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HSBC on Argentina: It’s Time for Growth to Come Out of Hiding

Argentina’s credit pipeline has grown from virtual non-existence to accounting for almost a quarter of Latin American bond supply in just over a year, an impressive re-awakening not seen in global markets in decades. Bonds & Loans speaks with Gerry Mato, Chairman of the Americas as HSBC Global Banking and Markets, one of the lenders leading the market’s revival, on the outlook for Argentina’s economy and the importance of restoring growth in the country.

Sep 22, 2017 // 1:30PM

What is your outlook for the Argentinian economy over the next 12- 18 months?

We are seeing improvements in trade as well as a much-needed recovery in commodity prices in the wake of challenges facing the region over the past three years. The country’s economy is expected to grow in the next year (2%- 3%) supported by a reduction in the fiscal deficit and the tax burden. Although there is still a need for stronger results on the fiscal consolidation front, the first years of the current Government began with a gradual fiscal improvement, which is key to kick-starting sustainable growth without introducing  shock fiscal adjustments.

Although the Central Bank has not been able to keep inflation within target range, it has achieved the lowest year- on-year inflation since 2012 – in spite of the currency depreciation. In addition, and more importantly, it has been able to set long-term inflation expectations downwards, which is key to reducing long- term uncertainty, improving the decisions of economic agents, and boosting investment and economic growth.

The direction taken by the Macri administration is the opposite to that undertaken in previous years, in which consumption – particularly public consumption – boosted the economy; public and private investment is now expected to be the main driver of growth, specifically in machinery and equipment. This is a key aspect to consider for the local economy, where real investment as a percentage of income is very low, and where there is potential to increase productive capital and grow in the long term. In addition, even though consumption showed an improvement, it was not overextended, which allows for a moderate increase next year.

It is important to note that rates and dollar adjustments continued despite this being an election year. Under the previous administration and during electoral years, the currency depreciation in real terms and interest rates were lowered in order to boost consumption at the expense of having to make adjustments next year. The new Government should not need to make a strong adjustment next year regarding interest or FX rates.

How does Argentina’s economic performance compare to some of its regional peers? Where does it need to improve and what do you see as some of the major challenges to address?

Argentina  is  a  bit  more  difficult to gauge because the economy has further to go than Brazil in terms of undoing poor policies and improving growth measures in a number of key areas. Nevertheless, our forecasts show that there are  good  prospects for growth there.

One of the key areas of focus for the Government is the energy sector, as evidenced by the national electricity state of emergency declared on December 2016. Electric Energy Generation (thermal, hydraulic and additional focus in renewables), transmission and distribution are key areas for growth in near-to-medium term. Furthermore, there should be  a pickup in investment in the Oil & Gas sector up, particularly in the Vaca Muerta basin. Public infrastructure projects will play an important role in the country, not only in the energy sector, but also in the transportation and logistics sector, with investments in these sectors over the next four years expected to reach USD30bn. Progress is also being made in the National Housing Plan, through which 120,000 housing units are expected to be built.

The main challenges for the Government in the upcoming years will be to lower inflation and at the same time reduce the fiscal deficit, which as of today requires financing from local and international markets. Another challenge will be to drive growth through private and public investments, while at the same time tackling inflation. The market friendly policies of the Government – although not fully implemented yet – should attract investments. Aside from the coming elections, the focus will be set on tax and labour reforms, and developing the local capital market.

Although Argentina recently returned to the debt capital markets after a successful debt restructuring process, the country’ fiscal deficit and ambitious infrastructure plans require a significant amount of financing that cannot be addressed entirely by the Federal Government, hence the support of alternatives such as Public Private Partnerships (“PPPs”).

Argentina’s capital markets have been quite active over the past year. What sectors can we expect to drive deal flow going forward?

Two areas of uncertainty have already begun to ease: namely, Argentina’s quick actions to cover its significant funding needs, and growing economic indicators suggesting that the economy has exited recession. We are particularly bullish on infrastructure, oil and gas, and energy generation, transmission and distribution. We see these as a few of the growth areas for Argentina.

What has been HSBC’s growth strategy in the region? How is the bank looking to differentiate from some of its peers?

HSBC has had a presence in Latin America for almost 50 years and remains committed to the Region. Our growth strategy is to provide our clients with the best banking teams on the ground and in our network while delivering valuable insight into a complex and diverse region. Additionally, HSBC is one of the strongest bank counterparties in the Americas market, and with our network, we provide a link between the region and other markets to invest in Latin America.

HSBC has participated on a number of landmark deals within Argentina since the markets reopened. What have been some of the highlights for you and the bank?

We acted as joint book runner on the landmark USD2.75bn deal issued by the sovereign earlier this year – the first 100-year bond issued to international investors by a sovereign rated below investment grade.

We’ve also executed the  largest  and most innovative transaction for a sub sovereign, recording a peso denominated floating rate local market deal (USD952mn equivalent), which was priced through the modified Dutch auction instead of the traditional bookbuilding process – but still managed under the 144a/RegS format. HSBC also worked on YPF’s first ever fixed-rate argentine peso- denominated deal under 144A/RegS format and New York Law, and the second largest transaction with the longest tenor in the Argentine Capital Market, printing ARS8.4bn (USD530mn equiv.) 7-year floating rate notes for the City of Buenos Aires. These were some of the notable highlights for us.

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