Real Argentine economy slows down

Bad news spring, forecasting potential stagnation. Interests are so high (more than 17 per cent yesterday for great companies and beyond 20 per cent in general) that corporations seek shelter in cash and dollars, in view of expensive and irrecoverable credit. In fact, credits have almost disappeared: hardly anyone lends at more than one year. Hostile climate for real economy, which is condemned to short-termism. Some private institutions are using an inflation index different from the official one, announcing that exchange rate is well-balanced. In other words, from now onwards, dollar would be more prone to rise than to fall, which is observed in people buying foreign currencies little by little in banks and exchange agencies. Argentine Central Bank (BCRA) has a handsome amount of dollars to face any rush, but government is mistaken in reserves' aptitude: they are assets, though tied to liabilities (pesos in the hands of the people, who, if deciding to change them for dollars, complicate the situation). To make matters worse, peso-denominated bonds plummeted again yesterday (dollar-issued ones remained stable), as opposed to calmer international markets (less volatile, Dow Jones climbed 0.1 per cent). Everybody admits is a local matter: problems in economy, electoral imminence and little confidence in front-runners.

Overheated rates - Development in Argentine market

Financial market lived yesterday a new chapter of rate overheating. Despite Argentine Central Bank (BCRA, in its Spanish acronym) pumped other ARG$175 millions into market through active repos and repurchase of LEBAC (BCRA's Bills of Exchange), yields for all kind of credit facilities climbed again, particularly in those cases in which financing was sought far beyond October 28 (presidential election date).

Banks also paid more to gain funds. Some 30-day time deposits of blue-chip companies were agreed at 14.25 per cent annual. BADLAR rate had touched a 13.50-per cent peak by the end of last week, but, according to preliminary data, it would have kept on rising.

Tension continued in one-day term, after poor signs of easing last Friday. Call money between blue-chip banks was traded at 12.75 per cent annual. However, companies needing short-term financing had to pay six points more, that's to say, around 19 per cent. In the case of second-line firms, rates climbed to 24 per cent.

"Fifteen days ago, we were fund offerors, but now we are also bidders. This is not related to deficit, rather to a matter of hedging," the financial manager of a foreign entity illustrated. This situation is observed in main banks: almost none of them injects pesos in market and opt for taking funds offered by BCRA through repos.

Apart from one-day and 30-day rate hike, yield requested for longer-term credits has soared. Companies needing greater financing terms are the ones suffering this situation. The electrical appliances network Megatone had to endure so yesterday, when placing a new series of its financial trust, Consubono. The yield it had to pay for this issue settled at 25.05 per cent, the highest one since leaving 2001-2002 crisis. Average duration of this placement hit 5.51 months. ARG$62.7 millions were collected and demand barely went beyond that level, when, for this kind of placements, offers used to exceed by more than three times the amount sought.

Nora Trotta, in charge of this transaction through Compañía Inversora Bursátil, explained that "Retirement and Pension Funds Administrative Bureaus and insurance companies, which are the ones participating in this transaction, ask more rate and we are going through a period in which market approves those increases." However, she warned that "if current situation continues, electrical appliances' firms may end up transferring this greater cost to new financings to consumers."

Last Friday, Tarjeta Privada trust came out at a 22-per cent rate in longer terms. Some banks opted for interrupting their trust offers in view of no interest. A crucial test will come tomorrow, when the firm Garbarino will jump into market to seek other ARG$100 millions through a similar mechanism.

Market feels this new rate level has come to stay. At least, traders have no hope that interbank rate will lower from the 12-12.50-per cent annual rank. It seems to be a level at which BCRA starts to feel comfortable. "If we estimate inflation around 20 per cent, it's not strange to see such rate zooming. It will hardly dip in current foreign conditions and elections' closeness," a trader of a domestic bank money desk stated.

Soaring cost

Almost all companies have the same outlook as regards bank financing. Cost of advances in current account or bill discounts has increased and, in some cases, financing limits have been drastically cut. Peso-denominated fixed rate is only kept for six-month financings or, if lucky enough, for one year. For longer terms, one must now opt for variable-yield lines.

Issue

BCRA will intensify today its rate injection policy. The monetary authority will try to renew LEBAC and NOBAC maturity (BCRA's Bills of Exchange and Securities) only for ARG$350 millions, less than half of the amount falling due. In practice, it entails additional peso issue for a similar amount. On the other hand, several banks find it difficult to get liquidity through BCRA bills' sale. The thing is that the entity makes specific purchases through auction sales and Nation Bank has almost disappeared lately as an institution pumping liquidity through this mechanism. However, the few transactions agreed show rates hovering around 20 per cent for one-year NOBAC.

BCRA officials hope this outlook will decompress, at least partially, by mid September.

The thing is that banks are accumulating excessive liquidity levels to comply with minimum cash rules. In the following weeks, they may sell part of those pesos, since BCRA does not pay the so-called "surplus cash minimums".

However, everybody favours liquidity for the time being. Foreign turbulence and closeness of presidential elections are more than enough to make banks and companies extremely cautious.