Tuesday, January 29, 2008

Argentina: We Are Fine, But We Are Going the Wrong Way

While we wait for the Federal Reserve to rule a further reduction of interest rates and the prompt approval of the tax incentive package by the US Congress, and following the concern of one of our readers about the future of Argentina –“What would happen if soybean prices go down by 20%? ... How will the government try to protect the tax surplus?”-today I dedicate this article to him.

As I have said before, I understand that Argentina will not suffer the impact of the international crisis, and I have reasons to say that: a floating exchange rate gives flexibility to the economy, international reserves of US$ 47 billion, tax and trade surpluses, international prices for agricultural commodities are said to keep its current status, a heavy domestic demand and, on top of this, no direct exposure to the high-risk assets that generated the crisis.

However, our reader has reasons to worry about certain topics that Argentina must focus on immediately, since they can threaten its continuous economic growth. I agree that Argentina must address its domestic problems, rather than focusing on those that come from abroad. Which ones? Let’s see:

The inflation menace, for starters, that is everywhere even though the government does everything to hide it. Otherwise, how can we explain a 33% y-o-y increase in the collection of I.V.A. (value added tax)? Simple: 8.5 % belongs to the economic growth, 2% could be related to a higher efficiency in terms of collections…and what about the rest? This is clearly explained by inflation. Our pockets are not confused…

The energy problem is an issue that must be addressed as soon as possible because the country has reached its limit. Also, Argentina suffers from a severe distortion of relative prices as a consequence of its domestic price control policy and the freeze in the utility rates. Therefore, where prices should be the signals that guide investments, they are showing them the wrong way and so we find supply problems in these sectors.

It is true that Argentina has tax and trade surpluses, but it is also true that they both are heavily supported by the prices of agricultural commodities. The governmental strategy to achieve both surpluses goes no further that praying that the external prosperity continues. If the country does not take the necessary steps to become truly competitive and consolidate the trade surplus, and more responsible in terms of managing the tax issues by basically controlling the public spending, this prosperity will come to an end.

Another issue that makes Argentina vulnerable is its situation in the international finance markets, and so the need to depend on Chávez and other sections within the same government to pay the services of the debt.

But despite its own concerns, our reader keeps the confidence on our country and asked me if I could recommend any given company to invest in. Yes, of course I can do that, and that is Banco Macro (NYSE:BMA ; MERV:BMA).

Banco Macro, chaired by Jorge Brito, is one of the main winners of the banking sector after the 2001 crisis. Following the crisis, the bank started a strong expansion process through acquisitions of other entities that ended up in the bank climbing to the sixth spot in the ranking of financial institutions, both in terms of assets as in deposits and loans. In terms of equity, Banco Macro is the second bank in the country. When many banks decided to hibernate, Banco Macro took the lead and its now enjoying the results of such decision.

I have X-rayed Banco Macro to find out that it shows a P/E of 11.34 (industry P/E is 16.67), a ROA of 2.84% (1.16% for the industry) and a ROE of 20.12% (12.97% for the industry). The bank’s doubtful accounts represent 1.36% of its total portfolio (2.66% is the doubtful portfolio of the entire banking system). Total headcount is 3,422 employees, where 246 branches are spread all over the country.

Not only have these indicators shown that this stock is an opportunity, but also that the context is benevolent to the bank: the argentine financial system is in full expansion, thus guaranteeing growth opportunities to this entity. At the moment, Argentina has low levels of financial intermediation and a ratio of private credit to GDP of 12.5%, which shows the low level of actual indebtedness. Financial intermediation is in full recovery with credit to the private sector growing at a y-o-y rate of 42% while private deposits grow at a rate of 23%.

The lovers of technical analysis that had already seen the graphics must be surely confused by my pick of a stock with a negative trend in its quote for the past six months. My answer is that this stock has been unfairly punished by a market that is afraid of banking stocks, and so the strong fall in its price has nothing to do with objective information. Moreover, on top of the financial indicators and market perspectives that endorse my opinion, Banco Macro has repurchased its own stocks a couple of weeks ago because it considered that they were not fairly priced by the market.

And last, I want to tell you that I have digged in my own backyard during the weekend to see if I was lucky to find oil or gas…only rocks already, but I still do not give up hope. Yesterday, Pan American Energy announced the discovery of an oil reservoir of around 100 million barrels in the province of Santa Cruz, Argentina, the most important discovery in the past few years in the country.

Horacio Pozzo


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