Argentina - Daily Economic Challenges
I went to Argentina. I spent some pesos. It's different than in other countries.
If you live in Argentina, travel there regularly, or deal with payments in Argentina for whatever reason, much of what I write in today’s newsletter will be common sense and second nature. This post about the fascinating and frustrating daily currency issues is more for people not in Argentina and who haven’t been there in a while.
Even if you follow Argentina closely, there is a clear difference between writing about economic issues in general from abroad and actually pulling out a stack of 1,000 peso notes in a restaurant to avoid paying by foreign credit card, something that would add an additional 60% or so to the price of the bill.
Example: If I’m at a restaurant in Buenos Aires and the bill is 2,000 pesos. That’s just under US$11 if I pay in cash exchanged at the blue rate and US$18 if I pay on my credit card and receive the official rate of exchange.
Take that example at an individual level and then imagine running a business dealing with those issues. It helps explain why multinational businesses have a hard time operating in the country and the sometimes strange choices that the government makes while trying to defend the currency.
The dual-rate currency and the widening gap between the official and blue rates are issues Argentines have dealt with before including under the presidency of Cristina Kirchner, but its return after several years of fewer controls under Macri still comes as a shock. When I visited Argentina in early 2019, the official and blue rates were close enough to identical that I didn’t have to think much about it. Three years later, the difference between those rates was at the center of every transaction I made.
If you have a dollar bank account, you can send money to yourself via Western Union, Xoom, and several other money transfer services and they will give you the blue rate (or at least relatively close to it) in Argentina.
If you bring US currency to change or use, it needs to be flawless. Any stamp, ink, tear, crease, fading, smudge, or any other minor issue will cause people to reject your bill. I was told this ahead of time, and yet regularly found bills that I thought were great being rejected for the smallest of imperfections that I would have never noticed. People also treat bills of different denominations differently. Some places might accept a $100 bill at a 200:1 rate but accept $20 bills at 150:1. Or vice versa.
Alternatively, if you have family or friends in Argentina, many Argentine citizens may be happy to purchase dollars from you at a rate between the blue and official rates because they are capped as to how many dollars they can purchase at the official rate each month.
There isn’t a punishment for exchanging pesos on the gray market (it’s not Venezuela in 2013). One souvenir stand in downtown Buenos Aires openly offers a 200:1 exchange rate (better than the unofficial rate you can get at a backroom money exchange!) if you pay in US dollars there. Why would they do that? Because they know the currency will devalue and they don’t have an urgent need to spend, they’d rather hold on to dollars for the next year when the exchange rate will be 250:1 or 300:1. (also, everything in that store is overpriced, so offering 200:1 still nets them a nice profit).
The Argentine government clearly benefits when they convince foreigners to use their credit cards, bringing in much needed hard foreign currency (dollars, euros, reais) at a rate that can’t be defended locally. For this reason, many of the tourist attractions only accept credit cards. No cash allowed when paying for the entrance fees to Iguazu Falls and Recoleta cemetery.
The currency controls create space for cryptocurrency companies. Even if you’re a pessimist about crypto use cases everywhere else in the world, you can see how having money exchange options that don’t involve cash or credit cards at unfair exchange rates could be a very useful tool for locals and foreigners. In addition, with 60% inflation expected this year, most major cryptocurrencies will hold value better than Argentina’s peso, even if they are volatile or lose some value compared to the US dollar. Crypto businesses are trendy everywhere, but they have a stronger foothold and a greater interest in Argentina than almost any other country because of the economic troubles.
The currency controls also create opportunities for arbitrage and for importing electronics and other devices at unofficial prices. The markets I saw in Paraguay aren’t driven by Paraguayan demand. Economic restrictions, tariffs and currency issues in Brazil and Argentina make those sorts of markets possible and profitable.
In addition to the day-to-day challenges, there is a constant fear of devaluation. I left Argentina with some pesos. Unless I return within the next year, those pesos will be worth nearly zero the next time I go. There is general global inflation impacting every country in the hemisphere and it’s compounded by the devaluation of the currency that is occurring at a much faster rate in Argentina than in any of its neighboring countries.
I was in Argentina for ten days. Hypothetically, prices rose almost 2% in the short time I was there. Any pesos I exchanged and didn’t spend lost 2% of their value by the time I left. But devaluation is less steady than that and happens in waves. At some point in the coming months, a new sudden crisis will likely push the blue rate to 220 or 250 or lower. While nearly everyone expects that to happen, it will still come as a shock the day that it does.
The price increases make it difficult to assess the cost of a weekly grocery bill or gasoline. Arianna, who works with me at Hxagon, witnessed a worker in the supermarket print out a new price and update the label for a block of cheese in the middle of the day. Argentines worry about how to save long-term as any savings effort in pesos is near certain to be devalued by the end of the year. Those sorts of stories resemble the hyperinflation era, but inflation is only 60% annualized right now. If it worsens, those effects will increase significantly and the political backlash will be severe.