Argentina's chaotic economy

Whoever wins Argentina's presidential election will need to normalise the economy. Here's what awaits them...

Whoever wins the election will need to normalise the economy – here’s a flavour of what awaits them…

Insurance industry

“At present, the unfortunate characteristic of the Argentine insurance market is that a shortage of dollars means a moratorium on paying reinsurance premiums”, explains David Cooper, CEO of Cooper Brothers, a family-owned loss-adjuster and Lloyds Agency that has been in the market for more than a century. “Even blue-chip companies can’t pay because the Argentine Central Bank doesn’t let them access the dollars. By law, any Argentine property must be insured in Argentina. Of course, the capital capacity isn’t here to insure large, complex risks. In those cases, you have a low retention by an Argentine insurer, with most of the risk passed to reinsurers abroad.

“At the moment, local and international corporates based in Argentina will be paying their insurance premium to the local insurance company. However, that insurer won’t be able to pass that payment on to the foreign reinsurers. Instead, the insurer will invest the money locally, with the idea being that one day they will be allowed to make the payment to the international reinsurers can take the payment. The big question is: will the international reinsurers continue to reinsure those contracts under these conditions?”

Housing market

“if Argentina had a conventional economy, then banks could grow exponentially”, says Fabian Kon, CEO of Banco Galicia, Argentina’s largest bank. In Argentina credit is just 9% of the country’s GDP, compared to 90% in Chile and around 60% in places like Colombia, Peru and Brazil. In Argentina the banks are just transactional as we don’t really provide long term credit. That explains why the Argentine economy can’t grow – its entrepreneurs aren’t able to borrow to fund expansion. It also hits households as there are practically no mortgages in Argentina. Even in the boom of the Macri years we only issued 7,000 mortgages, despite having a base of more than 2 million customers. The high inflation makes issuing credit impossible – imagine taking on a loan with 100% interest.

“You have to realise that young Argentinians, even those earning good wages, can’t buy a house. They rent until they are 50 years old in the hope that they can inherit their parents’ home, so the pent-up demand is huge.”

Capital controls

“The capital controls, the multiple exchange rates, and rampant inflation are the main challenges for foreign investors”, Marcelo Slonimsky, Partner, Bourel Paris-Laplace. “What incentive is there to make money in Argentina if you can’t repatriate those profits? There are work arounds, for example you can use crypto currencies or bond transactions that give you access to US dollars. But these are extremely complicated transactions with lots of restrictions and sometimes difficult to understand or to be approved by large publicly listed companies.

“Companies end up spending hours of their lawyers and accountants’ time finding creative structures to repatriate profits. Argentine companies are establishing trading companies in Uruguay to keep hard currency there. Others, with their Pesos, are buying local assets denominated in US Dollars, like real estate.”

On the plus side it can create local deals, says Francisco Romano, a partner at Buenos Aires corporate law firm, Pagbam. “Companies that are productive and have a good business in Argentina find they can’t repatriate their profits, so they need to invest them locally and that generates local deals. Companies with excess cash need to invest pesos in a way that is dollar linked, so that when the capital controls are lifted, they can recover the value of the money. We have seen a lot of real estate development from companies that aren’t property developers but need to do something with their cash. So, we help our clients with that. You also see cash-rich clients looking to acquire profitable Argentine businesses or lending money.

The incredible 0% bond

“Argentina has a complicated business environment but that also creates opportunities”, says Ricardo Hosel, CEO of Oldeval, the pipeline that carries all of Vaca Muerta’s crude oil. “For example, we recently issued a three-year, $50million bond at 0% interest. We raised money in pesos but at the official exchange rate of ARS210 to the dollar. We will repay the bond in three years’ time at the official rate. So effectively investors are betting that the official rate then will be closer to the free market rate.

“The current artificially-low official peso is probably unsustainable so it seems a safe bet for them. Any future change won’t cause any problems for us because we charge our clients at the official peso/dollar rate. And it allows us to benefit from zero cost financing. The bond was ten-times oversubscribed, so we could have borrowed a lot more. However, we don’t want to be left with excess pesos, so we just borrowed an amount that we could put to work immediately.”

“There are companies that can issue bonds at 0% interest rate in dollars, because they promise to repay in pesos adjusted to the pesos-dollar exchange rate in the future”, says Santiago Carregal, Chairman of Marval, Argentina’s largest corporate law firm. “If you are an Argentine company that earns in dollars but need to pay local costs in pesos, then it is a great financing solution. There are lots of economic actors that have found a way to make money in the situation, so even though everybody always talks about reform I wonder if those winning right now really want things to change.”


“When you want to import you have to exchange your pesos for dollars at the central bank and they aren’t always available”, says Gustavo Carro, CEO of Tacker Oil Tools. “However, those controls don’t impact international service companies as they can ‘temporarily’ import the equipment from abroad. At Tacker we are fortunate that we have operations in Colombia and Mexico, so we can access dollars from those subsidiaries and bring the equipment into Argentina.

“Since our original equipment is from the US, we need to buy the original spare parts. Our solution works because we buy them with our foreign subsidiaries, however, that means that our Mexican and Colombian operations are subsidising the Argentine business. Our business here in Argentina is doing well but capital controls mean that we can’t repatriate the profits. So we have to reinvest the profits locally, as we don’t want to keep savings in pesos as the real value will be eroded by inflation. The moment capital controls are lifted it will make our business simpler.”