The challenge to expand Argentina's financial system

Wednesday, November 16, 2016

The Argentine financial system is one of the smallest among the major economies in Latin America.

A general lack of stability in economic and political policies has conspired against the long-term growth of the financial system, as has the country's notorious boom-and-bust economic cycles.

Business-friendly President Mauricio Macri came to power in December last year, promising a new economic future for Argentina, with more stable economic growth and greater openness to foreign investors. Given this new scenario, BNamericas spoke about the growth potential of the local financial system with banking expert Marcelo Bastante, who is a partner at Deloitte Argentina.

This is the second part of the interview with Bastante.

BNamericas: What impact have you seen so far in the financial system from the many reforms that President Macri has implemented since his government came to power in December last year?

Bastante: What we have seen so far is more activity in the local capital market and a stronger appetite for Argentina's sovereign bonds among international funds. So there have been more financial investments, but they have had a very small impact on the real economy.

BNamericas: Argentina is currently in a recession. When can we expect a recovery and the expansion of the financial system?

Bastante: We expect the economic recovery to begin in 2017 and continue during the following years as a result of stronger consumption and investments in the real economy. A higher level of consumption and investment will also allow the financial system to expand. The increase in financial investments that we have seen in the capital market doesn't automatically lead to a bigger financial system.

BNamericas: How much of a problem is the country's high inflation?

Bastante: High inflation is a major obstacle to the expansion of the financial system.

In the medium-term inflation is expected to decline and lead to lower interest rates. To gradually reduce inflation, the central bank is applying an orthodox policy of maintaining the benchmark interest rate at a high level, while the finance ministry is seeking to reduce the high fiscal deficit through a gradual decrease in public spending.

This situation has created strong demand among investors for the short-term bills that the central bank issues. The benchmark rate is at around 27% and this creates a very high floor for the interest rates that banks are charging for their loans. This also helps explain why loans are growing below the rate of inflation.

BNamericas: How optimistic are you about the possibility of seeing a significant expansion of the financial system in the coming years?

Bastante: I'm cautiously optimistic about this possibility and the logical path for the coming years would be decreasing inflation and fiscal deficit due to the policies of the government and the central bank. This in turn will allow banks to extend the maturities of some of their loans, including corporate and mortgage loans.

However, we always have to remember when talking about Argentina that the country has almost always had periods of very high inflation or large fiscal deficits that have prevented any real expansion of the financial system.

During the last 10 years and during the 1970s and 1980s we had high inflation. During the 1990s we had low inflation but high fiscal deficits. This led to a crowding-out effect, since the government was paying increasingly higher interest rates to get financing from the banks, who opted to provide financing for the government's fiscal deficit instead of financing the private sector.

About Marcelo Bastante

Marcelo Bastante has more than 20 years of experience in the banking and capital markets industries. His professional background includes providing audit, advisory, consulting and M&A services to Latin American banks, including US GAAP and IFRS implementation, assistance in issuing corporate bonds and providing auditing services to banks registered with the US Securities and Exchange Commission.

Bastante has a degree in accounting from Universidad de Buenos Aires. He is a finance professor at the same university and also professor for the postgraduate program at local market banking association AMBA.

About the company

Deloitte Argentina is part of Deloitte, which provides audit, consulting, financial advisory, risk management and tax services to clients worldwide.