The leading contenders in Argentina's presidential election are unlikely to derail a budding recovery in structured finance, most observers said. But even if the new administration swiftly executes market-friendly policies, a proper securitization sector looms only in the medium- to long-term, after banks have cleaned up their books and genuine confidence returns to the battered market.
"We need a president who will sow the seeds of business certainty in the country," said Juan Pablo de Mollein, associate director of Latin American-structured finance at Standard & Poor's. "Only after that happens can we see the generation of assets such as auto loans and mortgages come back to life."
The signs leading up the elections, scheduled for April 27, are heartening. "Interest rates and the dollar have been falling ahead of the elections, and that's good for the sector," said Mario Kenny, a partner at law firm Nicholson y Cano. Those indicators are inarguably a response to a recent climb in poll numbers for the two market darlings among the candidates: Carlos Menem and Ricardo Lopez Murphy.
Still, first-round results and voter intentions under different run-off scenarios remain disconcertingly opaque. Everyone expects a second round. According to recent polls, only former president Menem might collect more than 20% of the vote in the initial ballot. While he and Lopez Murphy appeal to financiers, two rivals with experience as provincial governors, Adolfo Rodriguez Saa and Nestor Kirchner, are pushing an agenda that is more hands-on than many investors would like. Further on the left stands market bogeywoman Elisa Carrio, who is plumping for income distribution, selective capital controls and interventionist policies for the oil business.
Menem, Lopez Murphy and Kirchner appear to be ahead in the days before the vote, but picking the definitive winner is like predicting the outcome of a dizzying game of musical chairs.
Restoring credibility to Argentina's banking system and cleaning up a landscape strewn with ugly defaults - including the government's - are among the main challenges facing the incoming administration, analysts said. According to Merrill Lynch, the sovereign needs to restructure a whopping US$65 billion with overseas and local investors. At the same time, banks are saddled with appalling mismatches on their books due to the pesification of debts.
Merrill predicts a "wait-and-see" period of a few months should Kirchner or Rodriguez Saa prevail. A win by Carrio, most agree, would cause at the very least short-term financial upset. "There would again be rising interest and dollar rates," said Sergio Capdevila, head of trust services for local bank Banco de Valores.
Higher rates would, of course, cripple consumer credit, an asset that is just beginning to make a comeback. On the flip side, a continued drop in interest rates - most likely under Lopez Murphy or Menem - would further spur consumption. That sector has yielded a couple of deals in the last several months, the last being a securitization of consumer loans originated by Banco Saenz (see ASR 4/23, p.18). Argentine chain Garbarino and the local operations of Chilean department store Falabella are waiting in the wings with transactions as well, sources said. A continued improvement in the economic climate would bring them out.
On the agricultural front, chances are producers and exporters will keep tapping funds via securitizations since banks remain in such poor shape. The return of serious bank funding is not expected in the short term even under the administration of the more market-friendly candidates. "The banks have no capital to lend right now; that's something that's not going to be resolved quickly," said a Buenos Aires-based analyst.
On the other hand, some point out that if the situation normalizes - still at the soonest a medium-term scenario - foreign banks could step in to provide cash for the export sector, which is in overdrive thanks to the cheap currency.
While the poll numbers for both Carrio and Rodriguez Saa have edged down recently, their policy talk on the oil sector is troubling to the investment community. Both have mentioned the possibility of setting up a state oil company, a proposal disparaged by many analysts as ill conceived and fantastical. "The state is bankrupt, where would they get the resources to do that?" one banker asked rhetorically. Perhaps more unsettling are calls by the Carrio and Rodriguez Saa camps for oil exporters to pay higher taxes or face forced repatriation of profits, since those ideas appear to be more politically palatable and are certainly more workable than establishing a state producer. A casualty of those policies would no doubt be Argentine oil giant YPF, the only issuer to break the silence of the Argentine cross-border market over the last year. In December and again in early February, the producer issued deals totaling US$520 million behind a concealed identity (see ASR 2/17, p.17).
Even under an auspicious framework, securitization sectors mauled by the crisis, such as MBS and deals backed by federal participation revenues, will conceivably take years to return. The pesification of debt triggered massive defaults in those sectors and investors will be licking their wounds for years to come.
Some economists suggest an overhaul of the co-participation system, whereby the federal government distributes taxes to the provinces. "A less rigid and simpler system needs to be put in place to make provinces accountable for tax collection," said Merrill Lynch in an elections report penned by fixed-income strategist Pablo Goldberg.
MBS is far off on the horizon, not least because there has been no mortgage origination since the crisis erupted in the final weeks of 2001. And just the mention of BHN, the acronym for the originator of Argentine MBS, sends shivers up the spines of emerging market investors. Banco Hipotecario Nacional, the full name of the bank, defaulted on all its deals, which amounted to US$616 million.
But even if BHN eventually sorts out its problems, mortgage origination is still stifled by an unrelated problem. To keep a lid on price increases, the government has imposed a prohibition on indexing debt to inflation. But that is a sine qua non of long-term credit in Latin American countries. Even in much safer emerging markets, like neighboring Chile, nominally denominated mortgages are unheard of. "You can't have mortgages without indexation; it's as simple as that," said one Buenos Aires-based banker.
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