Photographer: Diego Giudice/Bloomberg

Argentina Ends Currency Rule Seen Muting Foreign Investment

Updated on
  • Previous restriction called for funds to stay 120 days onshore
  • Move caps yearlong effort by Macri to boost direct investment

Argentina lifted the last major regulation hindering currency flows, part of a yearlong effort by President Mauricio Macri to revitalize foreign investment in the South American nation.

The change, effective immediately, does away with a rule that mandated foreign funds brought in to investors’ portfolios remain in Argentina for at least 120 days, a measure aimed at keeping so-called “hot money” from causing wild fluctuations in asset prices. It removes a barrier to capital flows that doesn’t exist in most major economies.

The move may help Argentina draw new investors to its local bonds and win back emerging-market status for its stock market, which has been stuck in the lower-tier frontier grade since Macri’s predecessor introduced controls. Macri has spent the past year trying to jumpstart an economy in recession by making the country more appealing to foreign investors, allowing the currency to float freely and reaching a settlement to end a decade-long battle with holdout creditors from its 2001 default. The measure announced Thursday is among the first to be taken by Economy Minister Nicolas Dujovne, who took office this week.

"None of the investors like having these obstacles," said Zoran Milojevic, who works in emerging market sales in New York at brokerage Auerbach Grayson, which is planning to bring investors to Argentina this month to get the lay of the land. "People are looking to do local trading in peso stocks, rather than just in ADRs."

Despite Macri’s efforts in the past year, foreign investment has been slow to arrive and the economy is still contracting. After shrinking 3.7 percent in the second quarter and 3.8 percent in the third quarter, analysts expect gross domestic product to continue sliding through the first three months of this year.

The removal of the rule opens the door for Argentina’s local fixed-rate peso bonds to be included in JPMorgan local government bond index, which could translate into $2.6 billion of demand for Argentina’s $10.3 billion of the securities, according to estimates by Siobhan Morden, the head of Latin American fixed-income strategy at Nomura Holdings Inc. Yields on the country’s fixed-rate peso Bote bonds due 2026 fell to 15.7 percent as of 1:28 p.m. in New York, the lowest since Nov. 8.

It will also help the development of the foreign-exchange market and ultimately lure more hard currency into the country, BBVA analyst Alejandro Cuadrado wrote in a note. The peso gained 0.8 percent to 16.01 per dollar on the MAE electronic market.

Last May, Argentina’s central bank excluded foreign investors from sales of its local notes on concerns that a surge in dollar inflows would fuel excessive peso gains. The rule removal may add volatility to the peso in months ahead, said Gustavo Quintana, a foreign exchange trader at PR Corredores de Cambio.

The 120-day rule was also seen as potentially jeopardizing the country’s stock market from winning emerging-market status from MSCI Inc., whose indexes are used as benchmarks for tracking more than $10 trillion of investor assets. The country’s frontier status is under review by MSCI and results will be announced in June.

Argentina’s Merval benchmark index rose 18 percent in dollar terms in 2016. Some investors, like Federated Investors Inc., had said that they wouldn’t invest in the country’s stocks until the rule was lifted. Most trading in Argentine equities happens in American depositary receipts. The Merval was little changed, trading near a 10-week high.

The restrictions on foreign capital flows date to 2005, when the country mandated any direct investment remain onshore for at least one year. Former Finance Minister Alfonso Prat-Gay reduced that to 120 days within a month of Macri taking office in December 2015. Dujovne, one of two people who replaced Prat-Gay, who was asked to step down last week over disagreements over economic policy was the one to eliminate what was widely considered a hindrance to foreign investment.

— With assistance by Jonathan Gilbert

(Updates to add broker’s comments in fourth paragraph.)
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