With Argentina currently experiencing inflation exceeding 150%, Argentinian bonds trading with a yield to maturity of more than 50% several times over the past few years, and a current year-over-year GDP decline of 5%, Argentinian capital markets are among the most volatile globally. To gain insight into the key drivers and pressure points of Argentina’s financial markets, it is essential to take a glimpse at the nation’s economic history.
A famous quote attributed to the Nobel laureate in economics, Simon Kuznets, humorously categorizes countries into four types: developed, undeveloped, Japan, and Argentina. It’s not surprising that Argentina stands out as an economic anomaly. In 1895, it had the highest per capita GDP in the world. Today however, recent data from the National Institute of Statistics (INDEC) reports a poverty rate of over 43%. So, what led to this stark transformation? The current state of the Argentine economy is the result of a complex interplay of factors that are challenging to explain, but one thing is abundantly clear: politics plays a significant role.
The Economic History of Argentina in a Nutshell
Argentina experienced substantial growth from the end of its civil war in 1852 until the onset of World War I. During this era, a significant wave of European immigration took place, driven by offers of land in exchange for military service in the Argentine army. These immigrants played a pivotal role in the development of ranches dedicated to livestock, wheat, cotton, and various agricultural products. In urban areas, newly arrived immigrants established businesses and engaged in artisanal manufacturing. Meanwhile, British capital investments supported the transportation of commodities and the development of essential public services.
During and after both World Wars, Argentina attempted to industrialize through import substitution policies, supported by revenue from livestock and agricultural production. However, these policies were not well-received by producers and landowners who sought to maintain the previous economic model. Simultaneously, the global influence of communism led to the emergence of armed movements and guerrillas that would eventually clash with the military.
The subsequent years, up until 1983, can be described as tumultuous for Argentina. The country experienced multiple coups, lacked a consistent economic policy, and, simultaneously, civil society was caught in a conflict involving guerrillas, successive governments, and the military. This period reached its climax with the restoration of democratic order after a military junta attempted to forcefully reclaim the Falkland Islands (Malvinas).
Despite having restored democratic order, this advantage was not reflected in the country’s economic well-being. Since 1983, Argentina has experienced 3 hyperinflations, 4 defaults, and has had to turn to the International Monetary Fundseveral times. Currently, Argentina is the largest debtor to the IMF. In total, over the past 60 years, Argentina has gone through 14 recessions and is currently entering the 15th.
Argentina’s chronic fiscal deficit without access to debt
The Current State of Argentina’s Economy
How can an economy operate with an annual inflation rate of 160%, an indeterminate number of exchange rates, capital controls, and bonds carrying interest rates exceeding 60% in dollars? The answer is straightforward: it can’t. These are the harsh realities that define the current state of the Argentine economy, which is projected by economists to experience a 2.5% contraction this year.
Inflation and Depreciation
The Argentine currency, the peso, lost more than half of its value in just one year, but this phenomenon is not recent. The peso has accumulated a loss of value of more than 99.9% over the last decade due to the fiscal needs of the country in a context where there is no access to external credit. In other words, there is a continuous fiscal deficit that cannot be covered through debt and is therefore financed through the central government sharply increasing money supply.
Argentina’s annual inflation rate. Rolling 12m basis
As inflation continues unabated, domestic investors seeks refuge in liquid assets like the US dollar to preserve their savings. This means that the USD exchange rate reflects future expectations. In other words, it is one of the “thermometers” of the economy. For example, prices for cars and homes are denominated in dollars. Additionally, whenever the dollar rises, producer sales in supply chains come to a halt.
As a result, in recent years as inflation has multiplied, the US dollar has followed a similar trajectory. While in 2016, the exchange rate was at 15 pesos per dollar, currently, the unofficial market has a price of 1,000 pesos per dollar, marking an appreciation of 6,566%. It is important to note this distinction of the unofficial market versus the foreign exchange market which does not reflect where goods and services are being sold in USD.
Foreign Exchange Market
The official foreign exchange market has capital controls and is set at a fixed price of 350 pesos per dollar. However, almost no transactions occur at this price. Imports in Argentina are entirely determined by the government and are limited to medical equipment and other intermediate components for domestic production. Exporters, mainly agricultural producers, are obligated to sell their dollars at this price to finance imports.
Difference between the official exchange rate and the “true” exchange rate
As the real price of a dollar is much higher than the official rate, the producer faces an approximate loss of 65% BEFORE taxes. For this reason, more and more exporters (agricultural, petroleum, etc.) are reluctant to sell their stocks, smuggling has surged, and a ‘shadow economy’ has emerged.
Asset Prices in Argentina
Naturally, the past few years have the maarkets have experienced a sharp decline in the prices of Argentine assets, including real estate, bonds, and the stock market. One of the most iconic Argentine stocks is Galicia Bank, a top-tier commercial bank in the country. Its price has decreased by 55% over the last 7 years. But if we also take into account the inflation of the US dollar, this decline is even greater.
Galicia Bank (Nasdaq: GGAL) stock price
Real estate has had a similar performance in recent years. The price per square meter for residential properties in Buenos Aires has decreased by 20% since 2020, and currently, there is a significant accumulated supply in the market,
Finally, we must mention that Argentina’s most recent default occurred in 2019. There was a debt renegotiation with private creditors in which new bonds were issued. If we look at their yield to maturity, the returns are higher than 50%. However, their current prices, which have fluctuated between 20 and 35 cents per dollar in the last several months, suggest that Argentina will default again. In other words, the yield to maturity is virtual, as it does not reflect a refinancing cost but rather the parity per dollar of debt issued.
AL30 is Argentina’s most liquid bond has recently traded between 20-35 cents per dollar
Argentina is a country with great human capital. Its population is very well educated and it possesses a greater quantity and diversity of natural resources than many of its neighboring countries. Currently, however, Argentina is facing a severe recession.
Regarding the economy, the new administration’s future policies certainly will impact the trajectory of the current severe economic crisis that can already be classified as hyperinflationary in pesos and deflationary in foreign currencies. According to most economists, Argentina will have to confront a recession in 2024, but asset prices might experience strong gains if expectations are reversed. While most asset prices haven’t experienced an improvement, stock prices bottomed in 2020, and Argentina is known for experiencing high growth rate “surges” as the economy stabilizes and economic growth returns.
This article was written and submitted by a guest contributor.