A new week, but no new dawn for Argentina. In our report on 12 August we said that currency controls were one of four possible options for Argentina’s government in its attempt to avoid (or at least mitigate) a currency crisis. Now it has implemented them. The government announced on Sunday a limited range of restrictions on currency purchases on firms and individuals until the end of the year. The move follows the government’s announcement last week of its intention to extend the maturity on some US$100bn of debt (see our research here).
FX controls might buy the authorities some time during the election period and they avoid burning FX reserves in a futile defence of the FX rate, but they are straightforwardly negative for international investors. And although the controls will help protect reserves, they might also add further to the unpopularity of the Macri government as it heads into the election in October.
Recent precedents for currency controls include Egypt and Nigeria. Both markets avoided downgrades from MSCI equity indices (although Nigeria was put on consultation) and Nigeria was excluded from the JP Morgan government debt index.
Investors are having to react to a fast-changing environment, as are Argentina’s companies. Last week the country’s largest energy firm, YPF, ‘peso-fied’ its hard currency-denominated contracts with suppliers, at a USD/ARS exchange rate of 45.10, in light of the government freezing crude oil prices for (at least) 90 days. Starting immediately, YPF will demand that those ‘dollarised’ costs be quoted in pesos, at an exchange rate of 45.19 pesos per dollar, even though ARS currently trades at nearly 60 pesos per dollar. The price freeze is set to cost the company cUS$120mn a month, according to CEO Daniel González
We are Neutral on YPF, as the company has never defaulted and is being proactive in announcing cost cuts to match the projected decline in revenue. But we are not as confident for all Argentina’s big corporates. We gave our view on who may default and when in our recent report.
We have a Sell recommendation on Argentina’s sovereign bonds. Its equity market is certainly not our preferred pick either, but it is very cheap and it has a relatively low hurdle to attract back capital. For more, see our equity monthly.
The current crisis was triggered by President Macri’s shock defeat in the primaries. The general election scheduled for 27 October looks a long way away, and between now and then there are plenty of twists and turns to come for Argentina.