Argentina’s trading debt has reached record-breaking levels and is already over US$38 billion. Many firms, mainly PyMEs (small and medium-sized companies, or SMEs), have decreasing room for manoeuvre. According to a recent survey by the UIA Argentine Industrial Union, 77 percent have difficulties in paying their suppliers.
Given the shortage of dollars, the toughening of foreign exchange controls has been mainly centred on delaying importers access to the official market, forcing them to rely on private short-term business financing. This has caused a significant increase in the delay of payment of imports in arrears.
The Sistema de Importaciones de la República Argentina (SIRA), Argentine import system, which came into force in October, 2022, is the scheme chosen by the government to control and manage purchases from abroad.
One of the novelties included in this new mechanism, which replaced the SIMI (Comprehensive Import Monitoring System), was to make it easier for PyMEs to import: a 60-day term was established to release foreign currency once the goods had arrived.
However, in its latest report, the UIA stated that in August, 71 percent of surveyed companies, including PyMEs, struggled to have requests approved (more than 58 percent of April levels). In the meantime, SIRA approval times lengthened for 80 percent of companies and 77 percent had trouble paying suppliers.
On the other hand, according to the International Monetary Fund (IMF), from June 2022, while cumulative monthly imports averaged US$6.6 billion, payments in foreign currency amounted to US$5.4 billion. In addition, the average required financing period rose to 90 days.
“As a result, importers’ short-term debt grew by around US$16 billion between late 2021 and July 2023 and the volume of financing of imports reached a historic US$38 billion (about 60 percent of total imports, compared with a historic average of 39 percent),” stated the body in its latest review.
“A large portion (60 percent) of this increase in import financing has been funded via intra-corporate flows (especially in the manufacturing sector), and the rest came from business credits between companies (the internal financial system has not played a major role in the financing of business credit),” it added.
Into the red
The figures of Argentina’s Central Bank went deeper into the red as the drought continued to hit the farming sector, lowering exports and therefore reducing income in dollars to import. In the first eight months of the year, income in foreign currency was US$14.703 billion, a dip of U$S11 billion from the same period in 2022, according to a report by the Chamber of the Argentine Oil Industry (CIARA) and the Grain Exporting Centre (CEC).
Chief economist for the Argentine Chamber of Commerce (CAC), Matías Bolis Wilson, points out that the drought led to a negative shock, causing exports in the first half to fall by 25 percent and imports by 10 percent.
“That difference has to be somehow funded so as to keep the activity from dropping,” he said.
“During talks with a delegation from Taiwan, which had a fairly similar problem with the export of computer chips, they told me they financed it with their own reserves. Since the Central Bank doesn't have sufficient reserves of its own to fund a shock of that scale, or access to the international debt market; it funded it partly with a swap with China, partly with the credit line from Qatar and also with the IMF rollover,” explained Bolis Wilson.
“When there’s a shock of that size, either you assume the fall in the activity and you step on all imports, or you distribute the shock of the poor harvest over the next few years,” the specialist added.
After being consulted about the possibility of suspending imports in some sectors, the economist said: “That generally depends on the credit lines the exporter from abroad gives the importer in Argentina. They may reach their maximum quota of credit risk and not sell anymore.”
He also pointed out that in the case of multinationals, Argentine subsidiaries are funded with a credit line by parent companies.
“That is a facility multinationals have, which maybe is not available to PyMEs, or they do not find it so easy to access this type of business credits”, he said.
Looking ahead to the next administration, economist and former Central Bank governor Martín Redrado told Perfil: “There are companies with the capacity to stretch that financing process and others that don’t have it. Therefore, the trading debt won’t be solved overnight and will also be related to the dollars and accumulation of reserves by the Central Bank.”
“Undoubtedly, multinationals which have been in this country for so long can wait one more year. Now there will be PyMEs which cannot fund it with their suppliers. It will have to be dealt with on a case-by-case basis. But there is no doubt that it has to be a priority,” said Redrado, who supported Horacio Rodríguez Larreta’s unsuccessful run for the Presidency.
Another problem faced by companies is the increase of their debt in the face of potential devaluations. This happens because the company pays the supplier with the dollars authorised by the Central Bank. Until the monetary authority releases the foreign currency, the foreign exchange risk is assumed by the company.
Given that, companies are seeking “foreign exchange insurance” or hedging mechanisms.
“There are financial securities such as Rofex, which was very active after the PASO primaries. Thus, companies ensure today’s exchange rate, hedging themselves against a devaluation,” explained Bolis Wilson.
In this respect, from the Matba Rofex, they specified that in 2022 the number of contracts in future dollars amounted to over US$174 million as against US$110 million in 2021. In the meantime, so far in 2023, the volume was US$137 million. Transactions peaked in August, the month of the PASO primaries, when they amounted to US$19 million.
From the SME sector, they estimate that the outstanding debt for importers is now US$18 billion.
“The problem is that suppliers can no longer extend payment agreements”, they said.
“We’re facing a major bottleneck in many sectors of the industry because there are no dollars and the SIRAs to be approved are not enough”, they said.
A few weeks ago, Economy Minister Sergio Massa announced the release of all pending SIRAs for 7,428 PyMEs to be able to finalise their outstanding purchases abroad to the tune of US$700 million.
Fabián Castillo, president of the Buenos Aires City Industry and Trade Federation (FECOBA), stated that suppliers abroad had started cutting imports because they were not being paid.
On the other hand, he assured that, due to the lack of access to credit and very high interest rates, PymMEs finance imports with their own stock.
Castillo also explained: “It’s impossible to transfer the cost of imports to prices, because otherwise people won’t buy.”
Companies are forced to use the CCL (contado con liquidación) exchange rate (currently around 740 pesos per greenback), as a benchmark to replace its supplies and raw materials.
“Small and medium businessmen reduce their profits to be able to sell. That’s been going on since post-pandemic times. And there’s no reference price to know if you’re even, losing, or what you have left to gain. The times of plenty are over, we’re in a lean period now,” said Castillo.
With the warning signs flashing, the logical step is to ask if there is brightness on the horizon. Looking forward, the Ecolatina consultancy firm observes that “the legacy to be received by the next government starting in December will have favourable flows on the international front: the end of the drought and the great impact of the commissioning of the Néstor Kirchner Gas Pipeline.” In addition, a foreign exchange correction, and consequently a narrower gap, or ultimate unification, might discourage the demand for imports.
Nevertheless, according to the expert consultancy firm, there will be some restrictions: the delicate situation of stocks, committed to sustain imports and the activity via the swap, and the exponential growth of the trading debt.
“A scenario of release of flows (demand for imports, savings) and stocks (trading debt, dividends), in the face of scant firepower by the Central Bank and no major access to international credit, calls into question the behaviour of the exchange rate and its potential consequences for prices and economic activity in general,” said Ecolatina.
“Within this setting, the high levels reached by the debt make it foreseeable that it may lose dynamism moving forward. Moreover, the post-PASO devaluation leap, in addition to the recent implementation of the PAIS Solidarity Tax and the uncertainty of the electoral process, could lead to a lower growth of the trading debt stock moving forward”, the report added.
“When it comes to facing the complex situation of an inherited shortage of reserves, it will be essential to contemplate how it all fits into the different flow terms (seasonal supply of exports and demand for imports) and stocks (trading debt),” Ecolatina concluded.