Capital controls were enforced in Argentina with full force 5 years ago restricting the transfer of funds abroad (the "cepo cambiario"). This measure has had the double effect of inhibiting foreign investors from entering the Argentine market and restricting Argentine investors and firms to investing their savings at home or accessing the illegal or contado con liqui markets.
Unlike a settlement with the holdouts, a freeing of the capital account is not an easy task since it would require the realignment of many macroeconomic variables that, if not approached in a smart, programmatic manner, could lead to a severe currency run or rampant inflation. Furthermore, some of these measures are not sector neutral and would suffer from much opposition from jeopardized actors (i.e. fx and its effect on importers and exporters). The probability that these measures will be implemented is high, but far from guaranteed.
The withdrawal or reduction of capital controls would have a significant impact in FDI and would serve as a driver for investment in private assets in a similar fashion as a settlement with the holdouts would for investment in publicly traded assets: investments would start actually yielding to foreign investors. For exactly the same reason as before, this reform would drive an increase in valuations across the board.
However, these restrictions have also created severe price dislocations because of the difficulties of the local Financial System to direct capital efficiently. Since capital has been forced to stay within the country, these dislocations have been amplified.
Unlike a settlement with the holdouts, a freeing of the capital account is not an easy task since it would require the realignment of many macroeconomic variables that, if not approached in a smart, programmatic manner, could lead to a severe currency run or rampant inflation. Furthermore, some of these measures are not sector neutral and would suffer from much opposition from jeopardized actors (i.e. fx and its effect on importers and exporters). The probability that these measures will be implemented is high, but far from guaranteed.
The withdrawal or reduction of capital controls would have a significant impact in FDI and would serve as a driver for investment in private assets in a similar fashion as a settlement with the holdouts would for investment in publicly traded assets: investments would start actually yielding to foreign investors. For exactly the same reason as before, this reform would drive an increase in valuations across the board.
However, these restrictions have also created severe price dislocations because of the difficulties of the local Financial System to direct capital efficiently. Since capital has been forced to stay within the country, these dislocations have been amplified.
The Financial System in Argentina is very ineffective at articulating savers and investors. As an example, private debt represents only 15% of GDP against 69% in Brazil and mortgages are close to nonexistent. Coupled with capital controls that restrict foreign capital and a lack of liquidity events for local groups, this has restricted investors to direct retail investments that make it very hard to finance big and long projects.
Consequently, capital has flooded the markets where individual investors can atomize their investments and access liquidity relatively easy (i.e. residential real estate), but stayed away from investments which are sizeable, (i.e. infrastructure, utilities) and long-term with low current yield (i.e. significant land plots).
Empirical data is consistent with this hypotheses. Residential real estate is yielding Cap Rates of ~4%, similar to New York City with small studio apartments yielding even less, while big shopping malls are acquired at ~5pp spreads to similar assets in the US for a total return in the low teens.
The return of Argentina to global capital markets where significant pools of capital are easier to articulate would result in higher demand for big-scale, long repayment, hard to atomize assets. Furthermore, a gradual reform of the Financial System would also favor such a focus.
Sources: Central Bank of Colombia, Central Bank of Chile, Central Bank of Brazil, Central Bank of Argentina
Consequently, capital has flooded the markets where individual investors can atomize their investments and access liquidity relatively easy (i.e. residential real estate), but stayed away from investments which are sizeable, (i.e. infrastructure, utilities) and long-term with low current yield (i.e. significant land plots).
Empirical data is consistent with this hypotheses. Residential real estate is yielding Cap Rates of ~4%, similar to New York City with small studio apartments yielding even less, while big shopping malls are acquired at ~5pp spreads to similar assets in the US for a total return in the low teens.
The return of Argentina to global capital markets where significant pools of capital are easier to articulate would result in higher demand for big-scale, long repayment, hard to atomize assets. Furthermore, a gradual reform of the Financial System would also favor such a focus.
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