A new political scandal in Brazilian was revealed on Wednesday, when rumors of President Temer being involved in an illicit related to the well-known “Lava Jato” appeared on every newspaper shocking the markets.
In a single day, the Brazilian real depreciated about 8%, the biggest drop in a day since the lethal 1999 Real currency crisis. Meanwhile, trading on the Brazilian stock exchange was interrupted by a circuit breaker automatically triggered when the Bovespa index fell 10%, at the same time that the multinational flagship Petrobras lost 17% of its value in 24 hours.
It is possible that the movements previously described as well as those that will probably take place in the weeks to follow involve a certain amount of "overshooting", and shall the political pieces accommodate quickly, the fundamentals of the incipient Brazilian reactivation would not be affected In the long run. However, if we place the current event in the context of a political crisis that began more than a year ago and included accusations that ranged from corruption to a “civil coup” it raises the concerned that the institutional crisis is far from being solved, and therefore threatening the future of our neighbors’ economy.
How does all this may affect Argentina?
Presumably a crisis of our main trading partner will not go unnoticed by the still stumbling local economy. Brazil is the destination of 20% of our total exports, and clearly if as a result of the gloomy economic projections its citizens buy less goods (including foreign goods) the impact on our external balance would be huge, and it would include less entrance of foreign currency.
The market has begun to discount the predicted impact, and the dollar appreciated almost 2.5% on Thursday. The depreciation of our local currency in relation to the one of the Brazilian currency will be a key factor to follow in the coming weeks. Today, the real exchange rate index between ARS and BRL currencies published by our Central Bank is at its lowest level since mid-2016, illustrating the loss of competitiveness of our economy relative to Brazil’s.
In the short run this means that Brazil is cheaper for Argentinians than Argentina for Brazilians (therefore, fewer exports and more imports will accentuate Argentina's balance of trade deficit with our neighbors’, draining foreign currencies). In the long term, it can even motivate a relocation of investments in favor of Brazilians agglomerates. With a common external tariff for the MERCOSUR and zero tariffs between our borders, the decision to locate a plant in Argentina or Brazil is defined, mainly, by the relative prices of the factors of production, strongly correlated with the exchange rate’s swings.
In addition, if the Brazilian crisis was perceived in the world as a regional crisis, the outflow of funds from emerging economies would affect the Argentine external accounts as well as undermine the expectative of the national government that the arrival of fresh money from abroad will trigger Argentina’s economic growth.
¿Which could be the specific impact on the agricultural sector?
The depreciation of the real, which went from R $ 3.10 to $ 3.40 per dollar, means that for every dollar an importer pays for Brazilian soybeans, until Wednesday he could buy R $ 3.10 of soybeans and now R $ 3.40. It can be seen that, in nominal terms, it works as if Brazilian goods are cheaper now for the rest of the world.
The consequence is clear: domestic soybean prices rose in Brazil and triggered farmer selling (until then, Brazilian producers had sold half of the estimated 2016/17 production, when on average the last 5 years already 65% of it was already sold, according to Safras & Mercado). Some private traders reported that between 3 and 5.0 million tons of soybeans has been traded on Thursday only. The above suggests that international purchases to the United States will slow from now onwards, and the price of the nearest future at Chicago Board of Trade lost USS 10/MT on Thursday.
In our local market, the fall in the external price was offset by the increase in the dollar value, and buying offers remained almost at the same level than the previous session, supported by the need of the crushing industry. It follows that grain prices will be sustained in Argentina as long as the local depreciation rate compensates for the grain swing in the external market. If Brazil becomes cheaper relative to Argentina, its placements will be preferred over ours. Here the strategy of continuing to add value to the grain will be fundamental, since while Brazil's shipments consist mainly of soybeans, ours are oil, meal, and other soybean by-products. To the contrary of what happened in 1999, Argentina now has a variable exchange rate regime that could help to cushion external turbulences