Treasury & FX in Argentina

CompleXCountries is not in the business of making economic forecasts. However, last September, we forecast that the situation in Argentina would get worse before it got better. Unfortunately, this has proved correct. The current situation:

• In October, the party, following a path of austerity to reduce inflation and stabilise the currency and the economy was defeated by the opposition – who have a policy of economic isolationism and deficit spending. The former president, Cristina Kirchner, is now the vice president.
• Inflation continues at a high rate – around 60%, and the currency continues to depreciate. 
• Interest rates on deposits continue to be low – around 20% with international banks. This represents a negative real interest rate of around 40%. Deposit rates are higher with local banks, but many participants hesitate to use them, or have a policy against doing so. Having said this, some participants have good experiences with some local banks, and the cash management tools available in pesos are efficient.
• Exchange controls, which were introduced before the election, continue to be reinforced. There is a lot of confusion and uncertainty over exactly what the rules are – new ones are introduced on a regular basis, it takes a while for them to be clarified, and they are highly bureaucratic. However, once they have been clarified, participants’ experience is that payment is approved and executed relatively swiftly – as long as the paperwork is in order.
• These rules allow for the repayment of international debt, but rarely make foreign currency available to pay for the import of goods or services, especially from related parties. Some participants belong to sectors which are considered essential to support the economy and exports: they have less difficulty getting approval to pay for imports, but they still do not get all their imports approved.
• The result is an accumulation of foreign currency liabilities, with no way of effectively hedging the currency exposure. Given the hyperinflationary environment, many companies have moved to using the USD as the functional currency for accounting – but this still leaves an exposure in the local books.
• A second consequence is trapped cash – which is a particular issue, given the negative interest rates and the counterparty concerns with local banks. Some companies are considering or using a process whereby they use local cash to buy shares of Argentine companies which are listed abroad (usually, in New York), and then sell the shares for dollars in the US. This process appears to be legal, but it involves a haircut of about 30%.
• The problem is further aggravated by a requirement to sell the proceeds from all services exports within five days of receipt in the spot market – these proceeds cannot be kept to pay for imports, and it is not even possible to time the sale so as to coincide with settling outstanding foreign currency liabilities. So there remains an exposure to exchange losses. So far, there does not seem to be any pressure to ensure that foreign currency receivables are collected within a specified date, so they can be used to provide a natural hedge – up to a point.
• Though cash management in pesos is generally efficient, some participants have problems with customers who pay by cheque, and collections in remote locations. Argentina is a very large country, with some areas which are very sparsely populated.

As can be seen, the participants share a set of problems – and there appear to be few solutions. Sadly, it does not seem that the country’s situation will improve quickly: Argentina is trying to re-negotiate its foreign currency debt, and there is a lot of concern it may default again.

We would love to be able to forecast an improvement in the near future. Sadly, there do not appear to be any grounds for doing so.

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