ARGENTINA: An Introduction to Banking & Finance
“Country Overview”
Argentina is a leading food producer with large-scale agricultural and livestock industries. The country has also seen constant development in the innovation and technology services field. With abundant natural resources in energy and agriculture within its 2.8 million square kilometres of territory, Argentina is endowed with extraordinary fertile agricultural lands, significant gas and lithium reserves, and has great potential for renewable energies.
Economic activity has recovered faster than expected, with a 10.3% increase in GDP in 2021 (after a 9.9% drop in 2020 in the context of the crisis unleashed by COVID-19). The fiscal deficit decreased compared to 2020 mainly as a result of: (i) the reduction in COVID-19-related spending; (ii) extraordinary revenues such as those from the tax on large fortunes imposed in 2021; and (iii) higher export duty collection in a context of rising international commodity prices.
On the other hand, although employment has fully recovered from the pandemic, real wages remain below 2019 levels. While trade links with Ukraine and Russia are minimal, the evolution of global prices has affected Argentina. Although food exports have temporarily benefited from this, the increased cost of energy imports, including natural gas, increases the cost of energy subsidies.
The monetary policy interest rate rose sharply in the first half of 2022 and is expected to rise further to ensure positive real interest rates, as domestic financial markets play an increasingly important role in financing the fiscal deficit. In order to ensure the continued refinancing of short-term local currency debt, the Argentine government has implemented strict foreign exchange controls, with consequent damage to the country's economic growth. Exchange rate policy, with its crawling peg regime, faces a difficult trade-off between preserving export competitiveness to ensure a continued trade surplus and support reserve accumulation, and limiting inflationary pressures.
The issuance of currency to finance the fiscal deficit has contributed to the acceleration of the inflation rate, which has hit 64% year-on-year. In addition, exchange controls, low foreign exchange reserves and limited fiscal headroom keep risks high, which will weigh heavily on investment in 2022 and 2023.
The national Government and the Central Bank are expected to continue taking measures to lower inflation. In this sense, the entry into effect of the agreement with the IMF may consolidate a framework of macroeconomic certainty, thus helping to limit the expectations of exchange rate and inflation increase. Hence, the Central Bank is expected to conduct its monetary and exchange rate policy in a context of lower financial assistance to the National Treasury, seeking a gradual convergence towards positive real interest rates and managing liquidity adequately to preserve monetary stability without affecting the economic recovery.
“Business Environment”
The difficult domestic macroeconomic environment may limit growth expectations in the short term unless more ambitious reforms are implemented. High inflation significantly affects consumption and investment. Investment is likely to remain weak during 2022 and 2023, as the macroeconomic environment is fragile. Exports are expected to remain strong thanks to high commodity prices and new measures being evaluated by the government regarding the exchange rate, while foreign exchange restrictions will continue to significantly limit imports.
Law firms, as well as other sectors of the economy, are continuously adapting to a new digital work culture. Likewise, the pace of business has recovered, and firms have regained their work dynamics. Although the growth of law firms in Argentina slowed down during the pandemic, it has now stabilized and is expected to rise as a result of the lifting of the pandemic restrictions and the timid economic recovery mentioned above, as well as the business opportunities given the low asset prices, in addition to Argentina’s high competitiveness in the agribusiness, mining, technology and FinTech businesses.
The economic recovery has also forced companies to reduce costs and improve efficiencies. The current currency controls and high inflation in the country are great challenges for leaders of Argentine companies and law firms.
Finally, financial intermediation increased during the first half of 2022, in a context in which liquidity and solvency margins remain relatively high in the Argentine financial system.
“Banking and Finance Regulations”
In terms of innovation and technology services, electronic means of payment have shown outstanding dynamism so far in 2022. The Central Bank and the Securities and Exchange Commission have enacted many regulations relating to technology applied to financial innovation, covering: immediate payments, e-commerce, financial scoring, payment service providers, digital wallets, open banking, cryptocurrencies, crowdfunding, among others. One of the most significant regulations relates to the development of a new real-time payment scheme named “Transfers 3.0” in December 2020, as a step forward in the regulation of the payment system in Argentina. By means of Transfers 3.0 payment scheme, the Central Bank introduced a new “Standardized Payments Interface” that allows the matching of payments through an open and interoperable digital ecosystem in the frame of the Argentine National Payment System. On the digital wallets front, the Central Bank has issued regulations broadening the interoperability of the payment system, not only for banks, but also for payment service providers and digital wallets. Payments by transfers initiated through interoperable QR codes have had a significant increase, accumulating almost 15 million operations since the end of November 2021.
In addition, despite the fact that Argentina does not have an open-banking law (similar to the European model developed in the recent years), local FinTech companies have recently launched their business incorporating some of the principal characteristics from the European open-banking model (e.g., launched open APIs into the market, which is one of the fundamental pillars of open banking, and implemented platforms that allow clients to access all their bank accounts with different payment service providers and banks). Additionally, the Central Bank has enacted some specific pieces of regulation directly related to open banking, establishing that payment service providers, who also offer digital wallet services, must allow initiating payments from any virtual account or bank account, even if such account is opened with a different payment service provider.
“Foreign Exchange Regulations”
While the global economy continues to recover, its pace is moderated in the face of the uncertainty associated with the armed conflict between Russia and Ukraine. In this context, the Central Bank, among other governmental authorities relevant to the country's economic development, continues to impose foreign exchange restrictions in order to implement a more efficient allocation of foreign currency.
Thus, the Central Bank has recently strengthened foreign exchange controls by: (i) imposing the obligation for Argentine exporters to transfer their goods and services export proceeds into Argentina and exchange them for Argentine pesos in the foreign exchange market; and (ii) restricting transfers from Argentina through the FX market on account of: (a) payments of principal and interest on cross-border financial debts and (b) payment of imports of goods and services (including temporary restrictions through September 30, 2021). Dividends and other related company payments have also been temporarily restricted.
At the same time, Central Bank regulations provide for an incentive investment promotion scheme for projects with investments exceeding USD 500,000,000. Under these scheme, and subject to compliance with certain requirements, exporters may allocate export proceeds to payments of foreign debts without being subject to their mandatory conversion and repatriation.
Authors:
Carlos María Melhem
Jorge Ignacio Mayora