Melting weight is risk for Brazil-Argentina agreement – 03/05/2023 – Market

The Lula government’s attempt to finance Brazilian exporters and Argentine importers to buy products from Brazil, repaying the loan with the sale of imports in the neighboring country, comes up against the growing devaluation of the peso against the real, especially in recent weeks —marked by the worsening in the Argentine crisis.

As the real (and the dollar and the euro) appreciates almost daily against the peso, it will be an obstacle for Argentine companies to raise funds later to pay off the financing in full. Three months ago, R$1 was equivalent to 74 pesos. Today, it exceeds 93 in the parallel market.

Argentina announced that it will do its “homework”, presenting fiduciary guarantees so that Brazil does not default. Lula, in turn, pledged to put even the Brics’ bank, the NDB (New Development Bank), in the deal. The fact is that Venezuela, Cuba and Mozambique, in the past, have already left Brazil looking for ships.

According to the Ministry of Finance, with Brazil’s lack of mechanisms to finance national exports and Argentine imports, the country lost about US$ 6 billion in the trade balance with Argentina to China — today the largest commercial partner of Argentines.

Just as Brazil now wants, the Chinese have been providing financing mechanisms and alternative means of payment, such as operations in yuan or via the granting of credits to exporters.

Lula made a point of showing political support for the leftist Alberto Fernández, who visited him in prison in 2019. He said that the IMF should “take the knife out of the neck” of the country, although the Fund has been quite condescending, relaxing targets, in line with the Argentine debtor.

But an interest at stake for Lula in these risky negotiations is to reinforce the sale of industrialized products to the neighboring country, supporting the national industry. Argentina is the main destination for manufactured goods in Brazil, especially in the automotive sector (auto parts and vehicles).

A sign of both the shrinking of Brazilian industry and the increasing dependence on agricultural products in the export basket, Brazil currently sells more to the Middle East than to Argentina. The Arabs buy meat, corn, iron ore, soybeans and sugar.

In 2022, Argentina absorbed 4.6% of Brazil’s foreign sales, which had a surplus of US$ 2.2 billion with the neighboring country —US$ 15.3 billion in exports and US$ 13.1 billion in imports. Sales to the Middle East reached 5.1% of the total (US$ 17.2 billion).

According to the Brazilian Foreign Trade Association, two decades ago almost 60% of what Brazil sold in the world was manufactured. Today, that share has dropped to less than half. From the mid-1980s onwards, the share of the manufacturing industry in GDP dropped from 36% to around 11%, according to a study by the FGV.

In addition to being an important destination for Brazilian industry, Argentina competes directly with Brazil in the international market for agricultural products.

But, because of the taxation of exports by the government with the aim of reinforcing cash in dollars, the neighboring country has been losing markets to Brazil.

According to the Argentine Rural Society, taxes on exports of soy oil and flour (33% rate) and wheat and corn (12%), among others, reduced the availability of resources to increase production and resulted, in the last two decades, about US$ 175 billion in taxes to the Argentine government.

In the 2022/23 harvest, however, the severe drought that devastated the country led Argentina to lose around US$ 20 billion. With practically no dollars in reserves, Fernández is trying, with Lula’s help, to avoid the worst until October, when there will be an election in which he announced that he should not participate.

The biggest risk until then is a currency exchange rate devaluation, which could catapult Argentine inflation far beyond the annual 104% recorded in the last 12 months – imploding any agreement with Brazil for good or increasing the chances of default.