Milei taps unseasonal source in search of dollars

Faced by a shortage of foreign reserves, Argentina’s Central Bank is turning to an unusual source of funding for this time of year: a risky trade by crop exporters.

Replenishing the Central Bank’s coffers is a key step for President Javier Milei to be able to lift long-standing capital controls and make progress toward normalising Argentina’s economy. Its Central Bank is short of foreign reserves, leaving it with little ammunition to defend the country’s currency if needed.

Dollars are hard to come by in Argentina toward the end of the year, but the Central Bank just hit its highest greenback purchases in October in 15 years. That’s partly to do with a tax amnesty programme, and partly with crop exporters, even though the harvest season ended months ago.

An opportunity to generate juicy returns is leading crop exporters to borrow dollars and sell them in the official market, making them available to the Central Bank, which in turn has boosted its reserves. That carry trade however comes with a risk for exporters, as they depend on the Central Bank to keep devaluing the peso at a steady pace.

What’s the deal?

Selling soybeans, wheat and corn, crop exporters can borrow dollars from their banks, unlike most Argentines hampered by capital controls. They then sell those dollars and invest the pesos they receive in return in high-yield local currency assets.

This has helped dollar transactions by the agricultural sector exceed US$120 million a day over the past few weeks, according to brokerage PR Cambios, which collects data from Argentine grain exporters association Ciara.

Ranging from 2.5 percent to 5 percent, interest rates on dollar loans have come down, while peso investments continue to yield between 43 percent and 51 percent in interest. Assuming that Santiago Bausili, the governor of the country’s Central Bank, maintains the crawling peg that devalues the peso against the dollar at a two-percent rate every month, peso returns are expected to remain high.

Dollar flood

Argentine banks have had more dollars at their disposal due to the tax amnesty set to end Friday, which has resulted in about US$12 billion of dollar deposits in the past three months, according to official data. That has boosted their lending capacity.

Dollar purchases in the official market are helping the Central Bank boost its foreign currency reserves, bringing in more than US$1.2 billion so far in October. Still, the Central Bank remains in dire need of reserves after liabilities hit a low of almost US$8 billion in September, according to local brokerage PPI.

Banks have granted close to US$1.3 billion in dollar-denominated loans to crop exporters, up 25 percent from July, according to estimates by Banco Supervielle SA, one of Argentina’s largest banks.

Why now?

The Argentine government usually faces a dollar drought in the second half of the year. In July, the supply of dollars from soybean sales begins to decline, and dollar outflows increase as demand for energy imports increases.

But, this year, the Central Bank is finding a generous supply of dollars due to the impact of the tax amnesty and exporters’ carry trade. “The whole market was expecting the Central Bank to sell dollars in October, November and December. Instead, it is buying,” said Fernando Marull, economist at consulting firm FMyA Economía y Finanzas.

The Central Bank is also receiving dollars from large domestic companies. Those businesses have to sell proceeds from recent bond sales in the official market in exchange for pesos. Bond sales by those issuers hit over US$4 billion through October 15, the highest since 2017, according to data compiled by Bloomberg.

Potential red flags

The conditions that underpin the carry trade however are not set in stone. The dollar boon could end if banks lend less to exporters, or grain ends up being stored instead of being sold.

“Exporters at the end of the day are bringing forward next year’s exports, or the wheat and barley crop in the coming months,” Juan Manuel Truffa, an economist at consulting firm Outlier, wrote in a note to clients. “We have to be careful when evaluating the next year’s harvest and its saviour capacity.”