Argentina’s tax amnesty was hailed as a success, but during a trip to the country in May, Michelle Abrego found a lot more work needs to be done before its wealth industry is truly up and running.
It’s not often you hear a regulator described as easy to work with. Then again, it’s not every day a government tries to rebuild an investment industry after decades of scandal, mismanagement and mistrust.
That’s the challenge Argentine president Mauricio Macri is facing in trying to resuscitate the country’s capital market, which was decimated by his predecessors Cristina and Néstor Kirchner.
Within his first 18 months Macri has managed to resolve the country’s 15-year debt standoff, issue over $30 billion of government bonds and introduce a tax amnesty that led Argentines to declare $117 billion of previously hidden wealth.
Ahead of my trip to Buenos Aires, I thought I was about to land in a market on the verge of resurgence. On the ground, I did meet a number of local players who are preparing to take advantage of these opportunities, but they were not getting too carried away.
It seemed many were asking ‘if we build it, will they come?’
To put things in context, in 2012 analysts estimated there could be more than $400 billion of undeclared money offshore, a figure that has surely grown in the five years since.
Of the $117 billion declared in the amnesty, which ended on March 31, $93 billion remains offshore. In short, the amnesty did not make a market overnight.
Martin Gavito, a director of Argentina’s regulator the Comisión Nacional de Valores (CNV), told me: ‘We understand the money already invested outside of Argentina has stayed outside ...as the local regulator we want to create the best conditions for the market to develop.’
The regulator’s main goal is to push local investment and to augment Argentina’s market cap, which is currently only equivalent to 13% of its GDP.
The CNV is key in sustaining Macri’s market-making momentum, as reforms to the capital market framework are unlikely to be passed until after October’s mid-term elections.
The shake-up proposed in late 2016 aims to ease restrictions on private banking, mutual funds and foreign investment, but has not yet been considered by the opposition- controlled legislature. The elections didn’t seem like a threat to anyone I spoke to, but as 2016 showed, public sentiment can be unpredictable.
Gavito said his team is trying to push complementary regulation ahead of that. He plans to launch a new regulated role called the ‘Agente Asesor Global de Inversiones’, or a global investment advisor, who can invest assets in local and overseas vehicles.
‘There was $117 billion that wasn’t previously declared that now is. It’s probable that Argentineans want to bring it back or even have it managed from Argentina, by bankers based here,’ he said.
‘We think this regulation will connect the flow of money from offshore to onshore.’
A thriving Argentine financial services sector is not as far-fetched as it might sound. In the 90s Argentina had a robust financial services industry. However, after its economic crisis in 2001 this deteriorated on the back of restrictive policies and surprise moves—such as freezing billions of dollars’ worth of bank accounts— forcing global players to pull out and Argentina-based advisors to move offshore and underground.
Even institutional players have been burned. There is currently a law in Argentina prohibiting insurers from investing outside Argentina and private pensions haven’t made a comeback since the government nationalized $30 billion in private pension pots in 2008 to protect retirees from the global financial crisis.
Gavito welcomes outside players but said they’ll have to play by local rules and operate through local vehicles, such as Argentine brokerages.
Paulo Belluschi, chief executive of wealth manager Alchemy, thinks it will take more than five years for the domestic fund market to take off.
Argentines prefer to hold their cash in US dollars he said, explaining that every month nearly one million people go to the central bank to buy US dollars, while there are only 330,000 brokerage accounts to access the stock exchange.
‘There’s potential for exceptional growth,’ he said. ‘Incentives like tax benefits will help. People will eventually trust again, but it’ll be easier if there’s an incentive.’
An Argentine-domiciled fund can have up to 25% of international securities on which investors pay taxes of 15%. If the fund has more than 25% it is considered international, and then investors will have to stump up 35%.
‘International funds are going to have to compete with the tax,’ said Juan Francisco Politi of Allaria Ledesma & Cia, one of the country’s biggest broker-dealers.
Trust and taxes go hand-in-hand in financial services, and the government needs to nurture trust if it wants to see the return of the Argentine wealth industry.
Trust is a big issue for Argentines. As one investment consultant I met said, to some Argentines, trusting the government with your money is like believing in a bad boyfriend who’s asked you time and time again for forgiveness and is saying ‘this time it’s different’.
This article was originally published in the June 2017 edition of Citywire Americas magazine. To subscribe and receive the magazine click here.