Facing the Argentine challenge

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Afflicted by currency devaluation and hyperinflation, Argentina is testing the risk management skills of Latin American treasurers.

by Ben Poole

Published: 6 November 2019

While no stranger to financial crises over the past 30 years, the 35% devaluation of the Argentine peso versus the US dollar over the year to date is having serious ramifications for businesses across Latin America. BCRA, Argentina’s central bank, introduced a raft of currency controls on 1 September. These included the stipulation that all firms, banks and corporates alike, require BCRA approval to sell pesos for foreign currency.

“We are facing the Central Bank restrictions in Argentina and are trying to figure out how to solve it” explains Pablo Gastaldi, tax and treasury manager Latin America at global specialty chemicals company Nouryon. “Currently we don’t have any non-deliverable forwards (NDF) in operation, but we do have approximately US$10 million in loans and we may analyse whether it is worth converting these from dollars into Argentinean pesos”.

Continuing with the loans in dollars within the country represents a big risk for the local entity. “In Argentina it will not be possible – or at least very expensive – to buy forwards for dollar operations” Gastaldi said. “We may have to convert intercompany loans from dollars to pesos and figure out the solution outside of Argentina at a group level.”

The urge to convert debt from foreign currency to the peso is understandable on one level, based on experiences of previous financial crises in Argentina. One CFO based in Brazil, who requested to remain anonymous, recalls a previous painful experience:

“When you see such a difference in interest rates in Argentina between debt in dollars and debt in pesos, many companies are tempted to go for dollars, something that I suffered from in the past when there was parity between the US dollar and Argentinean peso. Our tariffs were somehow in US dollars and so we decided to go with much of the debt for the infrastructure in US dollars. This was a terrible mistake – after the peso defaulted, we were automatically in technical bankruptcy”.

While switching to pesos may solve one issue for corporates on the debt side, it can create a problem for cash holdings when the local inflation rate in Argentina is factored in – in September 2019 this was recorded at an eye-watering 53.5%. While this is 3.8% down on its peak in May, corporates holding cash in pesos are keen to shift out from their positions where possible.

This is the case at global hospitality chain Accor. “On the one hand we wanted to reduce our pesos because of the inflation, but also we didn’t want to use our hard currency for as long as possible – we always try to use the Argentinean pesos first, even for foreign remittances, before using the holdings in hard currency” notes Rial.

Learning from previous crises, Accor’s Argentinean entity holds an account in Europe in both euros and US dollars to facilitate the operations in that currency. “This requires specific attention to make sure we are compliant with foreign exchange controls imposed by the central bank” says Mauro Rial, the company’s CFO South America.

An extraordinary FX situation

To secure corporate capital and minimise FX risk, corporate finance departments in Brazil had to act swiftly as a result of the Argentine crisis. “It is an extraordinary situation that requires extraordinary measures,” explains Rial. “As a result of the Argentina crisis we’ve rushed to pay all open intercompany purchase orders as fast as possible”.

At Tigre Group, a plastic materials manufacturer for construction sites, having an important operation in Argentina meant that the downturn required a unique response – the set up of a finance ‘war room’ to manage the risk.

Vivianne Valente, Executive Director of Finance, Technology and Shared Services, Tigre Group
“The war room includes the business leader of the country, the treasury manager and myself” explains Vivianne Valente, executive director of Finance, Technology and Shared Services at Tigre Group, whose FX exposure to Argentina is 8% of gross margin.

Tigre’s finance policy dictates that the Group manages its FX exposure through natural hedging where possible. The severe nature of the crisis in Argentina meant that this was no longer possible, however. To deal with this financial stress and to get back to a position of being able to employ a natural hedge, the first act of the war room was to halt sales in the country in order to renegotiate contracts into US dollars. “Overall we want to hold the natural hedge where possible, in order to attach the new sales with the US dollar” says Valente.

On the receivables side, the war room worked to anticipate incoming receivables and then discount them. “The rate of discounted receivables is lower than the cost of funds in general in Argentina” Valente says.

The situation in Argentina remains very fluid. In the October presidential election, leftwing Justicialist party candidate Alberto Fernández toppled incumbent President Macri. The BCRA has also shown willingness to continue to adapt its currency controls. On 1 September it capped individuals’ dollar purchase power to $10,000 per month, a limit it then slashed to $200 on 27 October. Corporates will be watching closely to see if this tightening of controls extends again to their currency management plans.

“We are trying to anticipate any future movement in the currency” says Nouryon’s Gastaldi. “The entity has some dollar-denominated liabilities that we are reviewing, just in case anything happens in the next few months”.