A PROMISING FUTURE
The Investor Argentina 2018 I Capital Markets I Analysis
“MARKET CAPITALISATION IN ARGENTINA HAS REACHED $101.3 BILLION, REPRESENTING 5% OF LATIN AMERICA.”
THE NEW CAPITAL MARKETS LAW
Economic growth depends on the efficient allocation of resources, including the two main factors of production: labor and capital. Markets, operating on each factor, have allocated these resources in economies worldwide in ways that arguably approach optimality and have fostered economic development for the benefit of billions. Capital markets, both for debt and equity securities, have allowed firms to secure funding for productive uses while providing investors with opportunities for portfolio diversification.
The importance of capital markets for the development of economies and for the betterment of society cannot be overstated. This is just as true in emerging economies with free markets, such as those found in Latin America, as it is in developed markets. However, capital markets in the region are not being utilized to the fullest. In the last 15 years, the Argentine local capital markets have experienced substantial change, with both the country and market going through several distinct periods. In May 2018, the Congress of Argentina has passed the government’s Capital Markets Reform Bill seeking to boost the economy by reducing the power of market regulators and loosening restrictions on some funds investing in Argentina opening the way for the country to reach the same level than regional peers. New financial instruments were introduced to promote the financing of micro-, small and medium-sized enterprises in the capital markets. The Argentine Securities and Exchange Commission (CNV) will see modifications to the extent of its powers and its funding sources which were increased to optimize its functioning. The CNV’s regulatory function has been strengthened and it has been granted powers to conduct investigations and impose sanctions.
The capital markets in Argentina will be further developed with the new bill by increasing the number of investors and companies that are financed in the market, within the framework of a market with clear and transparent rules, to finally achieve a modern financial regulatory framework that contributes to the development of Argentina’s economy. Overall, the bill will allow the Government to consolidate the international integration of the market, improve investor protections and prevent systematic risks.
It is now essential for the local financial markets to facilitate the development of the real economy, and provide the necessary tools to finance growth. To address this, the depth in liquidity, as required in the investment arena, is crucial, and it is here that Argentina must seize new opportunities. Market capitalisation in Argentina has reached $101.3 billion, representing 5% of the market capitalisation in Latin America. Therefore, Argentina remains well below the $1 trillion (51% of total) held by the Brazilian market, $437 billion of Mexico, $299 billion (14% of total) of Chile and $130 billion (6% of total) of Colombia. It is clear that the potential for growth is very high. Another important comparison to its neighbors is that only 420,000 Argentines, out of a population of 41 million, invest in mutual funds. Chile has some 2 million investors, Colombia 1.5 million and Brazil 20 million.
It was announced in 2018 the reclassification of the MSCI Argentina Index from Frontier Markets to Emerging Markets status. The MSCI Argentina Index will be included in the MSCI Emerging Markets Index coinciding with the May 2019 Semi-Annual Index Review. The return of Argentina to emerging market status after being downgraded to frontier market in 2009, will provide an extra boost by ensuring the arrival of investment funds. MSCI’s benchmarks are widely used, with some $14 trillion in investors’ assets tracked against them. The index provider’s blessing can launch billions of dollars from index-tracking funds into markets around the world, especially developing economies. The decision of MSCI may set the stage for a 20 percent gain in the benchmark equity index, leading to about $3.8 billion of inflows, according to an estimate by JPMorgan Chase & Co.
A very important long-term trend is that the Argentine market is getting more diversified and includes more companies as well as industries to invest in. Financials, oil and gas, utilities, infrastructure and even some tech companies are coming to the market. Argentina has room to grow because its corporate debt levels are lower than in other Latin nations and companies can borrow more now that lenders don’t consider Argentina as risky, and a better economic outlook is driving demand for credit. The mutual funds industry in Argentina has seen a dramatic growth in the past years reaching $525 billion in 2017 and in growing to $670 billion in April 2018.
A RECORD AMNESTY LAW
On June 2016, the Argentine Senate approved a tax amnesty law that President Mauricio Macri’s government hoped would bring billions of dollars of offshore wealth and unregistered funds into the country’s formal economy. The ley de blanqueos is a package containing numerous new policies including the creation of an official system through which Argentines will be able to register previously undeclared income and assets (in the form of savings in foreign bank accounts or cash under one’s mattress, for example). According to the Economic and Financial Center for the Development of Argentina (CEFIDAR), Argentines held around $400 billion in offshore assets in 2012, a number that is likely to have increased during the last four years.
As a result of the law, the Government has declared in 2017 that $116.8 billion in assets were declared, mostly from abroad, in a record tax amnesty it hopes will help spur domestic investment and economic growth. The government collected $9.6 billion in taxes and fees from the amnesty, revenue that will help the government meet its fiscal deficit targets. The size and volume of assets that have been declared were considered a vote of confidence not only in the government but in the future of the country. According to the AFIP tax agency, 80 percent of assets declared were from abroad, mostly from the United States and Switzerland. Other Latin American countries including Brazil, Chile, Peru and Colombia have held amnesties in recent years or are starting soon.