Argentina Corporate Treasury Update

Commentary

Argentina  has a large amount of natural resources – and an economy which is little short of a disaster: most Argentinians cheerfully agree that this is the case and explain how they keep their cash in dollars in New York or Miami, to minimise the impact on them.

The purpose of this call was to discuss the latest series of shock measures which have been implemented by the government under Javier Milei. In December 2023, he devalued the Argentine peso by 50%, and instituted a series of measures which are intended to free up the currency market and restore convertibility of the peso. These drastic actions have also pushed the inflation rate up from nearly 100% annualised to close to 200% - though one peer reported this is now decreasing.

Participants’ reactions to these measures were generally mildly positive, but, at best, lukewarm:

• The government has sold dollar denominated bonds, with a maturity of three years, known as BOPREAL – bonds for the reconstruction of a free Argentina. There have been three issues to date: the first one was a flop, but interest has been gradually increasing for the subsequent ones. None of our peers has bought any of these bonds: it is very difficult to explain them to HQ and get approval, and no-one wants to wait for three years to get their dollars, or take the substantial haircut which comes if you discount them. [Note: subsequent to this discussion we have heard that companies have successfully taken up BOPREAL bonds and sold them on the secondary market at a c 20-25% discount - you also need to use the bank where the invoices were originally recorded - Santander and BBVA have been mentioned]
• There has been talk of reducing the penalty period if you use the blue chip swap method of getting cash out: this is a way of accessing hard currency, but at a parallel market rate and people using it are barred from the official currency market for 90 days before and after executing a transaction. However, the situation is not totally clear – the administration has been struggling to catch up.
• The official market, which had more or less dried up, now has a layering system, where currency to settle import invoices is made available in tranches of 25% after 30, 60, 90 and 120 days. There was some skepticism, but this does seem to be working – and several participants have shortened intercompany payment terms to start the process sooner. Essential products, such as pharmaceuticals, can be settled after 30 days: this seems to be working. 

• Both BOPREAL and blue chip swaps can now be used to pay dividends: this is a big step forward. 
• One peer uses the blue chip market: they had to set up a mirror account in Uruguay.
• In all cases, there is a significant tax on the purchase of foreign currency - the “impuesto PAIS”. It is not clear how this functions with the blue chip swap market, or whether it will be deductible from future tax liabilities.
• The massive devaluation caused problems, but it has more or less eliminated the gap between the parallel market for the blue chip swaps and the official rate. This has simplified currency management – though the bureaucracy required for any payment remains painful.
• Some companies have even started hedging the currency again – though this remains expensive, and many prefer not to.
• Despite the high inflation and the recession which has been caused by these measures, most participants find that business in Argentina is doing well. 
• Even though businesses are doing well, few on the call have significant trapped cash in the country. This reduces the attraction of the various schemes, which all require a significant peso outlay.
• In fact, given various quirks in the tax system and the impact of currency devaluations, several peers are having to re-capitalise their local entities, since negative equity is not allowed. All remain fully committed to the country.

Conclusions – and longer term thoughts:

• Most participants are taking a “wait and see” attitude. They view the measures as positive – but there is a long way to go.
• All participants found that managing their HQ was a significant challenge. Schemes like the BOPREAL and the blue chip swap generally go against corporate policies, and make the lawyers nervous. Add to this the frequency of changes, and treasury teams just cannot get approval to react quickly enough to take advantage of this fast moving environment.
• When there is a parallel currency market, with a substantial discount to the official rate, there is usually only one way out: as here, the official rate was brought in line with the parallel rate, going from 422 to the USD to over 800 in a single day. Most businesses, understandably, put off dealing with this until the official devaluation forces their hand. With hindsight, it can be asked whether this is the best overall approach. Hindsight usually suggests it would have been better to take the loss up front, and maximise cash repatriation.

Bottom line: we all hope the situation continues to improve. But our participants still need to be convinced.