Reducing Argentina’s fiscal deficit is mission critical for President Mauricio Macri’s center-right administration. It hopes a tax amnesty will help by driving private sector investments into the local markets, reducing the need for public spending and spurring domestic growth. 

The amnesty encourages Argentines with cash and assets stashed overseas to inject that money into securities and investment funds: people repatriating their cash into closed-end mutual funds or government bonds for five years will avoid penalty taxes. Argentina’s pool of domestic investors should grow as a result and provide more resources to finance improvements to the country’s infrastructure. 

The country is “way behind” when it comes to private investment funds, says Conrado Tenaglia, a partner at law firm Linklaters. 

“Right now, these funds do not really exist, so Argentina will follow the rest of the Andean region,” he says, pointing to neighboring nations where long-term funds look to invest in infrastructure projects to match their liabilities. “In Chile, for example, you have these multi-billion dollar funds that have a mandate to invest in large projects.”

Jorge Podesta, a director at Allaria Ledesma & Cia, one of two asset managers with approval to set up a closed-end mutual fund, says Argentines are showing “great interest” in the tax amnesty.

“The reasons are twofold — the tax information exchange scheme is within the OECD framework and, second, there is an increased interest in channeling part of their portfolio to domestic financial investments.”

Argentines must declare their holdings before March 31 and Podesta, who is inundated with dozens of projects from real estate developers, is racing to select potential investment prospects before the deadline.

“We expect the tax amnesty to foster growth both for institutional investors and for companies seeking non-bank finance,” Podesta says.

Alejo Costa, chief economist at local investment bank Puente, says the amnesty could bring home as much billions in funds from offshore assets and savings.

Argentines have long been good at saving, says Tenaglia. Unfortunately, they have historically saved their cash outside the country’s banking system, he says. 

“Almost always it has been offshore, or in safety deposit boxes,” he says. “So under the amnesty, the government will be looking at ways to ensure that money is properly channeled.”

By late November, some $20.5 billion had been declared. Close to $8 billion of that was simply undeclared cash — “money under the mattresses,” says Martín Redrado, the chairman of local economic think tank Fundación Capital. To cash in on Argentines repatriating their money, local brokerages and financial institutions are working to set up closed-end mutual funds before the March 31 deadline.

“The idea is to boost capital in the formal economy and lower the amount of money people have in informal accounts in other countries,” says Redrado, a former central bank president.

Argentines must declare their offshore funds but they can leave the capital abroad. Opting for the latter incurs a fine, 10% of their offshore funds if declared by the end of 2016 or 15% if declared by March 2017. The central bank can use the proceeds from the fines to lower the fiscal deficit.

In the short-term, Tenaglia suspects that “only a fraction” will be repatriated into Argentina’s banking system. 

Creating the supply

Juan Mazzón, chief executive officer at local lender Banco Patagonia, says the tax amnesty aims to not only create a series of funds, but also grow Argentina’s local capital markets. To do this, investors need incentives to save in volatile pesos.

“To improve the local capital markets, corporates and financial institutions need more freedom and autonomy,” Mazzón says. “You are essentially recreating the local markets and to do this we need more institutional investors.”

Whether Argentines will opt to invest their newly repatriated pesos in corporate bonds, however, is not clear. Tenaglia, for example, expects most of the investment to go into government securities. 

“From the point of view of the Argentine population, they need to get comfortable with inflation levels and the peso valuation being under control,” he says.

Allaria’s Podesta is more optimistic. “We trust that these new closed-end funds will make it possible to connect the financial market with projects in the real economy,” he says.

Looking for yield

The central bank hopes infrastructure projects like roads, along with energy, agricultural and housing projects, will prove attractive to investors. But before the projects can be identified, Argentina’s central bank must speed up the approval process for closed-end mutual funds.

Only two funds, including Allaria’s, have received approval so far, but another 40 are under consideration. Podesta says Allaria has submitted documents to create two additional closed-end funds.

The central bank expects the funds’ investments to take some of the weight off of the country’s public spending levels, which rose 52% year-on-year through end-October last year, Redrado says. But investors will want to see a return on their investments.

The amnesty represents a major drive to introduce regulation that is friendly to investors, says Sergio Guerrien, a director at Franklin Templeton Investments. Argentine instruments are yielding better than other emerging market nations, he says, and for locals, the tax amnesty is an opportunity to put their money to work.

“This is billions of inflows from overseas,” he says. “In the past, you could not buy this kind of investment and there was a lack of regulations.”

Yet there is much more to be done. The tax amnesty is just a first step, and the government should continue an aggressive drive to develop the local markets, says Puente’s Costa.

“If you look at the participation levels [in the local capital markets] from retail investors, it is too small,” Costa says. “The idea is to give funds more freedom to make them attractive to the public and increase earnings in that sector.”

In November, the Macri administration presented a capital markets reform bill to congress. The legislation changes the tax structure for mutual funds and limits the powers of the local securities regulator. It also cuts red tape to reduce liquidity costs for investors, Costa says.

“For local funds, the tax amnesty, in the context of local capital markets reform, is a game changer,” he says. “Mutual funds can exploit this and de-lever their positions, and this can also simplify restrictions to open new investment accounts in Argentina.”

The capital markets bill would also usher in new rules on derivatives, bankruptcy and inflation-linked debt securities, similar to Chile’s UF-denominated bonds, Linklaters’ Tenaglia says.

“There needs to be some transition into a stable currency and, this way, we may see longer-term deposits and mortgages in pesos that could then lead to a bond market with maturities beyond 18-to-24 months,” Tenaglia says. “To do this we need to have inflation-adjusted debt instruments.”

Charting a new course

Alejandra Naughton, chief financial officer at the local financial services firm Grupo Supervielle, says the tax amnesty is the “first of many steps” to create a new asset class. “If Argentina can continue to normalize its economy, you just might be able to make people save their money locally, and the tax amnesty is a very good step to attract savings back,” she says.

Argentina’s credit market represents just 14% of GDP. That leaves huge potential for growth when compared to its neighbors: Chile’s credit market is 70% of GDP, while Brazil’s is 45%, Redrado says.

“The amnesty is like a jumpstart for Argentina into a new pattern of development,” he says.

It does not take a “rocket scientist” to see Argentina’s credit market expanding, but a lack of direction from the central bank has held things back, he says. 

“You need an economy that gives you a planning horizon,” he says. “As things stand, we don’t know where interest rates will be in a year’s time or how public sector expenditure will behave and how much indebtedness Argentina needs in the next year or two or three.”

Charting a course for investment, foreign or domestic, is difficult under Argentina’s “day by day economy,” Redrado says. Inflation may have come down last year, but the central bank lacks a “systemic approach,” he says.

Costa also sees the central bank falling short. “Inflation is indeed going down,” he says. “This is a good reduction, but the central bank is implementing policies that are a short blanket. You may cover your head, but your feet are now exposed. Eventually something has to give.”

Tenaglia is more forgiving and says the market has been impatient with the Macri administration. “They’ve only been in place for a year and it takes time to dispel some of the old memories,” he says. “If this style of policy persists, eventually these memories will fade away.” LF