Argentina Commercial Banking Report Q1 2009

The five-year-long economic boom is well and truly over in Argentina, and the government's current attempts to micro-manage the economy and stimulate aggregate demand through fiscal policy will store up trouble for the future, in our view. We believe that economic growth will fall to 0.6% in 2009, from an expected 6.0% in 2008, with growing government consumption and a slight improvement in net exports likely to keep the economy above water, while private consumption and fixed investment contract. In 2010 we see an economic contraction of 0.9% as the government runs out of fiscal policy options and public consumption stalls, with an improvement in net exports the only silver lining. This would mark a considerable slump in real GDP growth relative to the stellar performance seen from 2003 onwards.

However, as we have long argued, the benign external factors and expansionary economic policies which facilitated the boom have allowed economic distortions to build up, and these now look like being exposed. On this note, we warn that the government's current policy of using newly seized pension funds to stimulate consumer demand could also lead to a fiscal crisis down the road, and keep private investment levels subdued over the medium term.

This report is being written at a time when the global financial crisis – which arose as a result of the evaporation of inter-bank liquidity – has moved into a new phase. Stock market participants appear – reasonably – to have taken the view that the policy responses taken by governments, central banks and multi-lateral institutions will be sufficient to prevent a total collapse of the global financial system.

Instead, stock market participants are focusing on the impact of a (near-)global recession on the earnings of non-financial companies.

The number and size of stand-by facilities agreed by the IMF since early October supports our view that, of the emerging markets whose commercial banking sectors are surveyed by BMI, the countries of Central and Eastern Europe are those whose economies are most at risk of suffering adverse affects as a result of the global financial crisis. This is partly because the macroeconomic imbalances are relatively severe and partly because the Central and Eastern European countries are more directly affected by the brutal recession that is unfolding in wealthier member states of the European Union.

As yet, it has not been possible to collate hard numbers, for most of the countries whose commercial banking sectors are surveyed by BMI, that clearly quantify the impact of the global financial crisis on the banks. As we explain in the section that discusses changes that we are making to the report, we again include a lengthy essay which attempts to identify the key issues. In essence, in the emerging markets (and, indeed, the developed countries) of the Asia-Pacific, commercial banks appear to be well placed to deal with the crisis. The same is, broadly, true of commercial banks in the various countries of the Middle East and North Africa. Latin America, Chile, Brazil, Mexico and Colombia appear better placed than Argentina, Venezuela, Bolivia and Ecuador. South Africa’s situation appears to have much in common with that of Brazil. In contrast, Nigeria faces some of the same challenges as those that confront Venezuela. The positions of most countries in Central and Eastern Europe, however, are alarming.

From Q209, we will include data that pertains to late 2008 and extend forecasts out to 2013. We will also incorporate much greater discussion of the various protagonists in each country’s commercial banking sector and a number of new features. We believe that the figures we compiled in mid-2008 provide insights as to how the various commercial banking sectors will fare in the current, extremely uncertain, climate. We have, therefore, left them essentially unchanged.

The figures on the tables above provide a snapshot of the banking sector in Argentina prior to the onset of the global financial crisis. To place the figures in context, it may be useful to bear in mind certain aspects of the 59 countries whose banking sectors are currently surveyed by BMI. Across this sample, the median growth in assets in local currency terms was 21.3% (in Colombia). The median loan growth was 21.6% (in India). The median growth in deposits was 17.9% (in Brazil).

On their own, the ratios of loans to deposits, assets and GDP mean little. However, they can provide useful hints when combined with other data. Across the 59 countries, the median loan/deposit ratio is 92.3% (in Greece). The median loan/asset ratio is 56.0% (in Poland). The median loan/GDP ratio was 63.9% in India.

Since Q108, we have calculated, on a consistent basis, a Commercial Bank Business Environment Rating (CBBER) for each of the 59 countries surveyed. The CBBER includes an assessment of the limits of potential returns. It does this by taking into account the size, growth potential and bancassurance potential of the banking sector, as well as aspects of the economy in 2007. The CBBER also depends on an assessment of the risks to the realisation of potential returns. This reflects BMI’s assessments of overall country risk, together with the regulatory and competitive environment.

Argentina’s overall CBBER is 53.1. Within the limits to potential return, the market elements and the country elements are fairly evenly weighted, with scores of 51.9 and 47.2 respectively. Within the risks to the realisation of potential returns, the market elements and the country elements are also evenly weighted, with respective scores of 60.0 and 60.3.