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Capital Market Reform: An Outstanding Bill for Argentina’s Economy

Argentina’s local markets have trailed behind its South American peers for years, and president Mauricio Macri’s ambitious reform package aims to change that; it will depend, however, on him securing enough political capital in October’s midterm elections to pass the legislation through Congress first.

Aug 21, 2017 // 4:59PM

President Mauricio Macri finally got some breathing room this week after the national primary, where his candidates achieved some major wins in almost all the relevant counties across the country.

While these favourable results do not guarantee a much-needed parliamentary majority in October, they do give him some political capital to start pushing the reform package, which, as he promised, ought to put the South American nation on its path to economic recovery.

Among the most ambitious changes proposed is the capital markets reform. While Argentina is the continent’s third largest economy, its capital markets are tremendously underdeveloped, even compared to its neighbours like Chile or Brazil.

For example, the number of companies that were listed in the Argentinean local markets last year was only 95 compared with 223 in the Chilean markets and 345 in Brazil. What is worse is that in the past three decades Argentinean markets have been in constant decline: there were 321 companies listed in the local markets in 1975. Overall market capitalization of Argentina stands at about USD81bn, equivalent to 8.5% of the GDP, compared with Brazil’s market cap of 19% and Colombia’s of 23% or 79.2% in Chile according to data compiled by Bloomberg.

Modernizing the System

There are many factors that have contributed to the lack of sophistication of the Argentinean local markets. Years of dominance of the informal economy among small and medium enterprises have made it difficult for them to adapt to regulatory standards required to go public, while at the same time the excessive regulatory burden imposed by current laws discouraged companies to look for funding in the local markets. Also, the immense power wielded by the Comision Nacional de Valores (CNV), the country’s anti-graft watchdog that often seems to act indiscriminately, has fomented additional uncertainty in the markets.

Not only do the current laws not encourage foreign investment, but they have actually driven local companies to other stock exchanges, like Sao Paulo or New York, instead of Buenos Aire, when looking for fresh cash.

For a government that is counting on foreign investment to put the country back into growth territory, it has now become imperative to update the current capital markets regulation.

According to Alan Glass a lawyer at Buenos Aires Advisors, the new regulatory framework aims to “developed and simplify Argentinean capital markets, mostly because today the country’s local markets are very limited”.

“With this new reform, what the government is looking to do is incentivize corporates to tap the local markets. The main objective of the new law promoted by the government is to normalize how the local capital markets function, by generating a set of rules that encourage a larger number of issuers and a larger quantity of instruments for investors, this way people’s and institutions’ savings will be used to bolster economic activity and, as a consequence, create more jobs,” the lawyer explained. 

The reforms currently under discussion include the regulation of financial instruments that currently don’t exist in Argentina, like for example investment advisors that offer private banking/offshore services and Real Estate Investment Trust (REIT). Another key point is the discussion about tax benefits that investors and issuers alike can receive: today, for example, the “closed-end funds investors have double tax imposition,” Glass pointed out.

To encourage more issuers, the new law also scraps Article 20, which gives the regulator - in this case, CNV – the right to intervene in the decisions of company boards without additional authorization from the department of justice. This article was the reason that in the past companies threaten to “delist” themselves from the Buenos Aire bourse.

The reforms have been stuck in opposition controlled Congress since last year, and while analysts are optimistic that the government will be able to pass them before the end of the year, final version of the law is only beginning to take shape.

“Today, what exists is a draft which is still being discussed by all the markets players, so we don’t have any guarantees of the final results. We believe that this reform will only be implemented after the midterm elections in October,” Glass admitted.

However, another important modification to the markets happened early this year when the nation’s stock exchange operator, Mercado de Valores de Buenos Aires (Merval) merged with the Bolsa de Comercio de Buenos Aires creating Bolsas y Mercados Argentinos, (BYMA). The new entity’s shares now trade in the open markets – previously only brokers had access to Merval shares.

This type of public offering leads to more efficient corporate governance, which at the same time allows the exchange of securities to become more dynamic.

BYMA also hopes to offer a locally-traded exchange-traded funds (ETFs) by the end of the year, its General Manager Jorge de Carli told Bloomberg, and is assessing ways to generate long-term revenue through data providing services.

"In the short-term, we expect BYMA revenue will jump as transactions grow 20 to 30% by early 2018 as business scales up; we hope the economic backdrop allows for it," de Carli told Bloomberg.

Years of isolation, populist rule, and excessive regulations made the Argentinian local markets fall far behind its peers, but the new capital markets reforms are expected to tackle some of these issues; still, this is no magic trick to fix years of mismanagement straight away, it will take years to establish a fully-functioning capital market.

 “The creation of ByMA and the selection of the current pro market board of the CNV are the right steps to create a more active local capital market,” Glass concluded.

Americas Policy & Government Argentina Latin America Macro

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