I. Introduction
In the first five months of 1997 the Argentine capital market continued the upward trend encouraged by the good performance of the economy. This coincided with high liquidity in the international lending market. Both factors contributed to significant increases in the market prices of government and corporate securities.
By the end of May 1997, the Merval stock exchange index reached 778 points, nearly 20% up since the end of 1996, and close to 50% more than in late 1995. Significant increases were also recorded by other stock indices during the first fivemonth period of 1997: The Burcap Index grew 23.5% and the General Index, that comprises a wider range of companies, went up 21%. Government securities also increased, continuing the upward trend observed since late 1995.
With respect to foreign financing of the public sector as of June 6 1997, US$5.02 billion of new debt had been assumed in early 1997. A new 20-year US dollardenominated global bond was launched for a total of two billion dollars. Moreover, securities were issued in a wide variety of foreign currencies, as well as a 10year bond in domestic currency for $500 million, demonstrating the confidence of foreign investors in Argentina's economic performance. Additionally, the average term lengthened, reaching 13 years in early 1997.
The national government also raised funds in the domestic market. In the first five months of 1997, Treasury Bills (LETES) were issued monthly under the system of public debt issues implemented in April 1996. By the end of May 1997, the total issue of LETES (including those issued in 1996 but not yet due) amounted to $2.58 billion. In the June auction, an additional issue of US$250 million for a 182-day term was planned, apart from rolling over a maturing series, that will increase the total issue of LETES. Treasury Bonds (BONTES), which have a longer term than LETES, were also issued. The issue of BONTES is helping to extend average placement terms in the domestic market. Taking into account the February and May auctions (and the amounts issued in 1996), the total issue amounted to US$1.79 billion. BONTES are expected to be auctioned in June for a total amount of US$750 million.
The role of the AFJPs (private-funded pension
funds) in the capital market continued to grow. The structure
of AFJP investments still indicates a clear preference for national
government bonds, which accounted for almost half of accumulated
investment by the end of the first quarter of 1997. Shares ranked
second with 20%, moving ahead of Time Deposits, which accounted
for 13.9%.
II. International Outlook
In the first five months of 1997 (Table 7.1) the international scene continued to be favorable for Latin American economies, including Argentina. Although capital markets were very volatile between midFebruary and April due to uncertainty about future of US monetary policy, international liquidity was a positive factor during the period.
The US economy grew significantly in the first quarter of 1997, continuing its long expansion, without any sign of a significant increase in inflation. The German and Japanese economies are still recovering without changes in their expansionary monetary policies: in Germany, due to the pressure exercised by the high unemployment rate; and in Japan, due to a weak financial system. Falling interest rates in Germany and Japan along with firmer and stable US interest rates impacted the foreign exchange markets. The German mark and the Japanese yen have been depreciating against the US dollar since the second quarter of 1995, and this trend continued in the first quarter of 1997.
From February 1996, the US Treasury Bond yield became more volatile, due to differences among traders about inflationary pressures and the role the Federal Reserve should play to prevent them. Graph 7.1 shows the changes in the yield of these bonds. Since midSeptember 1996, the yields on US Treasury bonds have been going down, helping US stock exchanges grow significantly. This spread to most international stock markets, including the Latin American markets and the surge continued until midFebruary 1997.
The bull market observed in both 1995 and 1996 (particularly in the last few months of the year) has raised questions about further corrections, the negative impact of which could be prevented by a tighter monetary policy. In early 1997, economic indicators showed a strong economy, once again encouraging an increase in inflation. Within this context, the Federal Reserve decided to take preventive action in the market and increased the federal funds interest rate target by 0.25 percentage points, thus reaching 5.50% by the end of March 1997.
By late April 1997, the Department of Commerce published preliminary estimates of the GDP for the first quarter of 1997, they showed 5.6% growth - well above the 4% growth forecast by analysts. However, this increase resulted from a strong increase in inventories and a slower increase in consumption in relation to production. This was interpreted as a sign that the GDP might slow down in the following quarters. Data published later indicated a deceleration and the Federal Reserve did not intervene in the market after its May meeting.
This was translated into the capital markets. In March 1997, the yield on 30year bonds reached almost 7% and surpassed that figure in April (due to fears of an overheating of the economy) and went down in May (when these fears began to fade). In January and early February 1997, the stock market continued the upward trend, and the Dow Jones Industrial Average even climbed above 7,000 points. By midFebruary profittaking occurred in line with the increase in US Treasury bond yields. By the end of April, the Dow Jones reached 6,700 points, and began another bull period. The Dow Jones Industrial Average grew 26.5% in 1996, 68.2% in the 19951996 period, and recorded a 13.7% increase in the first five months of 1997. The Standard and Poor's index grew 12.4% between January and May 1997.
Most stock exchanges experienced bull markets in early 1997. Table 7.2 shows increases were recorded in most European exchanges (Germany, United Kingdom and France, among others), although they were lower if measured in US dollars. In Latin America, Argentina's Merval index grew almost 20%, and the Chilean and Mexican exchanges increased 16.3% and 19.4%, respectively. Brazil's exchange grew significantly in US dollars (58.2%). Most Latin American bonds went up, as shown by the significant increases in the price of Brady bonds.
The Nikkei index increased only 4% (measured in yen) between January and May 1997. This was due to a significant increase recorded in May, after a downward trend in first four months of 1997. These fluctuations were related to changes in the expectations about the future of the Japanese economy: in early 1997 the economic recovery was considered to be weaker than expected and the financial system was still in a delicate situation, leading to declines in share prices. By May, however, certain signs indicated that the economy was likely to grow significantly, pushing up the Nikkei Index and the yen, which appreciated against the US dollar.
Graph 7.2 shows changes in exchange rates. After the yen appreciated significantly in early 1995 (reaching 82 yen a dollar), the Japanese currency began to depreciate, reaching approximately 103 yen to the dollar in late 1995, and 115 yen/dollar by the end of 1996. Similar movements were recorded by the German mark. After the low levels achieved in the first quarter of 1995 (close to 1.37 marks per dollar) it began to fall, reaching approximately 1.44 marks/dollar by the end of 1995 and to 1.56 marks/dollar by late 1996.
In the first quarter and in April 1997, the US dollar continued to appreciate against the yen and the mark. Most of this appreciation took place in January due to the publication of data that showed a strong and growing US economy, while unemployment rose in Germany and fears about the weakness of the Japanese financial system appeared.
However, while the German mark was at similar levels between late April and midJune 1997, the Japanese yen appreciated strongly and went from 126 yen per dollar by the end of April to 113.5 yen per dollar by midJune.
III. Stock Prices
In the first five months of 1997 Merval index increased almost 20%. In January, the Merval grew 6.6% and the upward trend continued during most of February. Later, fears about an interest rate hike in the US (that caused the US stock exchanges to fall) and the impact it might have on international liquidity, brought about a downward and volatile trend in late February that lasted until April. A 3.6% increase was recorded in February 1997.
By the end of March, Federal Reserve increases in the short-term interest rate created uncertainty in the capital markets, and caused international stock exchanges to fall. Argentina's Merval index recorded a 1.5% fall in March and this trend continued in early April. It increased later and ended the month with a 2.3% increase, growing even more in May (7.8%) (seeTable 7.3 and Graph 7.3).
Other stock indices also grew significantly in the first five months of 1997. The Burcap index increased more than the Merval (23.5%) because stocks with a higher weight in the Burcap (such as those of the telephone companies) recorded significant increases in the first fivemonth period of 1997. The General index, which covers a wider range of companies, grew 21%.
The favorable performance of Argentine stock indices was driven by greater profits (or, in some cases, reduced losses) and improved prospects for the rest of 1997. The "investment grade" rating granted by an important international rating agency also influenced the price increase, as well as the good performance of most international exchanges within a context of high liquidity. All these factors contributed to greater demand for stocks.
In the beginning of June, the Merval index reached nearly 800 points, close to the historic peak recorded in 1992. This was double the level reached in November 1995 and triple the trough of the 1995 financial crisis. The growth of stock indices hides the selective increases recorded by individual companies shares that make up the Merval index. Increases were led by iron and steel companies: ACINDAR recorded the greatest increase in the first five months of 1997. Telecommunication companies also went up significantly.
Market capitalization reached $53.40 billion at the end of May 1997, over 20% above the level of the end of 1996. Capitalization is concentrated in relatively few companies: the top three account for 47.7% of the total, and the top five account for 61.8% (see Table A.7.7). Three of these five companies resulted from privatizations carried out in this decade (YPF, Telefónica de Argentina and Telecom). The remaining companies are Pérez Companc and Siderca. Siderca ranked fifth in market capitalization, favored by the recent increase in the price of its shares.
IV. Public Debt Securities
Government securities prices continued to rise in early 1997, continuing the increases observed since late 1995 (decreasing rates of return). This resulted from high international liquidity and more favorable expectations about Argentina's economy and fiscal solvency. These factors resulted in a significant reduction in sovereign risk in general.
Table A.7.2. shows that the annual rate of return of bonds issued in foreign currency (BOCON, BONEX and Brady Bonds) was below a 10% annual yield on June 13. Only the stripped yield (yield without considering principal maturity) on the PAR and Discount Brady bonds, issued for longer terms, reached more than 10%. The spread between yields of bonds in dollars and pesos was low, showing that investors no longer fear a devaluation of the Argentine peso. The yield of Euronotes also went down significantly.
Table 7.4 and Graph 7.4 show steep declines in the sovereign risk indicator in 1996, which continued in the first five months of 1997. Considering the sovereign risk indicator, the yield of several bonds indicated sovereign risk indicators of between 200 and 300 basis points at the end of May, while the Brady Bonds stripped yield was higher. This decline continued in early June.
With respect to foreign financing, in late 1996, after the National Congress passed the relevant authorization the administration obtained more funding in anticipation of 1997 financing needs. Revenues from the last issues in 1996 were allocated to the 1997 budget. To take advantage of the prevailing liquidity in the international market, more issues were launched in the first few months of 1997. Table 7.5 shows that issues totaled US$5.02 billion, according to information from June 6, 1997.
Another 20-year dollardenominated global bond was issued in 1997 at a spread of 463 basis points over US Treasury bonds. This significant issue was 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. A tenyear bond was issued in domestic currency for $500 million, demonstrating the strong confidence of some foreign investors regarding the solvency and permanence of the Argentine economic program. In late 1996, a twoyear pesodenominated bond was also issued in the international market for $250 million.
In early 1997, issues in the international market were led by issues in US dollars (39.8% of the total), followed by issues in German marks (17.8%), Italian lire (13.7%), Argentine pesos (10%), Japanese yen (7.8%) and 10.9% in other currencies (Austrian schillings, pounds sterling and Spanish pesetas).
Terms has been lengthening. The weighted average term for issues through June 6, 1997 reached approximately thirteen years, while the average term for issues launched in 1996 was slightly over eight years. In 1995 the longest term was seven years.
With respect to financing in the domestic market, in the first five months of 1997, monthly auctions of Treasury Bills (LETES) were held as planned under the new system for public debt implemented in April 1996. Total auctions during that period amounted to $2.58 billion (see Table 7.6) (in both domestic currency and US dollars), including the portion corresponding to market makers (financial institutions that actively participate in the underwriting and secondary trading of LETES). Of that total, $517.3 million are already due.
Thus, the stock of LETES (including those auctioned in 1996 and not yet due), amounted to $2.58 billion in May 1997.
Four auctions of LETES were held in 1997 (January, February, April and May) to roll over maturing LETES (with a slight difference resulting from market maker demand). In the March auction, apart from rolling over previous issues, new bills were auctioned for $500 million at 364 days (plus an additional $21 million for market makers). In the June auction, $250 million of 91day LETES are expected to be auctioned to roll over a previous issue, and US$250 million o 182day LETES, to increase the stock of LETES.
Most LETES auctioned in 1997 were denominated in domestic currency ($2.07 billion compared to US$515.8 million). The interest rate fell for 91day LETES, comparing all monthly auctions held in 1997 for the same term and currency: The annual interest rate fell from 6.51% in January to 6.20% in February and March, rose to 6.38% in April and contracted to 6.09% in May 1997.
Another financial instrument under the new system for public debt first auctioned for the first time in December 1996: Treasury Bonds (BONTES). These bonds are issued for longer terms than LETES and the objective is to extend the issue terms in the domestic market. In February 1997, US$526.3 million were issued at two years at an 8% interest rate, and in May, US$761.7 million were issued for a fiveyear term bearing an 8.75% interest rate (both cases include the market makers share). When added to those issued in 1996, the stock of BONTES reached US$1.79 billion. Another BONTES auction was expected in June 1997.
V. Investments of the Pension Funds
By the end of March 1997, investments by AFJPs (private-funded pension funds) totaled $ 6.24 billion, up 17.3% from the amount recorded at the end of 1996 ($ 5.33 billion). This increase was due to the contributions received by the AFJPs and the yield of investments made (22.15% between March 1997 and March 1996).
Investments made by AFJPs are restricted according to the type of asset (see Table 7.7). This table and Graph 7.5 indicate the structure of investments. They clearly show a preference for national government bonds (TGN) accounting for 47.8% (the legal ceiling for this type of investment is 50%). The inclusion of a significant portion of national government bonds in AFJP portfolios has occurred since the beginning of the private-funded system.
The second most preferred investment was shares of both private and privatized companies, accounting for 20% of investments, while time deposits (CDF) ranked third and represented 13.9% of total investments. Investment in shares took the second place from time deposits at the end of 1996. The trend towards increasing this type of investment (and the consequent decline of investments in time deposits) has been observed in the last few quarters.
AFJP investments in company shares totaled only 1.5% by the end of 1994, went up to 5.9% in late 1995, grew to 18.7% by the end of 1996, and reached 20% at the end of the first quarter of 1997. Investments in time deposits were close to the legal ceiling of 28% from the beginning of the private-funded system, but fell to 25% in March 1996 (25%), and declined sharply at the end of June 1996 (17.6%) also falling in absolute terms. They stabilized by the end of the third quarter but fell to 14.2% in December 1996 (also with a decline in absolute terms), and reached 13.9% in March 1997.
The share of floatingrate time deposits grew within this category. They reached 40.8% of investments in time deposits, accounting for 5.7% of AFJP investments. Most time deposits were made in domestic currency (94%).
Investments in corporate bonds (ON) fell in the first quarter of 1997 and accounted for 6.8% of total investments (including both long and short term and convertible bonds) (see Graph 7.6). This share was below the 7.8% recorded in December 1996 and the 8.7% achieved in late 1995. The steepest falls were observed in short term corporate bonds, which went from a 5.3% share in total investments in late 1995 to 2.3% by late 1996, and 1.7% at the end of March 1997. On the other hand, the share of long term bonds increased in 1996, growing from 3.4% at the end of 1995 to 5.2% in December 1996, but fell to 4.8% in March 1997. Convertible bonds reached 0.3% of AFJPs investments in March 1997.
Securities issued by Government Organizations (TEE) represented 3.7% of investments in March 1997, down from the share recorded in late 1996. Mutual Funds reached 2.8% of investments, particularly investment (and not mortgage) trusts.
