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Tim Harcourt
Chief Economist
Australian Trade Commission
Sydney
Email: tim.harcourt@austrade.gov.au
22 August 2002
Argentina has experienced a severe economic crisis, which has greatly shaken confidence in that nation. An early exit from the World Cup in Korea-Japan didn’t help much either. But what does this mean for the South American region as a whole that had made so much economic progress over the 1990s after several decades of economic and political instability? And what does this mean for Australian exporters looking to hang out their South American shingle?
Let’s start with the bad news from Buenos Aires first. How the mighty have fallen. One hundred years ago, Argentina was one of the richest countries in the world. Buenos Aires (and Melbourne) had one of the highest per capita incomes in the world. Like Australia, Argentina was rich in commodities which it could export to the world, had vast land to explore and settle, and became a wealth magnet for immigrants from the old world. The phrase “as rich as an Argentine” came into common usage. But today, the contrast between the fortunes of Argentina and Australia could not be greater. Whilst, Australia is one of the most successful economies in the world, Argentina is plagued with a crisis of confidence with an economy in a pro-longed recession and marked instability in political governance. This has occurred despite Argentina’s still considerable resource base and highly skilled workforce.
What went wrong? Whilst Argentina does have a history of boom and bust and associated political instability, the current crisis concerns ‘the three d’s’: dollarisation, devaluation and now default.
Firstly, there’s dollarisation. To combat hyperinflation in the early 1990s, the (then) Peronist President Carlos Menem, pegged the Argentine peso to the US dollar. Unfortunately, for Argentina the strength of the US currency over the course of the decade, left Argentina with an uncompetitive economy (contrast this to Australia which had ‘floated’ its currency enabling the exchange rate to take the burden of adjustment instead of the whole economy).
Secondly, there’s devaluation. The dollarisation policy eventually had to come to an end but devaluation of the currency has also been an unpopular measure as many Argentines (both businesses and households) hold their debts and mortgages in US dollars whilst earning their incomes in pesos. Argentines have had to face political and economic instability with bank restrictions, austerity measures, and eventually, (the third ‘d’) default. The economic crisis has been accompanied by political instability with a series of Presidents coming and going in quick succession. The Argentine people have had to endure four years of deepening recession with worsening unemployment.
How is this affecting trade? Despite, the devaluation there has been few benefits coming through for Argentine exporters, many of who are still waiting for their export value added tax (VAT) benefits. In addition, many Argentine exporters have to pay mortgages in US dollars. There are domestic considerations too. According to Argentine economist Marianna Iribarne, “..Dairy and beef producers receive four-fifths of their sales from domestic markets and have been badly affected by floods as well as the unstable financial situation.”
The environment has affected some Australian exporters. For instance, Village and Hoyts have a strong presence in Argentina. Many foreign companies, including Australian ones, have been affected by having income streams in pesos but liabilities in US dollars.
So that’s the bad news. Is there any the good news?
Firstly, despite the uncertainty and instability, the reforms introduced may improve Argentina’s medium term viability. This will, of course, depend on the institutional response of Argentina at the economic policy and political level.
Secondly, the devaluation has had two major effects. It’s made Argentine exports competitive for the first time after many years of dollarisation. It has also prompted a mini-tourism boom in Argentina as Chileans, Brazilians, Uruguayans and Mexican visitors take advantage of cheap holidays deals.
Thirdly, there are benefits for some Australian companies who stick it out through the crisis. For instance, during the Asian financial crisis, some Australian companies who maintained their presence ‘through thick and thin’ benefited in the recovery phase. This may occur if Argentina’s situation improves.
One Australia case study is the Commonwealth Handling Equipment Pool (CHEP), which is part of the Brambles Group. The company is involved in the management and rental of industrial pallets and services clients such as Procter & Gamble, Colgate-Palmolive, Bayer, Nestle, McCain foods, Persan Argentina and a number of Argentina’s largest retail and wholesale outlets.
Deborah Monteith, Business Development Manager of Austrade Buenos Aires, recently spoke to Daniel Guerra, the General Manger of CHEP for Argentina and Uruguay. Mr Guerra regards stability in Argentina as a ‘slow crisis’ and draws upon the experience of their managers in managing other crises in Brazil and Mexico. He regards success as depending on the skills of the staff at CHEP:
“The skills that are necessary to do business in normal times are not enough in times of crisis, such as we currently have. The first skill is to have the capacity to accept the reality of the situation – to look at it objectively and accept it, whether you like it or not. The second is teamwork – creating groups to analyse each subject. For example the legal consequences. A team focused on operations, etc..The third and most valuable skill is visionary leadership – if accepting reality is necessary, the vision is the lamp that will keep the team motivated and the company on the right track to reach its goal..”
Mr Guerra believes it is an opportune time to invest in Argentina as “Enterprising companies with a business vision and developing the right segment will find that Argentina offers a strong growth potential which more developed markets don’t have.”
So in conclusion, for Australian exporters it has been tough in Argentina. But that doesn’t mean there are not going to be opportunities in a recovered Argentina and even in the rest of South America. For instance, there is reason for some optimism with respect to the outlook for Chile, which has an increased Australian presence in mining and knowledge-based services. Australian companies have also been active in Brazil in ICT, environmental technology and alternate energy. However, if you are in Argentina make sure you get some help from Austrade in terms of knowledge, networks and information about markets in the region.
*Thankyou to Deborah Monteith , Marianna Iribarne, Gerard Seeber for their assistance with this article.
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