ARGENTINA

Currency Devaluation and Its Effects on

Industries

TEAM 3
Dave Heyl
Deep Patel
Hilary Shah
Charles Paterson
ARGENTINA
• Population:
38,740,807

• Government:
Republic

• GDP:
$391 billion
 Key Industries
• Agriculture
– Some major exports: corn, wheat, soy, beef
– Accounts for about 7.0% GDP
• Services
– Financial
– Travel and Tourism
• Automotive
– Industry and Growth
• E-Commerce
– Impact on consumers
 AGRICULTURE
• Represents 7% of the Gross Domestic Product
(GDP)

• Produces 10% of world trade in wheat, 12.5% in

corn, and 13.5% in soy

• 3rd largest organic meat producer, with 90% of it

destined for export markets

• Remained fairly stable throughout devaluation

 AGRICULTURE
• Exports could reach US$15.3 billion in 2003

• Exchange rate: US $1 = 1.4 pesos

– Seems like a 40% price advantage
– Doesn’t necessarily translate into a price advantage.
• “Look for world commodity prices to be little impacted by this
devaluation. Inflation will rear its ugly head in Argentina and
wipe out any price advantage expected by their farmers and
ranchers.”
• American Farm Bureau Federation Senior Economist John
Skorburg
 AGRICULTURE
• Example:
– If wheat were selling at $3 a unit in the world
market and Argentina is devalued by 40%, the
assumption would be that Argentina will sell
into the world market at $1.80. However,
world prices for agricultural commodities have
not plummeted since the devaluation and the
real impact will be an inflated peso in
Argentina.
 AGRICULTURE
• 30% of the economy is still dependent on
agriculture.

• Employs 1million people

– 420,000 farms small family operations
– “Almost our entire sector is made up of
individual farmers…They generate large
numbers of jobs and are the backbone of the
country.”
• Secretary of agriculture, livestock, fish and food
 AGRICULTURE
• Farmers are seen as the country’s solution,
since 90% of the consumed food and 70% of the
nations exports come from local farming activity.

• President Eduardo Duhalde hopes devaluation

will boost exports and increase investment in the
ailing economy. The devaluation is attracting
new investors, but John Skorburg believes that
producers will hold on to their product until the
internal price of it adjusts to the new peso.
 Service Industry
• Financial Services
- Banking
- Capital Markets

• Travel and Tourism

- Hotels
- Airlines
- Car Rentals
 Financial Services
• Banking
– Past
• Decreasing Number of Banks
• Changes in Regulation
– Affect Operations of Banks (“pesification”)
– Deters Investments

– Present
• Foreign Banks Have Majority Share
– Citibank, Bank Boston, and TSB Lloyds
• Government Compensates Loss With Treasury Bonds
 Financial Services
• Capital Markets
– Past
• Increasing Country Risk (Equity Market)
– High Cost of Capital
– Public Debt
– Supply and Demand for Private Sector Limited
– Present
• Stock Exchange Re-emerging (Capital Investment)
• Bill to Create New Futures and Options Market
– Self-regulated Market
– Independent Clearing House
 Travel and Tourism
• Hotels
– Past
• Occupancy Levels Declining
– Dropped 6% From 2000-2001
• Average Room Rates Declining
– Dropped $31 US From 2000-2001

– Present
• Hotel Sector Experiences Growth
– Hilton, Howard Johnson, Marroitt, Radisson, etc.
• Double-digit Growth in Occupancy Levels and Average
Room Rates
 Travel and Tourism
• Airlines
– Past
• Reduction of Air Carriers
• National Airline in Bankruptcy
– Aerolineas Argentinas
– Present
• Air Carries Announce Increase in Flights
– Iberia, American Airlines, and Lufthansa
• Aerolineas Argentinas record Profits
– Owner Will Invest $30m US
 Travel and Tourism
• Car Rental
– Past
• Lack of Tourism
• No Demand for Car Rentals

– Present
• Tourism Boom
– Particularly From The US and Europe
• Sales Increase $6.5m US in Last 5 Years
• Expansion of Car Rental Agencies
– Alamo, National, Avis, Hertz, Localiza, and Europcar
Argentina’s Automotive
Industry
•1995-1998 Auto Industry Investments
•Brazilian real devaluation
•Argentine peso devaluation
•Annual & Monthly Analysis
 Auto Manufacturer Investments

• Chrysler $100M
• Ciadea $200M
• Fiat $600M
• Ford $1B
• GM $1B
• Sevel $300M
• Toyota $100M
• VW $500M

• 3.9B Invested in Argentina Between 1995-

1998
• Exported to Brazil
 Brazilian real Devaluation
• February 1999 the Brazilian real devalues
– Worth 25% less than the Argentine Peso
– Thus making cost of importing Argentine cars
Too expensive
– Causing production to shift to Brazil
– 2002 Argentine automotive production is at
15%
– Argentina was no longer a domestic
consumption based economy
 Argentine peso Devalues
• January 11, 2002 USD 1/Arp 1
convertibility regime is ended
• Peso was pegged to the dollar for 10
years
• Production gradually rises in automobile
production in Argentina
 1995-2002 Annual Analysis
Production Exports Domestic Sales
Units % Change Units % Change Units % Change

1995 285,435 -30.2 52,746 36.4 224,965 -37.6

1996 313,152 9.7 108,990 106.6 215,143 -4.4
1997 446,306 42.5 210,386 93 228,297 6.1
1998 457,957 2.6 237,497 12.9 221,971 -2.8
1999 304,809 -33.4 98,362 -58.6 220,553 -0.6
2000 339,246 11.3 135,760 38 186,400 -15.5
2001 235,577 -30.6 155,123 14.3 93,833 -49.7
2002 159,401 -32.3 123,062 -20.7 46,294 -50.7
 2002-2003 Monthly Analysis
Production Exports Domestic Sales

Units % Change Units % Change Units % Change

2002
JAN 4416 -42.2 3573 -45.4 1816 -55
FEB 7818 77 8543 139.1 4542 150.1
MAR 11155 42.7 9976 16.8 7419 63.3
APR 16473 47.7 11090 11.2 6086 -18
MAY 15247 -7.4 11973 8 3933 -35.4
JUN 13887 -8.9 9527 -20.4 2706 -31.2
JUL 15830 14 12402 30.2 2874 6.2
AUG 15238 -3.7 11578 -6.6 2938 2.2
SEP 15721 3.2 12810 10.6 2954 0.5
OCT 16124 2.6 11432 -10.8 3162 7
NOV 15787 -2.1 11027 -3.5 4181 32.2
DEC 11705 -25.9 9131 -17.2 3683 -11.9

2003
JAN 8919 -23.8 9504 4.1 3701 0.5
FEB 9909 11.1 7216 -24.1 3241 -12.4
MAR 13911 40.4 8839 22.5 3660 12.9
APR 15559 11.8 10656 20.6 4229 15.5
MAY 14106 -9.3 8671 -18.6 5123 21.1
JUN 13728 -2.7 8715 0.5 5319 3.8
JUL 12138 -11.6 8633 -0.9 5301 -0.3
 Currency Devaluation
• The e-commerce and internet industry:

– Brief Background
– The effects from devaluation on the industry
– The future
 Brief Background
• Argentine’s Economy has finally come
unraveled.

• Pegging the peso to the dollar has resulted in

a rapid devaluation.

• Country’s neighbors are bracing for the

aftershocks this latest devaluation is likely to
produce.
 The Impact on Argentina’s
E-commerce Industry
• Devaluation of the peso leaves Argentines to
limited access to their savings

• eMarketer study showed that the percentage

of Argentine internet users shopping online
had declined from 2000 to 2001.

• However, Neighboring countries remain

largely unaffected
 E-commerce Usage
• E-commerce users declined in 2001, yet the
number of internet users increased by 36%
 The Future
• Will Argentina’s fiscal woes have an
impact on internet usage on a regional
level?

• How will the industry be impacted?

• Will the internet help the Argentinean

people or hurt them?
 NOTES
• Euromonitor • CIA
• Trade Partners • Capital Magazine
• Hotel Resource • Fiscal Studies
• Travel Latin America • Business Week
• Trade Partners • Business Week
• Canning House News • Business Week
letter • Business Week
• E- Marketer