I. Introduction
At the time this report was being written, the worst of the crisis in Asian markets seemed
to have been left behind. Although the strength of the Argentine economy and its financial
system restricted the effects of this crisis to capital markets (with declines in stocks and bonds
and less fluid financing), by mid-March the prices of Argentine government and private sector
bonds were significantly higher than the lows recorded in November 1997 and borrowing
conditions had improved sharply. Recovery on international markets, which has been gaining
strength since mid-January, has helped in this improvement.
II. International Markets
Capital markets around the world had been evolving favorably in 1997 until the crisis
that began in Thailand in July spread to most of the countries in South-East Asia, reaching a
peak towards the end of October with speculative attacks on the Hong Kong currency and the
consequent fall of its stock exchange. The effects soon spread to most international stock
exchanges, which recorded significant declines.
In Latin America there were large falls in share and government bond prices and some
currencies were subject to speculative pressure, such as was the case in Brazil. Argentina was
not spared this lack of investor confidence.
Towards the middle of 1997 capital markets began to pick up gradually, and international
stock markets began to recover much of the loss they had recorded. In 1998 to date stock
markets have risen strongly, and in many instances at mid-March stood at levels higher than
those prior to the crisis. The same has happened in Latin America in the case of fixed-rate
bonds.
Although it is not yet safe to consider the effects of the Asian crisis to be fully over, the
capacity for response by the countries of Latin America and the vigorous behavior of the US
economy encourage hopes for a less volatile development of markets in future.
As can be seen from Table 7.2, in general 1997 was positive for most stock markets - in
spite of the sharp falls recorded between mid-October and the end of November - with the
exception of the stock markets in Asia. In this area currency devaluations have impacted
strongly, showing major falls in stock prices in dollar terms. As well as increases on US
markets there were increases on European markets and in Latin America. In early 1998 a
widespread rise in stock markets is being recorded, in this instance led by certain Asian
countries, except for Indonesia, as they reversed the losses experienced in 1997.
Main economic indicators show that the US economy continues to grow strongly in a
context of falling inflation rates. GDP for the fourth quarter of 1997 (second estimate)
recorded a year-on-year rise of 3.7%, with growth for the year totaling 3.8%. Unemployment
rates continue at minimum levels (4.6% at February 1998).
In this context the rate of return on 30-year Treasury bonds (see Graph 7.1) recorded a
marked decline in 1997 and the first few months of 1998. Although 1997 had begun with
inflationary expectations that led to an increase in short-term interest rates by the Federal
reserve at its March meeting and levels of over 7% p.a. in the 30-year bond towards April,
since then there has been a declining trend that accentuated with the crisis in Asia. From the
beginning of 1998 up until mid-March the so-called “long rate” was below 6% for most of the
period.
Several factors were responsible for the downward trend in the 30-year rate. On the
one hand projections for a slow-down in the US economy reduce the possibility of any rise in
the rate of inflation. Falls in the prices of certain commodities will also favor the holding down
of price increases. In addition, the strong reduction in fiscal deficit following years of growth
is cutting down on US Treasury financing needs. More specifically, the falls on stock markets
in the latter part of 1997 encouraged the search for safe investments, such as US Treasury
Bonds, leading to a rise in their prices and a consequent fall in implicit rates. The main
fears continue to reside in possible pressure on wages from low unemployment rates in an
economy that is showing vigorous growth.
During 1997 and the early months of 1998 the dollar continued its revaluation against
other leading currencies that began in the second quarter of 1995, favored both by the
strength of the economy and the relative yield differential of US dollar fixed assets.
In the first few months of 1997 the Deutsche mark quotation recorded a downward
trend in relation to the US dollar (Graph 7.2), rising from 1.55 marks per dollar at the
beginning of the year to close to 1.90 by August. The rate then declined from its maximum
levels, ranging between 1.70 and 1.80 in the last few months of 1997. In early 1998 the parity
again rose above 1.80 to the dollar, ranging between 1.80 and 1.84 until mid-March. Faced by
an economy that has grown strongly in recent years such as that of the USA, Germany is only
now showing signs of recovery, and the mark has lost value accordingly.
The Japanese yen recorded a slightly different performance against the US dollar
compared to the Deutsche mark. It began the year at 115 yens per dollar, losing ground to
126, although signs of a recovery in the economy again took the rate to 155 in June and July
1997. Since then the crisis led to a significant drop in the yen, which passed the 132 yen per
dollar level in early January 1998. The subsequent improvement in the situation of the region
led to a slight recovery in the yen, which moved within the range of 125-130 yens per dollar
between mid-January and March 1998.
III. The Argentine Stock Market
During most of 1997 the Argentine stock exchange recorded a significant growth that
was partially reversed by the crisis in Asian markets. Nevertheless, the year ended with
increases for the main stock exchange indicators. In early 1998 there was a wavering trend in
the markets, and by mid March the MERVAL index stood at levels similar to those of the end
of 1997.
At the end of 1996 the MERVAL index stood at 649 points, rising steadily to a peak of
over 860 points, ending September at 622 points. The falls on international stock markets
had a repercussion on the Argentine market, and the Merval fell sharply between the end of
October and early November. Having stood at 819 points on October 22, the MERVAL was
down to 660 points by the end of the month. During the first part of November this index
reached its lowest level for the year, closing on November 12 at 576 (see Graph 7.3).
Subsequently, as fears of a deepening of the world crisis dissipated, the MERVAL began
to recover, ending the year at 687 points, far from both the minimum and the maximums for
1997 and 5.9% higher than at the end of 1996. Other share price indexes performed better
than the MERVAL. The BURCAP index ended the year with an increase of 28.3%1 for the
year, while the GENERAL index, covering a wider range of companies grew by 24.7%. 1998
began badly for the Stock Exchange, and in the first few days of January there was a significant
drop in share prices, with a fall for the month as a whole of 10.9%. Reversal of this trend in
February meant that at the end of the month the MERVAL index was again at similar levels to
the end of 1997 (687 points), standing at that level on March 20, the date this report was
written.
Stock-market capitalization totaled $58,983 million at the end of 1997, 33.0% above the
level of 1996. At the end of February 1998 this value stood at $58,308, slightly lower than at
the end of 1997. In addition to higher prices, the access by new companies to public listing ,
such as has been the case of Banco Rio, has had an impact on total market capitalization. In
1998 Gas Natural Ban became listed following the sale of 20% of the capital stock held by the
Government.
Market capitalization is concentrated on just a few companies: the top three account for
46.2% of the total, and the top ten account for 76.5% (see Table A.7.7).
IV. Public Debt Securities
1. Changes in sovereign risk
The prices of government securities performed in an irregular manner during 1997.
Until the first half of October favorable expectations regarding Argentina’s economy and fiscal
solvency resulted in a significant reduction in sovereign risk2 implicit in the yield on
government securities. Subsequently the worsening of the crisis in South-East Asia, and in
particular the speculation against the Hong Kong dollar, had a negative impact on these
indicators (see Graph 7.4 and Table 7.4).
Between mid-October and mid-November sovereign risk rose by between 400 and 440
points in the case of social security bonds and by over 300 basis points in the case of stripped
Brady bonds3 . The gap in yields between dollar and peso bonds also increased.
Nevertheless, even at their November highs the sovereign risk rates were far from the values
reached during the financial crisis in 1995.
Since mid-November and through to mid-March 1998 Argentine sovereign risk
indicators improved significantly, encouraged at regional level by the strength of the Argentine
economy and the belt-tightening measures implemented in Brazil, which calmed investor fears.
Only from mid-December to mid-January were there any falls in the prices of Argentine
government securities.
In mid-March 1998, as this report was being written, sovereign risk indicators for leading
securities were between 75 and 127 basis points above pre-crisis levels, although lower than
the rates recorded at the end of 1996.
2. Public Financing
Public sector debt issues for 1997 have been noted for a growing participation by the
local market, achieved together with a lengthening of terms, as was also the case with the issues
on foreign markets. The difficulties in launching issues during the Asian crisis were resolved
thanks to the policy regarding the bringing forward of financing for future requirements that
began to be implemented at the end of 1996, which enabled the last few months of 1997 to be
faced without problem.
In the first part of 1998 through to the closing date of this Report there has been a
steady improvement in the conditions for debt placement. In addition to more fluid
placement a reduction in the rates of interest agreed on such issues has begun to be noted.
In 1997 issues on international markets amounted to a total of US$10,214 million (see
Table 7.5).Some of these issues were not used for public sector financing. In particular the
30-year global bond formed part of a debt administration transaction whereby the government
invited holders of Argentine government securities to exchange them for the 30-year
unsecured Global Bond. The Global Bond was also offered to investors for cash. Another
20-year dollar-denominated global bond was issued in 1997 for two billion dollars.
Additionally, securities were issued in a wide range of currencies: German marks, Italian lire,
Austrian schillings, Japanese yen, British pounds sterling, and Spanish pesetas. Some issues
were also denominated in domestic currency.
The average weighted term for issues in 1997, including the global 30-year bond used to
redeem existing bond issues, was approximately fifteen years. Excluding this bond the
average term was slightly under 11 years.
On the basis of information at March 18, in the first months of 1998 a total of $3,435
million was raised, of which the largest amount was in US dollars (36.4%) by means of the
extension of issues of global bonds carried out in 1997: US$500 million from the 30-year bond
and US$750 million from the 20-year bond (see Table 7.6). These extensions have made it
possible for the average weighted term of the issues made to be slightly over 14 years.
In spite of the high participation recorded by dollar issues, it was European markets that
showed the most fluid facility for placement. In addition to the issues in German marks,
Italian lire, French francs and guildens there were issues made in euros, the European currency
as from 1999. The lower yields in some European countries as a result of the establishing of a
common currency are stimulating investors to seek higher yields in other markets.
With respect to financing in the domestic market, in 1997 monthly auctions of Treasury
Bills (LETES) were held as planned, and the stock at the end of the year of these bills
amounted to $ 3,036.6 million. In general interest rates recorded a downward trend until
August, followed by increases in September and October. The last two tenders of the year felt
the impact of the Asian crisis (issues in pesos were suspended and the cut-off rates rose
sharply, especially in November).
Monthly LETES tenders continued to be made in the first quarter of 1998 (Table 7.7).
These auctions did not increase the existing stock, but there was a notable improvement in
their issue terms. This was evident from the traditional 91-day placement, which once again
began to be made in pesos in March after having to be made in dollars since November 1997
as a result of the crisis in Asia. In addition the discount rate has recorded a steady downward
trend: 9.20% in November, 8.80% in December, 7.99% in January, 6.84% in February (for
dollar issues) and finally in March the rate reached 6.60%, even though this last tender was
made in pesos. This rate is lower than that recorded at the auction in October 1997, although
higher than that for September (5.70%).
With regard to other issues on local markets, it should be noted that so far in 1998 no
new Treasury Bonds (BONTES) have been placed, so that their stock remains at the levels at
the end of 1997 (US$ 3,052.7 million). In addition, in January 1998 the so-called market
makers4 granted a syndicated loan for a total of $2 billion (1,563 million in dollars and 437
million in pesos) a bond being issued for a portion of the facility.
V. Pension Fund Investments
At the end of 1997, investments by AFJPs (Pension Funds) totaled $ 8,827.1 million,
65.7% higher than the level reached at the end of 1996 ($ 5,325.8 million). This increase in
the value of the funds has mainly been due to contributions paid in to the AFJPs and to the
return earned on investments.
The stock markets crisis only partially affected the performance of the funds
administered by the private pension funds. Although the AFJP Superintendency estimated
that between October 22 and November 17, 1997 the average drop was 10%, the yield
obtained by AFJPs for 1997 still reached 14.8%.
As mentioned in previous Economic Reports, these high returns have been made
possible in recent times through changes in the investment portfolios. The search for higher
yields led to portfolio investments in instruments with a greater volatility and thus greater risk.
In this new context there was a switch into shares, variable yield term deposits and to a lesser
extent mutual funds.
Tables 7.8 and A.7.8 (the latter to be found in the statistical appendix) and Graph 7.5
indicate in greater detail the structure of investment portfolios administered by AFJPs. These
continue to show a preference for national government bonds (TGN) which accounted for
39.9% of the total as at February 1998. However, there has been a decline in their share of
the total, as at the end of 1996 their participation stood at 48.1%.
The second most preferred investment were term deposits, accounting for 25.6%.
However, traditional fixed rate term deposits currently account for only 0.9% of AFJP
investments, while at the end of 1996 they accounted for 12.8%, having been close to the
maximum allowed at the beginning of the system. This increase in term deposits is explained
by the creation of variable rate term deposits (DIVA) with guaranteed principal and a
maximum yield, which evolve on the basis of an underlying asset (domestic or international
share indexes, stocks, government bonds). Whereas these DIVA accounted for only 1.4% of
AFJP investments at the end of 1996, in February 1998 they did so with 24.7%.
The two classes of shares (corporations and privatized public corporations) were in third
place, with 22.0 % of total investments in February 1998. These instruments have been
steadily gaining ground in the portfolios of AFJPs from the 1.5%, 5.9% and 18.7% reached at
the end of 1994, 1995 and 1996. Lastly, investment funds doubled their share in total
investments by AFJPs between December 1996 and February 1998.
1 The BURCAP weightings are based on market capitalization, while those of the Merval are based on traded volume.
2 This indicator is defined as the spread between yields on Argentine dollar-denominated bonds and the yield of US Treasury Bonds with
similar durations.
3 For Brady bonds this measumernt refers to the exclusively Argentine portion of the risk.
4 The role of market - markers was created in 1996. They participate significantly in the underwriting and trading of the various debt
instruments.