Measures taken by Argentine President Cristina Fernandez de Kirchner this year are unraveling as inflation erodes the benefits of devaluing the peso and raising rates, said Jorge Brito, the president of Banco Macro SA. (BMA)
“They’re still not cutting spending and the fiscal deficit is rising, and that’s the most important factor to slow inflation,” Brito, 62, who founded the biggest private Argentine bank by assets in 1988, said in an interview in his office in Buenos Aires. “We’ll be back in the situation of January or December of last year.”
Argentina devalued the peso by 19 percent in January and has raised benchmark interest rates by as much as 13 percentage points to reduce local demand for dollars that had helped drive foreign-currency reserves to a seven-year low. The measures helped boost reserves, which the country uses to pay foreign investors, by $1.2 billion to $28.2 billion in April while helping to narrow the gap between official and parallel exchange rates to the smallest since December 2012.
Devaluing “isn’t the solution,” Brito said. Fernandez needs to cut subsidies, which he says is the root cause of inflation and an overvalued currency.
Inflation Risk
Argentina subsidizes public transportation and utilities while spending heavily on welfare programs for the poor and even financing soccer match broadcasts.
After plunging an average 15 percent in January, Argentine bonds have posted three straight months of gains, surging 18 percent over the last 90 days and pushing the average yield on the country’s overseas debt to the lowest levels since 2012.
Government spending surged 31 percent in February, pushing the budget deficit to 7.76 billion pesos, compared with a shortfall of 526 million in the same period last year.
Loans to the private sector were flat in March from a month earlier, according to the latest central bank data.
“Inflation is the main risk for the financial system,” Brito said. “Delinquencies rise, credit slows and that clearly undermines banks’ balances.”
Since the end of January, twelve-month non-deliverable peso forwards, which allow investors to bet on Argentina’s peso, have rallied 8.5 percent to 11.17 per dollar, signaling the currency will weaken 28.3 percent over the next year. In the days following the devaluation, traders were betting the peso would fall to 12.3 per dollar.
Helicopter Pilot
A college dropout who is married with six children and flies a helicopter as a pastime, he assembled Banco Macro through a series of acquisitions over the past three decades.
Brito, who is president of Argentina’s national private banks association, says total credit in the country will grow 15 percent in 2014, half of last year’s pace. Banco Macro plans to open 25 new offices this year, adding to its current total of about 430.
Banco Macro’s American depositary receipts have risen 34 percent this year while its Buenos Aires-listed shares have jumped 49 percent. That compares with a 29 percent surge in Argentina’s benchmark Merval index.
“The financial sector has benefited greatly in the last few years from measures that boosted lending,” said Brito. “Now, while policies like some social programs need to be kept, others have to be redone.”
To contact the reporters on this story: Camila Russo in Buenos Aires at crusso15@bloomberg.net; Cristiane Lucchesi in Sao Paulo at clucchesi5@bloomberg.net
To contact the editors responsible for this story: Brendan Walsh at bwalsh8@bloomberg.net Bradley Keoun, Rita Nazareth
“They’re still not cutting spending and the fiscal deficit is rising, and that’s the most important factor to slow inflation,” Brito, 62, who founded the biggest private Argentine bank by assets in 1988, said in an interview in his office in Buenos Aires. “We’ll be back in the situation of January or December of last year.”
Argentina devalued the peso by 19 percent in January and has raised benchmark interest rates by as much as 13 percentage points to reduce local demand for dollars that had helped drive foreign-currency reserves to a seven-year low. The measures helped boost reserves, which the country uses to pay foreign investors, by $1.2 billion to $28.2 billion in April while helping to narrow the gap between official and parallel exchange rates to the smallest since December 2012.
Devaluing “isn’t the solution,” Brito said. Fernandez needs to cut subsidies, which he says is the root cause of inflation and an overvalued currency.
Inflation Risk
Argentina subsidizes public transportation and utilities while spending heavily on welfare programs for the poor and even financing soccer match broadcasts.
After plunging an average 15 percent in January, Argentine bonds have posted three straight months of gains, surging 18 percent over the last 90 days and pushing the average yield on the country’s overseas debt to the lowest levels since 2012.
Government spending surged 31 percent in February, pushing the budget deficit to 7.76 billion pesos, compared with a shortfall of 526 million in the same period last year.
Loans to the private sector were flat in March from a month earlier, according to the latest central bank data.
“Inflation is the main risk for the financial system,” Brito said. “Delinquencies rise, credit slows and that clearly undermines banks’ balances.”
Since the end of January, twelve-month non-deliverable peso forwards, which allow investors to bet on Argentina’s peso, have rallied 8.5 percent to 11.17 per dollar, signaling the currency will weaken 28.3 percent over the next year. In the days following the devaluation, traders were betting the peso would fall to 12.3 per dollar.
Helicopter Pilot
A college dropout who is married with six children and flies a helicopter as a pastime, he assembled Banco Macro through a series of acquisitions over the past three decades.
Brito, who is president of Argentina’s national private banks association, says total credit in the country will grow 15 percent in 2014, half of last year’s pace. Banco Macro plans to open 25 new offices this year, adding to its current total of about 430.
Banco Macro’s American depositary receipts have risen 34 percent this year while its Buenos Aires-listed shares have jumped 49 percent. That compares with a 29 percent surge in Argentina’s benchmark Merval index.
“The financial sector has benefited greatly in the last few years from measures that boosted lending,” said Brito. “Now, while policies like some social programs need to be kept, others have to be redone.”
To contact the reporters on this story: Camila Russo in Buenos Aires at crusso15@bloomberg.net; Cristiane Lucchesi in Sao Paulo at clucchesi5@bloomberg.net
To contact the editors responsible for this story: Brendan Walsh at bwalsh8@bloomberg.net Bradley Keoun, Rita Nazareth
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