Mortgages breathing new life into Argentina's financial sector

Monday, February 5, 2018

Argentina's financial sector is showing clear signs of recovery. Despite high inflation and an annual interest rate of 28%, the sector is beginning to regain the trust of a society that has viewed it with disapproval following crises such as the 2001 freezing of accounts, or 'corralito,' to stop a run on banks. One way it has done so is by offering mortgage loans, which had not been seen in the country in decades.

"Argentina's mortgage market hadn't taken off in many, many years, and we've made such a significant change that right now its monthly growth rate is 8% in real terms, and we ended the year with 100% growth," said central bank president Federico Sturzenegger.

To get a true sense of the current state of Argentina's financial services sector, and its outlook, BNamericas spoke with Alejandro Mayoral, former board member of the central bank and ex-VP at Banco Provincia, as well as former secretary of commerce and consultant on issues of finance and international trade. 

BNamericas: There has been an increase in bank credit but not deposits, what is the reason?

Mayoral: Argentina had a small banking sector in relation to GDP. The aggregate value of loans in the private sector – whether to households or corporates – was not too significant. In relative terms it's probably quite low compared to other countries in the Americas.

What has happened is that as a result of the [2001] crisis, many people are averse to loans and are loathe to putting their savings in the Argentine banking system - even when it's currently solid and has liquidity.

BNamericas: And as for credit?

Mayoral: Although indebtedness has grown, Argentine households have very little debt, both in absolute and relative terms. Likewise, companies have also increased their demand for credit, but there is still a long way to go.

BNamericas: How has the market changed with the resurgence of mortgage loans?

Mayoral: Everything is part of the same problem. Argentines are accustomed to buying homes with personal savings and not through a bank loan, which is unusual at the international level. Although they have declined in relative terms, most home purchases are cash transactions of US$100,000 and even US$500,000.

In the 1990s some 15- to 20-year loans appeared, but then vanished with the crisis. As inflation grew, and people's savings were seized, bank deposits declined. Banks had a very difficult time finding funds, as there were no long-term instruments to do so. As a result, the largest mortgage-type operations are made in cash.

Nowadays, with the economy opening up more, somewhat lower inflation and the creation of the UVA [the inflation-linked Purchase Value Unit used for mortgages], which offers much more affordable payments despite continuously high interest rates, there is growth in this market and enormous potential.

BNamericas: With the rate cut this year, what's your outlook for loans in 2018?

Mayoral: In any economy it's very important for the saver to have - in the worst-case scenario - a neutral or slightly positive interest rate. What persuades people to deposit their money in a bank - beyond any doubts about the financial system's stability, which in my opinion have been completely dispelled - is if you'll have the same, more or less money when the term expires.

And to the extent that you have a strongly negative rate, people lose money. So I think the best way for savings and bank deposits to grow is with a rate that remains slightly positive. I think that at this time, for loans, it is too positive; the interest rate is too high.

True, it's not like in other countries where households and companies are heavily indebted, and hence the interest rate works more or less automatically when you raise or lower it in order to moderate activity levels. In Argentina it doesn't act so fast and, therefore, I don't think it has such a negative effect as it is believed. Nevertheless, it's not so good to have such a positive interest rate because it implies a very high inflation outlook.

So it is good that, with inflation trending downward, the interest rate be slightly positive for the saver - that will allow deposit levels to grow over time, and therefore provide an expansion of credit without the need to resort to external credit.

BNamericas: There's been considerable growth in fintechs that provide simpler banking services, allowing consumers to open accounts or request loans through their phones. What do you think about the central bank maintaining that it will not regulate them?

Mayoral: I value all applications that can lower the costs of the banking systems. In finance there is a contradiction between the efficiency of the business - the ease with which loans, financial assets and new products make it to consumers - and the auditing process to make sure everything is under control and that you don't have exotic financial derivatives developing into a bubble.

The fact that people and companies can benefit from these new products also favors the firms to the extent that it reduces their operating costs. Now, I would keep an eye on oversight.

BNamericas: The tax reform imposes a tax on financial income. How will this affect the sector?

Mayoral: The political and social impact may have more relevance than the actual impact on economic transactions. In the case of companies, they were somehow already paying taxes on financial income, but now it is being extended to individuals.

Some people don't like this measure, as many people repatriated their assets held abroad last year through an amnesty, by paying a penalty, which I think was the right move. But now they are hit with another penalty.

On the other hand, you can also argue that, "If everyone pays taxes, why not the people making money from their financial assets?" That's a valid point, and I agree that taxes must be paid on financial income from assets. It's just logical.

But it is a matter of degree, of how much you tax them. Otherwise, banks are forced to raise their interest rates as demand increases, given that people will figure out how much they're losing in interest earned, knowing they'll have to pay taxes.

Perhaps people's perception is not there yet [congress has yet to regulate it]. When perception is there, it will produce some upward pressure on interest rates. However, I don't think it'll be a significant impact of the tax reform. I would say that there is a tax that is more distortionary.

BNamericas: Which one do you mean?

Mayoral: The tax on bank credits and debits. It's been kept because it's easy to collect, and it goes against the 'formalization' of the economy – because whoever goes through the proper channels of the economy faces an additional penalty of around 1.2%. Whoever goes through informal channels doesn't have that.

This tax is more distortionary than the income tax. In the latter, you pay only if you earn. It's also not fair that the tax base does not take inflation correctly into account: you have nominal gains that are lower than those of previous years, so you're taxing inflationary effects that are not gains.

BNamericas: How is a tax on financial income understood from the perspective of the current government?

Mayoral: With some of the population, the government is seen as being too pro-business. So it's essentially saying, "Wait a minute, we're doing something no else has, we're taxing people who live off of rents." From that point of view, it seems like a good move, because people who earn a lot should contribute more. Now, it can also have a significant effect on interest rates, or discourage people who had not taken taxes into account from making financial investments.

BNamericas: Does inflation affect banking?

Mayoral: Inflation is highly distortionary. People are worried about their income all the time, and it affects their professional activities. We constantly have to discuss whether a salary increase is fair, which moves the discussion away from the most important thing: productivity. The effect on the balance sheets, as I said, is that you're paying taxes on non-existent gains, which is inflation. So there's a significant distortion in the balance sheets, and it may be used to justify inefficiencies: "I'm doing everything well, but because there's a distortionary inflation environment, I cannot get it fully right."

The inflationary environment covers up inefficiencies and, obviously, harms those that don't have defense mechanisms within reach.

The financial system is as hurt by this as any company. Although in recent years it has done, in terms of profit, quite well.

BNamericas: How will the dollar behave against the peso this year?

Mayoral: I think that in the short term there is no problem, but in the medium- and long-term there could be. There's no political crisis foreseen in the near future, particularly now that the end of the year, which looked pretty menacing, is behind us. Nothing has happened and the inflow of capital has continued.

I believe that capital inflows will continue, and that the external sector may be a bit better off with a higher exchange rate favoring the dollar. But structurally there is a problem with Argentina's external market, because the economy is not sufficiently open. And to open it up more, it needs the exchange rate to be a little bit higher; with a peso this strong, creating stronger economic openings is not possible. The gradualism of economic openness is conditioned by a highly appreciated exchange rate, which makes it difficult to increase the degree of openness on the imports side.

In the short term, the exchange rate will float at an equilibrium of around 20 pesos per dollar throughout 2018, on a moderately increasing path but without explosions. But I would pay attention to the exchange rate in the long term because I believe you'll see an important appreciation of the dollar.

BNamericas: 2017 was a year marked by mergers and acquisitions in the Argentine economy. We'll we see movements of this nature in banking?

Mayoral: There was a great process of mergers in international banking in the last 10 to 20 years. All significant international banks are in Argentina and the players present today are mainly international. Therefore, I don't see a merger of international banks in the country.