I don't really understand economics...

[jamila]

It is not something that I am particularly interested in but I have been trying to follow along as my move to Buenos Aires is set for September.

So I have a few questions that I would like some help with. If someone could explain I would be very grateful. Remember, this is not my strong point so simple terms and examples would be appreciated.

1. Everyone agrees that Argentina is heading into a recession correct? Normally don't prices of items go DOWN in a recession? Why is it that Argentina prices are going up?

2. I realize that the worst part about a recession in unemployment.. which i think leads to increase in crime... but what else should one expect during a recession?

3. If the value of the peso continues to decrease. I realize that this is bad for Argentina as a whole but... is it negative for those who make their money in dollars/euros? It seems to me that this would be a positive for increasing tourism... Is that not true? why?


Thanks in advance, I am going on faith that there is no such thing as a dumb question!

 

[expatinowncountry]

Your questions are not dumb at all. Quick and unsophisticated answers:

1- Yes, thanks to CK the economy is slowing down big time. A recession could be due to lower demand, lower supply or a combination of the two. Prices can go either way then. During the 1970s the world got to know stangflation= inflation + recession. The government in Argentina is printing pesos and people do not want those pesos, so the value of pesos is going down (you can buy less things with your pesos, hence prices are higher)

2) Unemployment is only one part of the story. Some contracts will not be fulfilled. Some tenants will not be able to pay the rent, some companies will not be able to pay their suppliers, some people will not be able to pay their loans/credit card... so there could be also some financial troubles depending on how bad the recession is. Some banks could go down. That has happened in Argentina a few times.

3) The devaluation of the peso has some pros and cons. If the devaluation rate is higher than the inflation rate (it was not the case in the last 4-5 years), then the peso will depreciate in real terms, meaning that Argentina will be cheaper for foreigners who have hard currency and Argentinean exports will be cheaper helping the country to recover a little bit of the competitiveness it lost in the last few years. Argentina is devaluating the pesos to match the devaluation of the real in Brazil.... but devaluation also means inflation and that is very unpopular with most of the people. Also devaluation means more expensive imports and a lot of the things made in Argentina use imported intermediate inputs.

I hope it helps.

 

[kurtdillard]

1. yes, normally, but Argentina is suffering stagflation rather than a typical recession. The slowdown started in october, right after Kristina won another term, but the inflation rate only dropped a bit, I think its still over 20% anually.

2. spot shortages of numerous consumer goods and near constant shortages of imported goods.

3. foreign currencies haven't been appreciating nearly as quickly as inflation, our standard of living has dropped considerably over the past 5 years. Also note recent articles about dropping tourism like this: http://en.mercopress.com/2012/06/09/argentina-rapidly-becoming-too-expensive-for-foreign-tourists, I have read a couple others just in the past week on US and British websites.

 

[jamila]

Thanks that does help a lot. So if Argentina is in a stagflation.. how does the country hope to fix the problem.. if they have a plan. I read that the govt is trying to make people use pesos instead of dollars but if pesos can't buy you very much then what is the end game?

Is it more likely that prices will continue to go up and goods will be harder to get? OR that things will be forced to change?

It seems to me like the best idea for the country is to let the peso drop so that Argentine WOULD be more attractive to tourists... but then again what do i know.

 

[el_expatriado]

It seems to me like the best idea for the country is to let the peso drop so that Argentine WOULD be more attractive to tourists... but then again what do i know.

Not just more attractive to tourists, but also for companies who export. If the peso were cheaper we could export at cheaper prices and start to reactivate the economy. The problem is that this will probably cause a spike in inflation and the unions will demand a huge salary increase to compensate, etc. A devaluation right now could cause runaway inflation.

 

[jimdepalermo]

Also note recent articles about dropping tourism like this: http://en.mercopress.com/2012/06/09/argentina-rapidly-becoming-too-expensive-for-foreign-tourists, I have read a couple others just in the past week on US and British websites.

The article is right about the trend, Kurt, but the facts are off, as is so often the case with Mercopress. I hadn't checked the prices of flights to the interior for a while, which I just did, and the cheapest London-Baires flight is still more than double the most expensive flights (non-resident prices) to IGR, USH, or SLA. I could also question several other assertions in the article.

I would also point out that a 3% decrease is tourism is not yet a crisis. Although Argentina is not the bargain destination it was several years ago, it is still inexpensive compared to major cities in Europe or the US. Friends from Barcelona who visited recently complained most about the internal airfares and the lack of the bargain airlines they are accustomed to in Europe. The rest they found relatively inexpensive.

To jamila's concern, I would anticipate the biggest issue would probably be general civil unrest. From what I'm told about the 2002 crisis, many stores had little merchandise, but essentials like food were never a great problem. I would expect even less impact in the next crash because the quantity of national goods in shops is much, much greater than it was 10 years ago.

 

[el_expatriado]

There is no reason for another crash. The fact is, the biggest debt payments the government has is this year, in August 2012 and December 2012. Once we finish 2012, it is smooth sailing from there on out. Argentina has one of the lowest debt to GDP ratios in the world. That's what happens after 10 years of no credit on the int'l markets.

I'm thinking that maybe in 2013 they might be able to relax the controls a bit on everything if they don't manage to totally sink the economy first.

 

[camberiu]

The reality is that there is no silver bullet to solve the economic problems here in Argentina. The fix requires a lot of very tough political/economic measures that the government simply cannot afford to make without alienating its electorate.

The solution would involve a massive cut on government waste, privatization of companies like Aerolineas and YPF, end of the dole policies, subsidies, etc... The moment the government convince the market that it does not need to print money in order to pay for its expenditures, inflation will be under control.
The problem is that this is much easier said than done. Argentinians, from all social and economic classes seem to believe in the concept of "free lunch". They are all for cutting government expenditures/subsidies, as long as these cuts affect someone else other then them. Since everyone, from industrialists and farmers, to blue collar workers and the very poor benefit from one sort of government handout or another, putting the house in order is a herculean tasks, politically speaking. The fact that CFK and her clique believe that any type of balanced budget/realistic spending is a submission to the "neo-liberal policies of the Washington Consesus" does not help any either.

 

[camberiu]

The article is right about the trend, Kurt, but the facts are off, as is so often the case with Mercopress. I hadn't checked the prices of flights to the interior for a while, which I just did, and the cheapest London-Baires flight is still more than double the most expensive flights (non-resident prices) to IGR, USH, or SLA. I could also question several other assertions in the article.

I just came back from a 9 day vacation to Chile. We were planning on going to Salta at first. But the trip to Chile was so much cheaper that it ended up being a no-brainer.

BTW, after spending 9 days in Chile, coming back here feels like returning to North Korea.

 

[el_expatriado]

The problem is that this is much easier said than done. Argentinians, from all social and economic classes seem to believe in the concept of "free lunch".

I can tell you from experience that this is true. There isn't a single group of people here who want the government to just get out of everybody's business. My Argentine partners in the taxi business complain that taxis are not subsidized while bus, train, and subway companies are subsidized. The thought that everyone should compete without subsidies never entered their minds. Instead when they talk with the union, for example, about projects to do together they talk about trying to get a subsidy for this or that.

Argentine businessmen are way too dependent on the government. Everyone in Argentine society thinks the government is responsable for fixing all their problems. The problem is the people in government seem to agree.