Trade finance on the cheap

Argentine trade remains unfazed despite export bans and blackouts, writes Luis Waldmann.

Government-imposed limits on soft commodities exports and energy shortages curtailing soybean crushing are some of the worrying signs Argentina has been sending to trade financiers worldwide.

But contrary to what one might expect, trade financing remains cheap. Loans priced below Libor are being offered to a range of exporters, producing a stifling environment for international banks.

Argentine dollars, as the low-priced funds are known, result from a four-year-old central bank regulation ordering local lenders to loan their dollar deposits to exporters. The sub-Libor financing is available mostly with 180-day tenors to top-tier exporters, whereas international bank spreads are above Libor.

Conversely, longer-dated support such as that provided by export credit agencies (ECAs) is far less common. Argentina’s level 7 rating with the OECD puts the South American country on par with Afghanistan and Iraq, and leaves ECA premiums too costly. Brazil is rated 3 and Switzerland is rated 0.

Still, agriculture remains the cornerstone of the Argentine economy, accounting for approximately one third of the gross domestic product and almost 55% of exports, according to Manuel Alvarado Ledesma, a specialist in agribusiness from Universidad Catílica Argentina in Buenos Aires and a director at Consultor Agroeconímica.

And thanks to this particular sector, the government has been able to collect enough tax revenue to post much-needed fiscal surpluses, adds Francisco Prack, chief economist at Grupo SBS in Buenos Aires.

Argentine dollars
Cameron Letters, managing director and head of soft commodities, Americas, at BNP Paribas in New York, says that Argentine dollars combined with high liquidity have put pressure on pricing for international banks. Their margins for short-term pre-export finance have dropped to between 0.5% and 1% from 1.5% over Libor in 2006.

In some cases, large agricultural companies in Argentina have been borrowing from local banks at less than Libor, he adds.

“Pricing came down basically due to the flood of Argentine dollars available from local institutions, and more and more international banks coming back into play in response to the positive fundamentals of the sector,” says Letters.

That said, Letters maintains that the fall in pricing has not been so pronounced for banks prepared to enter into medium-term commitments, where competition from Argentine dollars, which are sourced from short-term deposits, does not come into play.

With loans stretching to as many as five years, BNPP supports the soft commodities, steel, aluminium, and oil and gas sectors, says Letters.

Percy Bayley, vice-president for international funding at Banco Santander Rio in Buenos Aires, says Argentinean exporters presently have access to financing at Libor flat or 30 basis points over Libor at maximum.

As an example, a medium-size exporter can obtain a locally-funded 180-day loan at 5.50%, while a similar line from an international bank will cost over 6%, says Bayley. He adds that about 90% of all export financing in Argentina is done with 180-day tenors, versus 270 days for import financing.

Banco Santander Rio’s trade portfolio equals roughly US$400mn, which is evenly split between corporate clients and small and medium-size firms whose revenues do not exceed US$10mn.

Bayley adds that the government has no plans to eliminate the Argentine dollar regulation in the foreseeable future, but the fact that dollars deposited with Argentine banks yield just 3% annually on average, versus 5.25% for US Fed funds, poses a considerable threat.

“A small crisis would whisk Argentineans to the safety of the US Federal Reserve,” says Bayley. Banco Santander Rio also does inventory financing through warrants and its lines can be two years long for exporters and importers. The latter can obtain plain vanilla import financing, forfaiting and letters of credit.

Concerning trade credit, Euler Hermes, the Paris-headquartered credit insurance company, is seeing demand grow in Argentina for the product, says Arjan van de Wall at Euler Hermes. The bulk of business is concentrated on 90 and 120-day terms, he adds. About 20% of all European companies rely on trade credit insurance policies, while in Latin America the ratio is just 1%, he says. “There’s a long way for growth,” says Van de Wall, who is senior vice-president and director of international development, marketing and strategy at Euler Hermes.

In the first half of 2007, Argentina’s leading exporters were Cargill with US$1.7bn, Bunge with US$1.2bn, Repsol YPF with US$903mn and Minera Alumbrera with US$898mn, according to local daily La Naciín.

The four top importers were Volkswagen with US$594mn, General Motors with US$579mn, Toyota with US$488mn and Ford with US$463mn. The main market for Argentine goods was Brazil, followed by the US, Chile and China. Exports reached US$53.1bn and imports hit US$41.2bn in 2006, from US$29bn and US$13.6bn four years earlier. The trade surplus is expected to narrow further this year as a booming economy drives up demand for imported goods.

Energy woes
Four years of economic growth averaging 9% per year, second only to behemoths such as China and India, has obviously reinvigorated the country. However, it has also led to an energy crisis, as investments in the sector were frozen due to the government keeping a lid on utility prices.

Plants in the Rosario area, which account for nearly all soybean crushing in Argentina, are being hit hard by energy cuts, says Jorge Weskamp, president of Bolsa de Comercio de Rosario, Argentina’s largest commodities exchange. Crushers will lose US$40mn this year stemming from purchases of generators and other substitutes, says Weskamp.

Facilities across Argentina have been severely hurt by energy shortages, says Banco Santander Rio’s Bayley, with the supply of energy often being reduced between 4:00pm and 8:00pm.

Supply will be absolutely incapable of meeting demand during the next three years, leading to hikes in energy tariffs soon, forecasts Prack at Grupo SBS.

In fact, booming energy imports sent Argentina’s trade surplus tumbling 50% to US$479mn in July 2007 versus the same month one year earlier. The surplus recorded in the year through July totaled US$5.6bn, 22% lower than in the same period in 2006.

Another factor helping bolster imports is China. Argentina’s trade surplus with China, which exceeded US$1.8bn in 2003, narrowed to about US$30mn in the first half of 2007. To this end, the Argentine government announced in August measures to restrict purchases of such Chinese-made products as shoes, textiles, electronics and toys. In response, China is applying stricter inspections on ships laden with Argentine commodities, thus delaying operations.

Government tampering
Limits on external sales of meat, corn and wheat, as well as taxes levied on all exports, are under harsh criticism. The limitations constitute a bid by the government to rein in surging inflation, while the taxes are allowing the country to reach fiscal surpluses.

Export taxes are the least of problems, Ledesma says, whereas export prohibitions are devastating farming. Restrictions on meat exports have been the longest running, leading banks to curtail financing to meat-related companies, says Ledesma at Consultor Agroecon mica.

“In five or six years of additional government interference, Argentina will stop exporting meat, save special cuts,” warns Ledesma, adding that without the levies on exports, the government would have no fiscal surplus.

To Prack at Grupo SBS, the intervention in agribusiness “is absolutely negative,” but he doubts grain production will fall provided international prices make farming highly lucrative.

Despite the limits, Letters at BNPP feels the Argentine government will not tamper with soy export flows, “one, because there is negligible domestic demand, and two, because export taxes on soy represent a major source of revenue for the government.” Farmers are producing as much soy as possible in detriment of wheat and corn, analysts say.

The export taxes, which started in the wake of the peso devaluation against the US dollar in 2002, preclude Argentine exporters from much of their currency gains, claims Ledesma. One dollar sells for about 3.2 Argentine pesos, down from 1 to 1 until 2001.

“The only incentive for producers to keep investing in Argentina is an extremely farming-friendly environment and an international market hungry for soft commodities,” concludes Ledesma. “If the peso devalues further, the tendency is that export taxes will rise accordingly.”

There is no explicit government tampering with sugar, although price agreements between officials and sellers are not uncommon, says Jorge Zorreguieta, president of the local sugar association Centro Azucarero Argentino. In 2006, Argentina produced a record 2.3mn tonnes of sugar, of which 610mn tones were shipped to international markets including Russia, Chile and the US.

The main shortcomings affecting sugar producers are the distance between the main production zones and consumer centres, and borrowing issues. The latter is being redressed by warrant-backed financing, Zorreguieta says. Argentina’s energy woes were weathered at sugar producing facilities for they are self propelled with the help of cane by products, he says.

Regardless of the outcome of the presidential elections, which are set for October 28, the currency will remain devalued, soaring imports will keep narrowing the trade surplus at a moderate pace and utility rates will go up gradually until the beginning of 2008, says Prack. In all, Argentina’s macroeconomic model is based on fiscal and external surpluses, which are likely to be recklessly pursued by the next president as well.