confidence change during Macri’s administration? How are Argentina’s banks, and their customers, most likely to fare under the country’s new president?

Alejandro Dillon, managing partner at Columbus Merchant Banking: The main issue for Argentina is that it has changed its regime, from 12 years of soft democracy under the Kirchner family to a renewed republic under the Macri Administration. This huge transformation has changed the expectations of the majority of society, creating high confidence in the new administration with a positive business and investment climate. Therefore the Ministry of Economy and the central bank are developing a new plan to get Argentina back to ‘normal.’ While the exit from the fixed exchange rate, or Cepo, was a real success, the government has many challenges ahead. It must reduce subsidies and public spending to recover fiscal surplus, reduce inflation, get final agreement with the ‘holdouts,’ access international financial markets and increase FDI. But Macri is developing strong teams to face all these fronts. The Argentine financial system is very healthy and well capitalized, plus the level of mortgages are very low, so any increase will be beneficial for the industry and thus for the economy. All these issues will help the government’s initiative for mortgage lending. Customers will demand mortgage loans and investment products from banks when long-term financing is available. This will create a big opportunity for banks and the real estate market. It will be key for customers and banks that Argentina quickly develops its local capital markets and also gets international financing. In my opinion, markets are reacting—both locally and globally—very positively to this new scenario. There is widespread consensus that the Macri’s administration is in the right direction with its economic policies to get Argentina back on the global radar screen, and thus the business climate will continue improving.

Santiago Gallo, director at Fitch Ratings: Mortgage lending is very low in Argentina, and there have been virtually no loans since the 2001 crisis. Over the past few years, banks have been reluctant to provide long-term loans. This new initiative is a very positive signal for the market, in terms of the intentions of the new government to create a more flexible environment that promotes long-term loans and financial development. However, 1 million mortgages in four years shouldn’t have a big impact on the financial system. The main obstacles for mortgage loans continue to be inflation, currency depreciation and the absence of long-term funding. The government is looking for the ways to mitigate these risks, in order to encourage private sector banks to participate. The government has begun to address the issue by creating a unit to nominate the loans in Argentine pesos indexed by inflation, similar to the Unidad de Fomento (UF) used in Chile, and by attempting to solve the country’s default status, so that banks may obtain long-term funding from the international capital markets. The latter could also be solved with state funds, although the country’s tight fiscal position probably makes this option less likely. The general public in Argentina has a low amount of trust in banks as a consequence of the multiple crises suffered in the past decades, in which many people lost part of their savings. This is a cultural issue and, as such, it could take many years to change this negative association with banks. This is another reason behind the absence of long-term savings in the Argentine financial system. In Fitch’s opinion, the victory of Mauricio Macri may lead to improvements in the operating environment for banks, although in the short term, the economic environment will remain challenging. The new government is expected to have a lower intervention in banking matters, which could potentially alleviate market distortions and improve long-term funding access over the medium term.

Miguel Kiguel, executive director of Econviews in Buenos Aires: One of the new goals of Macri’s administration is to develop the capital markets. After years of financial repression and foreign exchange controls that limited the expansion of the market, the objective today is to increase the amount of long-term financing to stimulate investment and reinvigorate the mortgage market. The biggest step in order to encourage capital inflows was the unification of the foreign exchange market, as firms had no incentive to bring in funds at an overvalued exchange rate, knowing that devaluation was around the corner. In addition, the removal on the payment of dividends abroad makes clear to investors that they can repatriate the funds over time. The government has made important changes in regulations that were negatively affecting the willingness to issue stocks and bonds in the market. Another important objective is the development of the mortgage market, which for all practical purposes disappeared during the Kirchner years. The main problem was that the large increase in inflation and the uncertainty that existed about its evolution over time led to the disappearance of long-term funding at reasonable interest rates in Argentine pesos. Federico Sturzenegger, the president of the central bank, announced a plan to create new instruments along the lines of the one that was successfully used in Chile. The key element is to offer mortgages at very low interest rates in which the principal amount is indexed to domestic inflation. This mechanism allows lenders to protect the value of their loan and helps borrowers to qualify. The missing element in this program is the lack of institutional investors that have a long-term horizon, which disappeared with the nationalization of the pension funds.

Fernando Albano and Valeria Azconegui, analysts in the Financial Institutions Group at Moody’s Investors Service: Argentina’s proposal to create an inflation-linked accounting unit that would act as a benchmark for real estate prices and interest rates will likely spur growth in the country’s mortgage market. This measure would support recently elected President Mauricio Macri’s campaign pledge to facilitate the creation of a million new home loans over the next 4 years, a significant increase over the approximately 200,000 mortgages currently outstanding in the banking system. While few details about how the plan will be implemented have been revealed, if successful, the plan would fuel portfolio growth for private banks in a relatively low-risk asset class. The plan is one of many policy changes announced since Macri took office in December that aim to reduce economic imbalances and bolster investor confidence. The administration has lifted currency controls, introduced an inflation target, eliminated export taxes, removed lending rate caps and interest rate floors and reduced mandated lending requirements for banks. While Argentina’s banking system is underdeveloped overall, the mortgage market is particularly so, with home loans amounting to just 1 percent of GDP, compared with almost 20 percent in Chile and 5 percent in Uruguay. Despite the country’s difficult economic conditions, asset risk indicators in the banking system have, until now, remained relatively healthy because banks have focused on low-risk asset classes, such as corporate and payroll loans. As investor and consumer confidence improves, it is likely that new business opportunities for banks will emerge over the long term, helping to reverse the trend towards declining financial intermediation seen in recent years.

Republished with permission from the Inter-American Dialogue's biweekly Financial Services Advisor

 

 

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