The pandemic has inflicted serious pain on world economies and it could be extra painful for Argentina.
Argentina has faced recurring fiscal crises, and now the global pandemic-induced economic recession has once again pushed the country to the brink of defaulting on its dollar-denominated sovereign debt. For corporates doing business there, including members of NeuGroup’s Latin America Treasury Peer Group (LatAmTPG), the most visible manifestation of the crisis is in the defensive measures the government is taking to preserve FX reserves, i.e., getting local cash and earnings out is getting harder and harder.
In the “good” column, the government has confiscated USD held privately, which was the so-called “pesofication” policy implemented during the last fiscal crisis. Second, the Argentine government does allow a parallel FX market (aka, the blue-chip swap market) to coexist with the official rate available from the Argentine Central Bank (BCRA).
- The blue-chip transaction involves buying local bonds or shares using pesos, transferring them out and selling them for dollars, at a significant “haircut.” The rate at which you can buy dollars officially is about 73 pesos, obviously preferred to the blue-chip rate at about 124 (June 17).
Eat your veggies first… In the most recent iteration of FX controls, companies are now required to use their offshore dollars first to cover their dollar needs, and only then will they be given access to USD from the BCRA at the official rate. In addition, companies are careful not to “flout” the FX controls too boldly, as it carries reputation risk and so most keep their parallel transactions to inconspicuous amounts.
- Having said that, large MNCs are reluctant to use the blue-chip market at all because if they do, they must wait 90 days before being allowed to transact at the official rate with the BCRA again.
No confidence vote. As difficult and uncertain as the financial environment is in Argentina, members also noted that much of the difficulties stem from a lack of confidence in the government to take the necessary steps for a successful resolution to the current crisis. Looking at the facts on the ground, the fiscal and debt measures do not appear to be nearly as bad as in the past, they said.
- On the working capital management side, members also noted that some banks are willing to factor receivables (without recourse) “at a reasonable rate.”