Corporate Treasury & FX in Argentina

Commentary

After Turkey and Egypt, this session discussed Argentina: have the shock devaluation and the rise in interest rates had the desired effect of making the currency more convertible, and starting the economy on the – slow and painful – road to recovery?

As in the other two cases, the response was one of guarded optimism. Business appears to be holding up, and the flow of currency out of the country has been improving. Also, as in the other cases, the exchange rate has stabilised. This does not mean there are no issues and everything is plain sailing: the Argentine consumer is going through a very difficult period. But one – Argentinian – participant said the pain is being accepted, at least for the time being. Inflation has started to come down: to put it in perspective, in September 2024, it had come down to an annualised rate of 209%, against 237% in August (source: BBVA). The central bank’s goal is 18%, and participants are budgeting for something between 30% and 50% next year,

Of course, this is Argentina, so nothing is simple:

• Foreign currency remittances have improved – for current imports, i.e, ones since December 2023.
• Many imports from before 2023 still cannot be settled. Various options exist:
  • BOPREAL bonds: these are three series of US dollar denominated bonds issued by the Argentine government, which will mature in October 2027 (series 1), June 2025 (series 2) and May 2026 (series 3). At maturity, the dollars can be remitted to settle import invoices, or, for series 2 and 3, dividends. These bonds can be sold in the secondary market, for a haircut which is usually about 30%. There has been talk of a new series specifically for old invoices.
  • Blue chip swaps: these involve using pesos to buy USD bonds, which can then be sold in dollars. The haircut on selling these varies: it has been as high as 60%, but currently is between 20% to 25%. However, companies using this route are subsequently excluded from the official FX market for a period of six months – there has been talk of removing this penalty, but it is currently still in place.
  • Layered settlements: approval can be obtained to remit FX to pay for an invoice, in tranches over the coming twelve months
  • Dollar denominated factoring (“cesión de crédito”).
• Imports now attract a new tax, the Impuesto PAIS. This was originally 17.5%, but reduced to 7.5% in September. Participants complained that the government is being very slow to process refunds on both this tax and the older VAT, which is still in place.
• Unsurprisingly, participants had varying reactions to these alternatives. All find it difficult to take a haircut up front to solve a remittance issue; others argue that it is best to eliminate uncertainty. Many with getting internal approvals, especially for the schemes which involve buying bonds – this is typically heavily restricted within corporate treasuries. One participant has bought BOPREAL bonds and used blue chip swaps to their satisfaction. At the same time, another participant decided not to execute a planned blue chip swap, as they think they will get a better deal by waiting.
• Most corporates had stopped hedging the Argentine peso, given the high cost and extreme volatility. Most participants are currently re-visiting this decision, and some have started again, as the price has come down. One even finds the cost attractive: when hedging costs 3% per month and the currency depreciates by 2% per month, the net cost versus not hedging is quite reasonable.
• Bureaucracy and paperwork have always been an issue in Argentina, and participants have found it difficult to fully comply with all the documentary requirements for imports. However, with effort, and help from the banks, the process can be improved.
• No-one has any difficulty finding banks to deal with: Citi, JPMorgan and BBVA are international banks participants use. One complained that HSBC, their main bank in the country, are exiting. HSBC sold their business to Grupo Financiero Galicia – for the corporate in question is not anxious to use them, but another participant views them highly.
• Although business conditions are difficult and cash flow is a challenge, no-one reported collections issues getting out of control, though some delays were being experienced.
• Several participants have cash which has been trapped in the country for some time: there are a variety of investment possibilities. One was receiving reduced bank charges in a different country as a way of enhancing return on peso deposits; deposits are available in both pesos and dollar linked structures.
• As in other countries with similar inflation rates, participants struggle with the impact of inflation accounting, which is required under both IFRS and US GAAP once inflation goes above 100% in a three year period.
• Regarding the various approaches being used to address all the issues, one word of warning was given: the tax and legal framework in which they take place is not always totally clear. It is advisable to make sure all transactions are fully reviewed.

Bottom line: Argentina is clearly seeing some improvement. But the various schemes for repatriating funds are complex and do not necessarily align well with the delegations under which corporate treasurers operate.

There is a long, hard, road ahead. This may well test the patience of the Argentine consumer – a consumer who has, in the past, not always been patient.