Economy & Finance: "The Unfortunate, Uncertain Predicament of Argentina’s Economy"

By:  Austin Kavanaugh, Brian Winstanley, Jack Tuttle, Drew Weaver     
Let’s venture back to the year 1914 in Argentina. We see an abundance of immigration and trade amongst a flourishing economy. In the 43 years leading up to 1914, Argentina showed an annual GDP growth of 6 percent, and was one of the top 10 richest countries in the world. This period, referred to as the Belle Époque in European history, marked a time of great optimism for Argentina as the country presented as a place of economic opportunity and progress.
Boasting attractive elements of a market with great potential, such as European entrepreneurs, well-established property rights, medium-sized farms, and a stable republican government, Argentina seemed like the ideal place to invest. The president of the United States at the time, Theodore Roosevelt, spoke quite highly of Argentina, calling it the U.S.’ “sister republic”. However, as wonderful as the future seemed for Argentina as the world entered World War I, the economy hasn’t returned to this robust state since.

A military coup arose in 1930, and others followed in 1943, 1955, 1962, 1966, and 1976. Argentina also struggled to impress the United States, a potential long-term trade partner, by remaining neutral and not joining forces with the Allies in World War II. The combination of lessening trade with Europe and North America, the military coups, changes in trade policy, recessions in the 1970s and 1980s, hyperinflation from 1989 to 1990, and a full on economic crisis in 2001 has left Argentina with a severe economic disadvantage compared to other developed countries.

Argentina has continued to slip away from a strong economic situation in recent years. With falling literacy rates and poor investment in education, Argentina lacks a competitive advantage in the world economy. The country lacks institutions to create much-needed, successful policies, leaving the country in an unfortunate dilemma financially. The country underwent a severe debt default in 2001, failing to compensate over $100 billion in bonds, which has led to heated debates with American hedge funds and bondholder strife. The country and its economy are in a position of uncertainty. The government has worked to settle this problem by offering an exchange program that offers new bonds with longer maturities. The predicament is starting to settle, but the country has a long way to go to restore consumer confidence.

            Besides the broad economic struggles of Argentina, there are some signs of promise, especially from their private sector. New companies like MercadoLibre are taking sizable market shares in Multi-Latina and global economies. Argentina’s businesses are expanding rapidly, and many are reaching far beyond the borders of the country. The economy as a whole is beginning to stabilize and grow, slowly but surely. Argentina hopes to replicate the growth of its neighbors on the West side of South America. If they navigate through economic strife and allocate resources properly, they have as much potential to grow as Peru, the fastest grower (based on GDP percent growth) in South America. Our group will monitor certain companies, such as MercadoLibre and coffee chain Juan Valdez, over the course of the semester to see if any growth or potential for growth is apparent in that short time.
With the volatility of the economy, Argentina has developed certain abnormal caveats. One of the most interesting aspects of the Argentinian Economy is the fact that it has a “double currency”. Argentina has a peso as their currency. But, depending on how the pesos are obtained, they are classified in one of two ways. “Black” dollars are acquired in the traditional fashion using banks, hotel concierge, and official currency exchange locations. “Blue” dollars are acquired through illegal black market exchanges. This may seem like a questionable practice that should be avoided by most tourists, but it is actually a very common occurrence that receives little attention from the authorities.
This double exchange rate originated from two sources. The primary reason for its existence is a lack of certainty and optimism from the population towards the Argentinian economy. After decades economic strife the citizens have lost faith in their government’s ability to stabilize their economy, and subsequently, the value of their currency. The downside potential for the value of a peso is enormous compared to other currencies. Argentinians would rather posses US dollars, currently one of the strongest currencies in the world, because it is highly unlikely to lose value dramatically. The second reason is the overstated optimism of the Argentine government. They decide what the formal exchange rate is, and that creates the gap between the true value of the USD and the rate at which it is exchanged.
Our main objective when we visit Argentina will be to test the hypothesis that we can essentially use arbitrage to make profit. We will conduct a case study by exchanging money using both rates, hoping to make profit. Throughout our time in Argentina our group will participate in money exchanges in an attempt to determine how much money can be gained, and whether it is worth the effort of visiting exchanges multiple times a day. The exchanges are fairly accessible, they are within hotels and banks and La Cronista, Argentina’s equivalent to the Wall Street Journal, publishes the blue dollar rate in its paper every day.
This chart will help me track how much money one could make during their trip. At the start of this study the Blue Dollar exchange rate was $12.88, and the formal rate was $8.70. By the end of this trip, we hope to have furthered our insight into the confidence of the population, the speculation of the government, and the problems that arise when the two disagree. We will complete the chart by the time we return to America.
Blue Dollars
For Source Reference and Further Reading on Topics We Covered:
History of Argentina
Current Situation
Double Currency and Arbitrage

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