Argentina: Pension Fund Fallout

BY LATIN AMERICA ADVISOR
Inter-American Dialogue


Argentine President Cristina Fernandez [recently] announced a plan for the government to take over the country's approximately $26 billion in pension funds. Fernandez has said she wants to protect the funds from turmoil in the global financial markets. What other factors are motivating the government’s action? What would be the impact of the pension takeover on Argentina's economy? How would it affect government spending and Argentina's credibility among investors?


José Octavio Bordón, former Ambassador of Argentina to the United States: In 1994, the state pension system, which had reached a point of crisis, was privatized at the peak of the Washington Consensus. Many of us who believed in the necessity of democratizing both society and the economy objected to the 'anticompetitive, statist, and compulsory' design of this privatization. The high costs of administration, interferences of a number of governments, and the crisis in the international financial system have generated a significant drop in total amount of capitalized funds. The state had to back them up with budgetary resources. In Argentina, the Pension Fund Administrators (AFJPs) have earned more than $12 billion in profits. There is a broad consensus on the need to transform the Argentine pension system. However, the government should avoid passing legislation too quickly. There are many technical and political concerns, especially regarding the future use of $30 billion in stock. In addition to avoiding the errors of the past, it is necessary to act now with greater prudence and institutional quality. In play are the millions of current and future retirees, the rights of Argentines who opted for the private capitalization and legal safeguards for the companies who acted within the current legal framework. During times of crisis, it is both a necessity and a right to assure that changes guarantee the well-being of citizens, but it shouldn't be an excuse to disregard people's rights and endanger the credibility of the country. A broad debate, both respectful and transparent, needs to happen in the Argentine Congress, similar to that which occurred over the taxes on the rural sector. This is the best road toward change, with legitimacy and legality both in the international and domestic context.


Milko Matijascic, Head of the Institute for Applied Economic Research at the UN Development Program's International Poverty Center in Brasilia: Pension reform is a complex problem in South America. First, local financial markets were small and couldn't easily absorb such a large volume of funds; second, with large informal sectors and low contribution densities, large numbers of workers are not generating sufficient savings to fund their retirements; third, with defined contribution schemes, market risks fall upon the shoulders of individual workers. As one considers the current crisis, these factors are critical. By October 20, the average pension fund fell 16 percent compared to the average value in 2007. A steep market decline and a precarious labor market would lead to poor returns for the pension system. Ironically, the debate in Argentina did not touch upon these three factors. The government appears motivated by fiscal concerns. If the pension funds' resources are taken over by the government, it may provide short-term relief, but at the expense of significant problems in the long term (including loss of credibility). Such drastic reforms should be preceded by extensive public debate and deliberation. This is the approach that Chile took as the Bachelet Administration achieved consensus prior to its landmark reform earlier this year.


Claudio Loser, Senior Fellow at the Inter-American Dialogue and former Head of the Western Hemisphere Department at the International Monetary Fund: The announced nationalization/expropriation of the Argentine pension funds constitutes one of the most blatant acts of financial piracy in the country's recent history. In terms of its gravity, it stands on par with the freeze on deposits of the banking system introduced at the time of the collapse of convertibility (the relation of one to one between the local currency and the US dollar). Contrary to the alleged claim that, once approved by Congress, it will protect the pension money saved by many Argentines, the action is intended to provide the government with fresh resources to solve its mounting fiscal problems. The proposed expropriation would eliminate individual savings, and convert them into a pay-as-you go system, with large funds that could be spent almost freely by the Argentine government. The transfer is equivalent to 10 percent of GDP, plus an annual flow of pension contributions equivalent to about $5 billion (1.5 to 2 percent of GDP). The unexpected and ill-designed plan has brought the financial system into crisis, with a precipitous decline in the stock market, pressures on the exchange rate, and a sustained loss of reserves at a time when Argentina is facing a drastic decline in export prices. Argentina was being shunned by foreign creditors and investors before this measure but it is now considered in virtual default, with grave and possibly unintended consequences on the country's economy.


Robert C. Helander, Managing Partner at InterConsult LLP in New York: Where to start on Argentina? After repeated demonstrations of fiscal sinverguenceria, one wonders how any government in Argentina will ever be able to convince its own citizens that their elected leaders can be trusted. Years ago, in an effort to attract foreign capital, the government guaranteed national treatment for foreign investors. Some invested on that premise, and they surely got the 'national treatment,' pesification, phony statistics, pressure to invest in government paper, etc. If Peronist government after Peronist government has mismanaged the economy and maltreated its own citizens, it is hard to think that any foreigner, save for the politically-motivated Venezuelan leader, might invest. As for lenders, there is no way to quantify the moral hazard. Absent a multinational bailout, another devaluation and default will be hard to avoid. The proposed 'protective measure' of nationalizing the private pension funds would only delay the deluge and make it that much harder for a future president to regain internal balance and respect. Do cry for Argentina; it is a sad story without a visible good ending.

IIF Sees Moderate Growth Deceleration

New data from the Institute of International Finance (IIF) predicts a moderate slowdown in growth across the board in LatAm through 2009. Regional expansion is forecast to ease to 4.4% in 4.1%, respectively, in 2008 and 2009, from 5.3% last year. This includes a decline this year to 2.7% in Mexico (versus 3.2% in 2007) and 4.6% Brazilian growth, from 5.4% last year. However, the IIF foresees a pickup in Mexico to 3.5% next year. Peru is set to fall from 8.5% in 2007 to 6.5% and 6.0% in the next few years, while the corresponding figures for Argentina are 8.7%, 6.8% and 4.2%, and for Colombia 7.1%, 5.1% and 4.5%. Inflation is meanwhile set to hit 6.4% this year, up from 6.0% in 2007 and 4.8% in 2006, says the IIF. It expects monetary policy to hold or tighten in coming months in Brazil, Chile, Colombia and Peru. Mexico meanwhile looks set to ease in the second half. “Most of the countries have shown solid growth in their economic activities and most of it comes from the domestic demand. Investors are optimistic,” says Carola Sandy, analyst at Credit Suisse.

Equity Markets Face Challenging Months

LatAm equity has outperformed other EM in the past month and quarter, but the next two quarters may be more challenging. “The short term outlook is more uncertain for LatAm equities,” says Geoff Dennis, head of equity strategy at Citi, referring to a 3-4 month timeframe. “If the global market continues to be weak, LatAm stands a chance of underperforming because it’s done so well until now,” adds the strategist. Bearish and volatile trading would keep the roughly 20 equity issuer hopefuls – mostly from Brazil – stuck in the pipeline. In the longer run, however, Citi maintains a bullish call on the region. It is constructive on EM and global equities if the US economy manages to turn around in the second half. The outlook for a continued up trend in commodities is still very positive, says Dennis. He notes that despite strong improvements in the region’s fundamentals, LatAm strength is largely supported by firm commodities, with oil, iron ore, copper, gold and pulp among the chief benefactors. LatAm stocks outperformed global EM in March for a seventh consecutive month, according to Citi, which points out the last time that happened was 1997. Brazil’s main equity index, the Bovespa, underperformed LatAm in March, falling 7.8% on the heels of an 11.9% surge in February. Peru dropped 5.1%, while Chile was the region’s strongest riser, gaining 7.7%, says Citi. Argentina and Mexico also had a positive March, rising 5.8% and 5.7% respectively.

Cresud Raises $288m in Rights Offering

Cresud, the Argentine holding company for IRSA and a number of agricultural assets in Brazil and the Southern Cone, completed a rights offering with existing investors Tuesday that grossed it $288m through the sale of 180m shares. The deal saw strong demand from existing shareholders, which meant new investors could not participate in the offering, Alejandro Elsztain, CEO, tells LatinFinance. Of the total shares offered, 60% were distributed in the form of ADS at $16, while the remainder was sold in the form of locally listed stock, at ARP5.04. Both the ADS, which represents 10 local shares, and each local share also carry a warrant that permits holders to buy an additional share at a 5% premium. “People are very interested in our track record with commodities. There are a lot of funds talking about investing in agriculture and commodities now, but we have the experience to show for it,” says Elsztain. The CEO says the proceeds are being used push into new markets, including Bolivia, Paraguay and Urugay. Cresud, which owns a 24% stake in Cactus Argentina, a feedlot whose co-investors include Tyson Foods, says Elsztain. That business is also set to grow and might draw some of proceeds he says. Citi, Deutsche and Raymond James led the offering.

Argentina Breaks 8%

Argentina took advantage of market conditions to place the third tranche of its dollar-denominated Bonar VII bond issue, Thursday, achieving a yield of 7.71% - at the low end of market expectations. The sovereign sold $500 million of the seven-year paper, which matures December 2013. The Republic last issued the securities in November when it achieved a yield of 8.03%. The government has $500 million left of the $2 billion program. Argentina’s external financing needs in the first quarter of this year total $3.76 billion.

Argentina Takes Bids For Bonar VII

Argentina will auction the third tranche of its dollar-denominated Bonar VII bond issue today, Thursday, according to the economy ministry. The sovereign is offering $500 million of the seven-year paper, which matures December 2013. The Republic last issued the securities, which carry a coupon of 7%, in November when it achieved a yield of 8.03%. This time around, Argentina will be looking for a yield of around 7.8%, say analysts. The government has so far issued $1 billion of a total $2 billion approved. Argentina’s external financing needs in the first quarter of this year total $3.76 billion. On Wednesday, Argentina’s country risk hit another record low, dropping to 190 basis points, as measured by JPMorgan’s EMBI+ index.

Banco Macro Returns For More

Argentina’s Banco Macro priced Tuesday a $150 million 10-year at par to yield 8.5%. The price was tightened from 8.625% area and the deal was heard trading up marginally on the break. Sole bookrunner was Credit Suisse and orders were heard in excess of $400 million. The deal was rated B2/B+ and highlighted the continued thirst for yield from investors. Proceeds are for general funding. Macro was last in the market in December with a $150 million 30NC5 at 9.75%. Macro started its capital markets comeback in March 2006 with an impressive $300 million IPO.

Argentina: Record Exports In 2006

Argentina achieved record exports of $46.6 billion last year, according to figures released by the economy ministry. The 15% annual increase in sales led to an increase in the trade surplus to $12.4 billion, despite the 19% rise in imports to $34.2 billion. GDP growth of around 9% helped drive up the demand for capital goods imports, said the ministry.

Argentina Economy Expands 8.5%

Argentina’s economy grew by 8.5% between January and November last year, according to the government. Year on year, the economy expanded by 8.6% in November, driven by construction and industrial production and rose 0.6% on a monthly basis.

Moody’s Improves Ratings Outlook For Argentina Local Government

Moody's Investors Service has changed the rating outlook to positive, from stable, for two local governments in Argentina. The agency said the action was prompted by a similar, recent, outlook change for Argentina’s B2 foreign currency country ceiling for bonds. The governments and ratings affected are: City of Buenos Aires foreign currency bonds rated B2 (global scale) and Aa3.ar (Argentina national scale). Both were assigned a positive outlook; these ratings are constrained by Argentina's foreign currency country ceiling. The outlook for domestic currency bonds rated B1 and Aa2.ar remains stable, said the agency. Meanwhile, Province of Mendoza foreign currency bonds due September 2018 rated B2 (global scale) were assigned a positive outlook; this rating is constrained by Argentina's foreign currency country ceiling. The outlook for the province's domestic currency issuer ratings of B1 (global scale) and Aa3.ar (Argentina national scale), as well as for its foreign currency bonds due September 2018 rated Aa3.ar (Argentina national scale), remains stable.

Moody’s Improves Argentina Outlook

Moody’s Investors Service has raised the outlook on its B3 foreign- and local-currency rating of Argentina’s sovereign bonds from stable to positive. The change was due to “continued improvement in the fiscal accounts that, combined with robust economic growth and substantial accumulation of international reserves, has contributed to strengthening the government's overall credit profile and to reducing external vulnerabilities”, according to Moody’s. An outlook change to positive from stable was also made to Argentina’s B2 foreign currency country ceiling for bonds and to the Caa1 ceiling for foreign currency bank deposits. Unaffected by the rating action is Argentina’s Ba1 local currency bond ceiling, the highest possible rating that could be assigned to obligors and obligations denominated in local currency within the country remains stable, as well as the Ba1 local currency deposit ceiling.