How Currency Controls Affect Doing Businesses in Argentina

Face it: Argentina is out of money.

By Bianca Fernet, Argentina, The Bubble:

There’s a lot of commotion in the media regarding Argentina’s current mid-meltdown economic status. And while I won’t go so far as to brand it #FakeNews and attest that Argentina is a “very stable genius”, it’s a lot. And if you run a business that operates in or with Argentina, let’s face it! You’re like that irritating Scientologist from that 90’s movie that was vaguely about sports – “Show me the money!”

So I’ve taken the time out of my very busy day to share with you, from one businessperson to another, what currency controls mean for your business in Argentina.

The good news is, you can stop reading about, listening to, or basically paying any attention at all to policy announcements. At this point, it’s safe to assume that Alberto Fernandez will win the presidency. If somehow Macri pulls off some 9th inning hail Mary touchdown-goal-basket-run, you won’t regret having sorted out the ins and outs of what currency controls are going to mean for businesses in Argentina. And regardless of who wins (it’ll be Fernandez), the economic situation won’t be much different.

Face it: Argentina is out of money.

But how out of money, Bianca?

The best economic indicator for “out of money” is the Central Bank Reserves minus the foreign currency obligations. Of course all of this money isn’t due right now, but to get an overall picture of the financial reality, let’s do some painting with a broad brush.

At the time of writing, reserves are around US $50 billion. Not all of that is liquid, somewhere around US $18 billion is a swap with China.

The IMF loan package totaled US $57 billion. You math majors out there have probably recognized that 57 is bigger than 50.

But don’t put away your calculators yet! When you add the additional sovereign debt via government to the IMF debt, you get a total of US $101 billion owed by Argentina.

The fun doesn’t stop there, you little mathematicians, you. There’s also an additional US $15 billion in provincial bonds that need to be repaid.

And on top of the public debt, there is private dollar-denominated debt issued by Argentine companies that has to be released as dollars by the Central Bank. It was certainly a major surprise to successful Argentine real estate firm IRSA when they missed a US $130 million payment to their bondholders when a “technical glitch” blocked the transfer. I’m going to wait for the clever and well-staffed office at Bloomberg to put a number to the total US dollar-denominated debt issued by Argentine companies like YPF, but it ain’t small.

Even without those filthy capitalist dogs of the private sector, Bianca’s “out of money” index clocks in at negative US $66 billion. Yes, granted, that number needs a calendar of when payments are due and interest and stuff, but take it up with Bloomberg! Bianca isn’t in her 20s anymore.

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Where the f*** is Argentina planning to get that money?

What really matters to us in the business world is that guess where Argentina thinks it’s going to get US $66 billion dollars? From you!

And unless some Iranian drones somehow take out a massive portion of global soy supply overnight, thus driving the world soy price higher than it’s ever been, there isn’t an industry in Argentina capable of sustaining this economic madness. So, as I opined last week, it’s time for some good old-fashioned currency controls. If you plan on continuing to operate in Argentina, here’s what you need to understand.

How do Argentina’s currency controls affect businesses?

In Argentina, companies run into currency-related melodrama when there is an official and a parallel rate. The wider that divide gets, the worse the problems are. Imagine a world where the official rate is 55 ARS/USD but the “blue” rate is 80 ARS/USD, so a difference in the ballpark of 30-45% depending on which rate you pick as base.

You run into problems in four categories:

  • Imports –every time the central bank hands over foreign currency to an importer’s bank, they have to exchange USD for pesos at the official rate. That means the central bank is basically giving away dollars at a 45% discount, which they loathe to do. So they restrict imports – sometimes in the name of helping local companies compete, but don’t kid yourselves. It’s about limiting access to scarce dollars.
  • Bringing money in – The Central Bank would love it if you brought money in through banks at the official rate, because in that case you’d be giving them a 45% discount on hard currency. And you’ll run out of money really quickly if you’re paying a hidden 45% tax every time you bring money in.
  • Exports– If the Central Bank makes you repatriate money at the official exchange rate, you end up not only with pesos stuck in Argentina, but you paid an effective 45% tax on the currency conversion
  • Bringing money out – see bringing money in, but flip it and reverse it and then add on all the requirements to prove where the money came from and that your company is in legal standing to move money out.

The solutions that exist for problems that come up related to imports involve a combination of utilizing legal knowledge and applying political pressure.

The solutions for bringing money into the country involve to some extent the use of bonds or other dollar denominated currency. This is what people call Contado con Liquidacion (CCL) or the blue chip swap. The important thing here that companies must do a number of things from a compliance standpoint so that there are no issues in declaring source of funds, etc. That means making sure you’re working with a broker dealer who isn’t just cutting corners to get a commission on the trade and ultimately doesn’t care if in two or three years you run into problems or realize that you are unable to move the funds out of Argentina.

The solutions for exporting are more complicated and vary greatly between industries.

The solutions that are available to you for bringing money out will depend greatly on how much care was taken to bring that money in.

My seatbelt is buckled

I can’t entirely rule out that Argentina will have some massive collective “come to Jesus” moment and realize that the country is out of money and take decisive steps to right the boat. But for now, the only Jesús in Argentina who I’m familiar with is camped in a tent on Avenida 9 de Julio screaming that the IMF, capitalism, and foreign businesses are to blame for the sticky predicament.

So buckle up, stay on your toes, and don’t get cocky. Surviving in the Time of Currency Controls is a bit like Love in the Time of Cholera. It involves the use of outdated technologies, you have to be aware of an ever-shifting web of inter-dependent characters, and by the end you’ll likely feel exhausted and confused.

But hey. If nothing else, at least there’s one silver lining. It appears Bianca’s back. By Bianca Fernet, Argentina, The Bubble

If Argentina possessed the dedication to logic and collective will to do something so drastic, they would not be in this predicament in the first place. Read… Why Argentina Will Never Dollarize

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