How Currency Controls Affect Doing Businesses in Argentina

Face it: Argentina is out of money.

By Bianca Fernet, Argentina:

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.

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.

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  42 comments for “How Currency Controls Affect Doing Businesses in Argentina

  1. Old-school says:

    What happens if you own a US stock that pays you a dividend? Does Argentina convert it to the official rate and you spend it at the unofficial rate?

  2. NY Geezer says:

    Argentina’s Atacama desert region which is rich in lithium is being touted as a major potential source of battery grade lithium for the emerging Electric Vehicle industry. How is that going to work out?

    • DawnsEarlyLight says:

      I’m sure China will take advantage of that!

    • 2banana says:

      Lithium prices have pretty much crashed since 2018.

      The party (scam) of EVs finally wore off and economics started to take over.

      • doug says:

        Maybe also, every mine thought they would have first mover advantage? resulting in over production for now.

    • Bianca Fernet says:

      Mate, the Atacama desert is in Chile. Might I suggest a globe?

      • NY Geezer says:

        My comment referred to “Argentina’s Atacama desert region” not the “Atacama desert”.

        The Puna de Atacama or Atacama Plateau[1] is an arid high plateau, in the Andes of northern Chile (15%) and Argentina (85%)
        https://en.wikipedia.org/wiki/Puna_de_Atacama

        Arid definition: “being without moisture; extremely dry; parched:”

    • Izaak says:

      I live in Mendoza there is a mining restriction that just got bypassed on fracking. Most of the mining companies in Argentina are taken over or have such high taxes that the company leaves without the equipment and loose so much they never come back.

  3. 2banana says:

    Which would look like what?

    Cut the size, scope and spending of government?
    Dramatically lower taxes?
    Have the government live within it means?
    Let the free market work?

    Hard to buy votes that way…

    “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.”

    • char says:

      State spends most of its money* on local products so cutting government spending does not have a great effect. In fact cutting state spending often leads to lower exports and higher imports. It is also often not the state that is living beyond its means. (see Spain in ’08, Thailand & South Korea in the nineties). Government should follow the path of successful countries, problem is they rarely followed the free market path and that is if being a tax haven can be seen as free market behavior.

      Thankfully Argentina has had its “come to Jesus” moment and will kick out the IMF.

      *It is in the single digits outside debt repayment and military hardware

  4. So we are talking about resources; timber, mining and a pretty good telecom company? We’re not talking about Bolivia here, right? Suppose their currency problems relative to the dollar were solved by adjusting the dollar? Through the moribund forex system, the buck has been propped up as a global reserve currency (not anything we voted on). We have nothing to sell, and the price is too high anyway. Why would foreigners want our currency? All such things have three investment rationales: stable, able to rise to higher valuations and able to drop to much lower valuations, and I would say the last two are about 90% of the probability with the dollar in forex. Maybe the IMF has a plan?

    • Bianca Fernet says:

      In my real life with my real name I work in mining and lithium. The meat of this article comes from the advice I’ve given to clients. If you have to import capital equipment and then repatriate returns from selling your minerals and convert to pesos, it drastically impacts ability to succeed. On top of that, mines take 5-7 years under good conditions to develop. Argentina’s volatility does not lend itself to long term investing.

      • DamonW says:

        Thanks for this. I had a lowball bid in for a very good lithium prospect based in Argentina (Neo Lithium) but cancelled an order to buy more shares just now.

        I’ll hang onto the shares I already own, but won’t be adding to the position — despite attractive prices — until I see how this all plays out.

    • Petunia says:

      The IMF definitely has a plan, monetize all central bank debts with SDRs. Maybe Argentina is way ahead of the game.

      • By denominating debt in dollars Turkey and Argentina gain access to those SDRs. “Volatility” is by definition a lagging indicator. These are both countries with bad track records and a good business culture. Putting the head of IMF in charge of ECB is one signal you want to address problems at the periphery.

  5. Javert Chip says:

    Bianca:

    As a US resident who’s visited your beautiful & friendly country, but, to my shame, really doesn’t give a crap what Argentina does most of the rest of the time (invade Falklands, disappear their own citizens, military junta, brotherly support for Chavez/Maduro, that kind of stuff), I’d appreciate a brief overview (hundred words or less?) of how Macri (whom I understood to be a straight-shooter on economics) and the IMF allowed the country to go down so hard & fast.

    I appreciate your writing about the consequences, but what the hell went so wrong?

    • Bianca Fernet says:

      Happy to write whatever you’d like Javert, for my standard consulting fees ;)

    • raxadian says:

      Macri simply put, paid some debt to get out of default then started to borrow money like he was a thirsty man in a desert and money was water.

      The result? This crisis.

    • robt says:

      Straight shooting on economics is the kiss of death in politics, except in the rare instance of a cultural tradition honoring it. Emphasis on rare.
      A few hundred thousand women banging pots and pans in the town squares is enough to get the printing presses rolling again, accompanied by price controls. The IMF’s duty is to rationalize pumping other peoples’ money in to attempt to sustain it, based on promises by the supplicant to mend their ways. So think of them as enablers.
      Also, in the traditional left-wing manner, cleaning out the till, destroying government records, leaving the government staffed with your apparatchiks, and generally making it as difficult as possible to make the incoming government’s transition works well to undermine the patsies who ‘won’ the election.

  6. Crazy Chester says:

    Re: “But hey. If nothing else, at least there’s one silver lining. It appears Bianca’s back.”

    And absolutely worth the price! Especially from a distant vantage point. But let’s work a deal: how much for the entire country? A ballpark figure will do to get started. Do we have to take the worthless men at that price? All of them? You’re discounting for that, correct?

    • Petunia says:

      Since Greenland is not for sale, Argentina may be a good second choice.

      • d says:

        Great resources, however to many militant leftists, who with real money wants to take all them in such a deal.

        They are why Argentina has the issues it has, they all demand a champagne lifestyle, on Argentina’s bus income.

        Admittedly the plunder and gross mismanagement, let alone wholesale slaughter of innocents, by the Junta, didn’t help matters.

    • Javert Chip says:

      Crazy Chester

      Presumably, if it included the current crop of politicians, they’d have to pay you to take it.

  7. gorbachev says:

    Argentina please go bankrupt, except this time pay no one

    back or make promises to pay back even a portion of what

    is owed.This means future lenders will have to consider risk

    before, well, lending.

  8. James says:

    Perhaps one of these crises and some sanctions will finally drive many countries out of using US dollars for transactions?

    I wonder if China has a bailout strategy here which involves giving Yuan a higher trading preference, ultimately challenging the USD.

    • medial axis says:

      The USD’s days as reserve currency are numbered. In part, I think, because the very payment system has been weaponised. It’s far cheaper than bombs, bullets and armies and, more importantly maybe, the majority of the folk at home are unaware of what you’re up to. But it has its down side, and all the more so now that we have digital currencies you can knock up at the drop of a hat.

      • sunny129 says:

        Even accepting your points on US dollar, what’s the alternative in the immediate future? What’s the alternative, not the best kind but at least identical to status of US $? NONE

        US $ is the least dirty shirt despised but every one else in world wants it. real bad!

        60% of global commerce done under $. An acute stress related geo-political + financial (BEAR mkt?)events, where do the wealthy investors park their cash?

        • Craig says:

          @Sunny129

          Gold and Silver reserves purchased with exports. Or a free floating currency where maybe you avoid running the printing press to fund vote buying programs.

        • d says:

          Plenty of good currencies out there.

          You need a big economy, and a good currency you can trust, to replace US $.

          This was supposed to be EUR.

          BUT it still has not got around the insanity of, currency union, without fiscal union, so it pointless considering it.

    • Javert Chip says:

      James

      One of the reasons Argentina (other countries also do this) uses US dollars for some deals is who in their right mind would use Argentina Pesos?

      However, even if the debt is denominated in US dollars, the borrower still has to be able to pay it back. Argentina has been a country for about 200 years and they still can’t reliably figure this part out.

  9. Old-school says:

    In the US I would say that for whatever reason the ten year treasury rate equals the stated inflation rate. If you average out history you probably average a little more than 2% return above inflation on ten year. If someone is living off treasuries his drawdown rate will be about half of what it was on a 30 year retirement. For young people the goal gets further away 12 years ago you needed to save 1 million, now 2 million. Were they able to save 1 million in 12 years, I doubt it ? If lucky maybe 200 grand. It’s kind of like the country is not as wealthy as we think we are, but the government keeps papering it over with dollars.

  10. DawnsEarlyLight says:

    …’ the majority of the folk at home are unaware of what you’re up to’, … or misled!

  11. daniel says:

    I visited Argentina while back, and I doubt Argentina will become another Venezuela any time soon. They have more cows than people. I was shocked when i went into a desert shop and they served steak. Although the meat is a bit tougher there than US… must be in the grains/grass.
    If things really get bad… LET THEM EAT BEEF.

    • Frank says:

      To be washed down with world class Malbec.

    • d says:

      Its the breed/strain of the animals themselves.

      Your complaint about Argentinians meat, is our complaint about Australian and American, meat stringy tough garbage, to us.

      until you are hungry, then you just casserole it.

      • robt says:

        Canada legislated low-fat beef, tough; for me, USDA is preferred.
        Don’t know where ‘d’ is from, but I’d like to try their beef just to see the difference.

        • d says:

          Some of it is exported to the US the US producers however try aggressively to limit this.

          The majority of it that arrives goes straight to restaurants like the premium Rhodesian beef used to (much of that used to go to Germany and straight to restaurants that had standing orders for it).

          It is a naturally grass fed beef of much higher quality than the Argentine beef due as stated to a higher quality strain of Animal.

          Its like comparing Aberdeen Angus and the US semintail. Angus melts in your mouth like butter and the other has t be tenderised and you still need Jaw muscles and teeth like like a young combat marine.

          We have large Angus, Freesian, Jersey, and Angus cross, beef herds among others, A lot of it runs semi wild and is never grain fattened.

          There is a large volume of crossbred Heifer meat exported as heifers are easier to handle in herds than steers or intact bulls.

          A friend of mine runs INTACT pure bred Freesian bulls in herds they average over 900Kgs each on the hoof at 2 years, which is when he sends them for processing. Things are 1.8 meters + at the shoulder not something you argue with. There is a system to running large intact bull Herds. He happens to be in a area where there are large Freesian dairy herds and so a good supply of unwanted pure bred bull calves.

          1 man farm on 500 Acres with 1 part time assistant, and of course a 50 Foot ocean gong race Yacht which belongs to the farm for tax purposes new car every year Etc.

          Used to have a Milk farm before this, the stock now buyer’s always ring him, more demand than supply for this almost specialist meat. With much less up front cost, and better margin, than a pedigree Angus meat herd.

    • Tony (one of them) says:

      Argentine cows are fed real grass, US cows get cornfeed which is sugar so they are all obese and prediabetic – that’s why the meat is marbled, of course it’s tastier.

      • d says:

        Grain-feeding cattle is lazy factory farming, as the cost of grain rises, American will go back to feeding their Stock properly ON GRASS (Like they used to) and have better/healthier meat.

        But as always they will negate the natural advantages by running GM cattle.

        American meat Tastier?? this is a matter of opinion. Grain-fed meat tends to be tasteless. Try free-range/wild pork as opposed to factory/feedlot farmed pork, the meat is a different colour for starters.

        People raised on BAD or ODD food, think it is good.

        Tofu, Pumpkin, Swede, Turnip, Seaweed, Baloots, Whale meat, Raw fish, Some people find these things normal and nice, others can not, or will not, eat such things. Pumpkin, Swede, Turnip, Squash, these things are supplementary winter or final fattening cattle food, for us.

        • Wolf Richter says:

          In the US, there are different categories of beef, including at the pricier end: “free-range grass-fed” then “grass-fed” (which may not be free-range).

          Free-range grass-fed is not to everyone’s liking; one, it’s expensive, and two it’s fairly lean, and the meat is a real muscle, and you need teeth to eat it. But it’s very flavorful. So if you want it in form of a tender steak, you might want to get free-range grass-fed, 60-days dry aged — but now you’re talking real money.

  12. RagnarD says:

    I haven’t read the full piece yet

    But I just wanted to point out that its not Jerry, the agent, that is screaming,
    “Show me the Money!!!”
    It is his sports star client, Cuba gooding Jr, that is demanding $$$ from his agent.

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