Insurance Sector Caveats Could Bolster Infrastructure Sector
BMI View : Whilst news that Argentina's government is forcing insurance companies to invest a portion of their holdings into infrastructure poses further questions about Argentina's business environment, it is good news for a cash strapped infrastructure sector. The government has made a number of moves to force investment into the struggling sector, which should supplement growth in 2013.
In order to address the funding deficit for construction projects , which is seeing industry growth decline rapidly in 2012 , President Christina Fernandez de Kirchner has announced plans to force insurance companies to direct a portion of their holdings into ' productive investments ' , highlighting infrastructure in particular. The regulations, entitled PLANES (Plan Estratégico Nacional de Seguros ) are hoped to raise US$1.5bn in capital for infrastructure investment over the next year ; a significant increase from the US$18.5mn raised from these companies over the past year.
The investment mandate varies across the sub-sectors of the insurance industry according to BNamericas , which cites a 10% to 20% band for property & casualty insurers, between 12% and 30% for life insurers and between 5% and 20% for workers ' compensation. Investments must be made by March 2013, with full compliance by May 30 2013.
Capital Will Support Investment
As far as implications for the infrastructure sector are concerned , this is a measure which should benefit investment into the sector , and reinforces our view for a pickup in activity in 2013 , when government measures are expected to filter through to growth . Argentina is suffering a serious capital shortfall in infrastructure investment, but is also in need of considerable improvement in the quality of its transport an d energy networks. Investment is planned in to both, including US$5bn for two hydropower plants , two new subway lines and a US$3.5bn rail tunnel linking to Chile (the Aconcagua Corridor). Funding these projects has been our major concern, especially given that sustained interest in executing them has been seen. Indeed, nine companies, including four from Brazil and two from China bought the bidding rules for the two hydropower projects , indicating that interest in the country is still strong despite the ongoing deterioration in the business environment.
Consequently, we believe this measure is the latest in a long line of moves which , although detrimental to the general business environment , will support the construction sector growth outlook. This joins the housing programme ' ProCreate ' , announced in June 2012, through which the national pension fund Anses (which was nationalised in 2008) will allocate ARS20bn (US$4.4bn) for 400,000 loans for new homes. The loans are being provided at below-market rates, offering between 2% and 14%, depending on the applicant's wealth. In addition, the nationalisation of YPF will likely see a significant expansion in investment into the oil & gas sector as the government ploughs money into boosting oil production to support other areas of the economy and the revenue base, and therefore increased demand for support infrastructure.
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Mandating Investment Erodes Infrastructure's Appeal
Economy Minister Hernan Lorenzino argues that the investment into infrastructure will not only benefit Argentina's productive capacity, but also represents an attractive investment for insurance companies. Infrastructure is increasingly considered a lucrative asset class for institutions with a liabilities structure, such as insurance companies and pension funds. Those companies sitting on large pools of capital, who need stable but longer term investments, generally find infrastructure a good fit. Indeed, in many emerging markets, opening up these types of companies to greater domestic infrastructure exposure has been welcomed by both the companies and governments. For Argentina specifically, where inflation is spiralling, infrastructure's classification as an 'inflation-linked' asset class - due to the linking of tariffs and rates on usage to inflation typically - should make it attractive investment prospect.
However, mandated investment is a different matter. There is little clarification on what is defined as a 'productive investment' however. Instead a committee, formed of Deputy Economic Minister Axel Kiciloff and Commerce Secretary Guillermo Moreno, will be established to decide which investments will be eligible to be classified as 'productive'. Initially, investments already undertaken by Anses will be open for participation. This creates significant uncertainty for these companies and concerns over continuing government intervention in the economy. The negative reaction was seen in the 3.6% drop noted on the Merval following the announcement on October 24.