THE
ARGENTINE CURRENCY DEVALUATION
by Ronnie Bloom
Marketing Corp.
of Argentina
Buenos Aires, Argentina
March 4, 2003
Dear Financial Sense,
Thanks for encouraging me to write this article on what I consider to be the “Post-effects” of the Argentine currency devaluation which occurred in January 2002, after we had 10 years of the Convertibility Law which fixed the Argentine peso on a 1 to 1 basis with the US Dollar and made the country very expensive to live in as well as non-competitive in the exportation of its products.
I might add that in February 2001, I advised several of my Argentine friends to withdraw their pesos from the bank, convert them into U.S. Dollars and transfer them abroad, since I evaluated the situation here as being extremely vulnerable for them regarding keeping their pesos in the Argentine Banking System.
From a 1 to 1 Peso/Dollar situation in December 2001, the peso today is quoted to the U.S. Dollar: 3.20 – 3.25. The “Post-effect” devaluation has resulted in Argentina having approximately 9 different currencies, which includes different types of local Provincial Bonds, that can be used to purchase goods and as a currency for other transactions. Some of these Provincial Bonds are also only valid in the particular province and are not accepted in other Provinces nor by the National Government.
In addition, we see a daily increase in the number of poor people, which today total approximately 51.6% of this country’s 35 million people. Yes, the strong Argentine currency permitted the National and Provincial Governments to spend more than what was really made available to them. Thus causing a structural destruction of the country. The recent IMF-Argentine agreement, in my opinion, which took almost 1 year in agreeing to terms, will merely keep the corpse floating for a little longer period of time.
Argentina, at one time, had a very strong middle-class, which was close to 45% of the total population. However, poorly managed governments with poor economic policies slowly crushed the size of the middle-class population.
“Post-effects” of the devaluation have resulted in the withdrawal of a couple of international banks from Argentina and the closing of other banking institutions. It has, without any question, increased the crime rate, increased the number of kidnappings here, as well as the number of properties which have to be auctioned off due to this grave financial crisis, which the country continues to face on a daily basis, and whereby Government officials do very little about changing the direction of the country. Most Provinces are completely bankrupt and in some cases are 3 months behind in paying “School-teachers” and other Provincial employees. I see no effort being made by these governmental leaders to reduce employees. No doubt the present national leaders strongly believe, and rightly so, that they would have complete chaos on their hands, as well as a social revolution, should the present unemployment rate go above 25%. And since no social security benefits are available to the workers, they now depend on governmental food programs, which provide a great deal of corrupt money entering into the pockets of those governmental people administering the program.
On Sunday, March 2nd, the Catamarca Province, located in the north-west of Argentina, postponed elections for the Governor/House Members, since there was conclusive evidence that a specific group would, if necessary, either burn the ballots or illegally seize them. The political group was not permitted by the courts to participate in the Provincial Elections.
The “Post-effect” has also created “Havoc” in the judicial system, due to the abundance of legal cases against the devaluation. In addition, in the Provinces, roads have been blocked on several occasions in order to prevent “agricultural products” from getting to the harbour ports. Since the devaluation, many Banks have been robbed and looted; their structures defaced when the populace was not permitted to withdraw their funds.
Naturally, the events here were caused by the complete structural decay of the “Democratic System.” Yet, by the same token, it is interesting to note that in 2002, the local stock market continued to climb and during the year, increased in pesos by 65%. The free market peso, which started to float in February 2002 went from 1.50 (to the U.S. Dollar) to a value of 3.85 to the U.S. Dollar in July 2002. So the only place whereby you could possibly recuperate some of your money, after the devaluation, was in the local Stock Market by legally transferring your pesos. Over the past 4 months, we have witnessed more economic stability, although the grave financial crisis continues. There are no U.S. Dollars available today for “pre-financing” Letters of Credit. Most medium and small-size companies have to look for other means for obtaining credit lines when they are made available. Bank interest rates are prohibitive. The local consumption is 50% of what it was prior to the devaluation. Salaries in U.S. Dollar-terms have been considerably reduced and I don’t see a reactivation of the internal consumption, since the country must continue to maintain “cheap wages” in order to export their products to foreign markets.
So, as you can see, we have lived day to day with this situation. In fact, today, Argentina is the only country in the world, which punishes you if you export. When you export, you must pay a “Retention tax”, which varies according to the particular product. This is one of the few ways the National Government can legally obtain the funds they require, since there is a lot of tax evasion going on in the country. The “Retention Export Tax” can vary from 5% to 10%.
I also would like to mention that in 1989, Argentina had an inflation rate of 5900%. I recall that I had to get up at 6:00 a.m. and stand in line in order to get 1 liter of cooking oil, since the prices in the Super-markets were constantly being changed to higher peso values based upon the Black Market Dollar in those days. That year was an incredible one, as you can easily see, and caused daily “night-mares” among the populace.
How do I see the future of this really wonderful country in spite of its economic situation? I am rather optimistic to tell you the truth. There is no doubt in my mind that agricultural exports will finally start to grow, since the internal market will remain restricted. We saw our food ingredient export products grow last year considerably and we see a continuation of this trend during 2003, in spite of the fact that there is a tremendous uncertainty here as to “WHO” will be the next Argentine President, when elections are held the end of April. Today, I would say between 35%-40% of the people are not sure whom to vote for.
The country now anxiously awaits the next President, who hopefully will create a more stable economic policy than what presently exists so that exports will grow, and the country will, in some manner, shape or form, be able to reduce its present foreign debt.
Many thanks for permitting me to express my thoughts as to what occurs after a currency devaluation. I trust you found it to be of interest to you. Should you have any questions to ask me, please feel free to contact me.
Ronnie
Bloom
MARCOAR (Marketing Corp. of Argentina)
Soldado de la Independencia 743
6th Floor
C1426BGT
Buenos Aires, Argentina
Tel/Fax: (54-11) 4775-8553
Teléfono:(54-11) 4776-5156
E-mail
Follow up article: Two Years After The Argentina Currency Devaluation, January 27, 2004 Financial Sense University
