Sunday, August 17, 2014

Biggest losers from default waiting on US$4B

A cameraman films the building of the Central Bank.

By Charlie Devereaux & Camila Russo
Bloomberg (*)

Government takes steps to preserve hard currency and reduce imports authorizations

In what has so far proven to be a largely painless bond default by Argentina last month, the nation's importers stand out as one of the few clear losers.

While bond prices are holding near 80 cents on the dollar, saving creditors from the losses that typically follow a default, and the peso and local interest rates remain stable, Argentina is showing some concern that the situation may deteriorate by taking steps to preserve hard currency. The tax agency has slowed the pace of import approvals, adding to a US$4 billion backlog that is equivalent to 67 percent of June's imports, according to José Alfredo Nogueira, director of ABC Mercado de Cambios, a Buenos Aires-based currency dealer.

The move comes just as many importers have been gearing up for the opposite — easier approval of their dollar requests triggered by a government settlement with holdout creditors from its previous default, in 2001, that had been expected to have prevented a new default and reinsert the country into international capital markets. That deal failed to materialize, prompting a US judge to block Argentina from making an interest payment by the July 30 deadline and cementing the default.

“It came right at the moment when Argentine companies were expecting the Central Bank would be freer to give them their dollars and now that hope is gone," Luis Secco, director of Perspectiv@s Economicas, said in an Aug. 13 interview. “For the industry that had bought that promise, this is now a major worry.”

A tax agency official declined to comment. A Central Bank official didn't respond to a phone call seeking comment.

President Cristina Fernández de Kirchner’s government has spent much of 2014 trying to bolster Argentina's foreign reserves, which serve as emergency cash to defend the currency and assure essential imports. The reserves, which have held stable since the default at $29 billion, are down 44 percent from their record high back in 2010.

While little pressure has mounted on the peso since the default in part because of speculation that the government will reach a solution soon with creditors that reinitiates debt payments, the situation in local markets could deteriorate if that confidence wanes.

“The underlying sentiment in the market is that it will be a short default,” Maximiliano Castillo, director of Buenos Aires-based research firm ACM, said in an Aug. 12 interview. “But once a few weeks go by without an agreement, confidence is going to be lost and restrictions for importers and for buying dollars in general will increase.”

The restrictions are already being felt in stores.

Eduardo Woznica, owner of a pharmacy in Buenos Aires, said he hasn't been able to obtain about half of the products he'd like to sell.

“You can already see in the last two weeks that the situation has worsened,” Woznica, 51, said in an interview on August 6. “My suppliers don't have products to sell me. I don't even have disposable needles.”

Since last month, the tax agency began automatically freezing import permits while it scrutinized company tax records, according to an internal memo obtained by Abeceb.com, a Buenos Aires-based research firm. The measure could delay the authorization by as much as 70 days, according to an Abeceb.com report.

Since the default, importers have seen the time they're given to repay credit lines to suppliers cut to an average of 30 days from 110 days, said Miguel Ponce, manager of the Argentine Chamber of Importers CIRA. Other importers have been told they must pay in cash or in advance, he said.

“Lots of companies and banks, with the memory of what happened in the last default in 2001, took protective measures,” Ponce said.

In 2001, the government defaulted on a record US$95 billion and had to restrict bank withdrawals and convert dollar savings to pesos amid 22 percent unemployment.

Some companies that have been blocked from accessing foreign currency at the official exchange rate are turning to other markets in search of dollars. The blue-chip swap rate, a market used by investors to obtain foreign currency through transactions with bonds and shares, has slid to 11.46 pesos per dollar. That's contributing to pressure on an illegal street market where the peso fell to a record 13.2 pesos per dollar on Friday.

If more companies begin using the blue-chip swap rate to fund their imports, that could spark faster inflation, Secco said. Accumulated inflation in the first half of the year was 14.2 percent, according to the government.

“This is a temporary patch to protect the peso from weakening,” Nogueira said. “In the end we're going to finish with a larger devaluation like we always do.”

Fernández de Kirchner’s government, which devalued the peso 19 percent in January, has already restricted imports this year in a bid to protect reserves that have tumbled in the past year to US$28.9 billion.

Imports fell 7.5 percent to US$33.09 billion in the first half of the year compared to a year ago, contributing to a 0.2 percent contraction of the economy. About 85 percent of imports are raw materials needed for industry, according to CIRA.

Many companies had been waiting for the Central Bank to accumulate reserves during a record soy harvest, in the expectation that they would receive dollars in the second half of the year, Secco said.

The default will prolong the government's isolation from international debt markets and make it more expensive for companies to borrow abroad. The average yield on Argentine corporate debt has risen 0.9 percentage point to 10.3 percent since July 30, according to Bloomberg data.

“The government has delayed its return to capital markets, which means it will have to be more careful about the dollars it has in reserve,” Dante Sica, director of Abeceb.com, said. “Until they resolve this issue with the holdouts, you're going to see more restrictions.”