Tuesday, May 14, 2013

Argentina: Case Study in Currency Devaluation

Argentina is a case study in currency devaluation and inflation.  Over the last 5 years the official exchange rate for Argentina Pesos (ARS) to the USD has devalued about 40% from about 3.2 to 5.2 per USD.

This article by Bloomberg describes some interesting aspects of business in an inflationary environment.

  • The black market exchange rate is double the official rate or 10 ARS to the USD.  Interestingly in Argentina the illegal market is called a blue market.  Seems that if everyone is doing something illegal it cannot be entirely dark.
  • Auto sales are up 30% over 2012.  Argentines with ARS want to spend them before they devalue more.  And, Argentines with USD savings can exchange to ARS on the black market and buy that new car for half off.
  • The government is trying to help local businesses by requiring companies to export the same value that they import to Argentina.  So the automobile companies are exporting agricultural commodities, which likely has the unfortunate consequence of increasing food prices in Argentina.
  • The article states that Argentines are also purchasing gold without describing how.  The government must have controls in place to limit physical gold purchases and ownership.  Otherwise Argentine banks would have no deposits. 



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