Economy Economic Storm Clouds Brewing for Argentina?

[MDirtBoy]

The Argentine government's budget is based upon projected growth of 5.1%, however analysts are predicting 2.5% to 3.0% growth which will certainly put a dent in the government spending that has been a key economic driver over the last decade. The slowdown is due in part to a dry crop season, trade protections, and currency controls that the government put in place to try and stem capital flight.

The K's have enjoyed almost 10 years of economic growth but it looks like the party might be coming to an end. At the same time, instability often times creates opportunity.

Considering all of the economic drivers do you see any opportunites for Foreign Direct Investment in Argentina in the near future? I welcome your comments.

 

[TechNow]

The Argentine government's budget is based upon projected growth of 5.1%, however analysts are predicting 2.5% to 3.0% growth which will certainly put a dent in the government spending that has been a key economic driver over the last decade. The slowdown is due in part to a dry crop season, trade protections, and currency controls that the government put in place to try and stem capital flight.

The K's have enjoyed almost 10 years of economic growth but it looks like the party might be coming to an end. At the same time, instability often times creates opportunity.

Considering all of the economic drivers do you see any opportunites for Foreign Direct Investment in Argentina in the near future? I welcome your comments.

I am continuing to invest in Argentina. I know plenty of other small businesspeople who are investing as well. Small-scale businesses are pretty much immune to the kind of government psychosis that the Ks like to inflict on all of us because there just isn't enough cash (caja) for them to go after.

If I had a huge cash-producing industry like oil, mining, banks, etc, I would be worried right now. But if, like me, you have restaurants, taxis, real estate, etc., then you are pretty much immune to government action.

And the fact that you can get $6 pesos per dollar on the CCL market means that if you have dollars you can buy up Argentine assets that are denominated in pesos for dirt cheap. They are saying that if the dollar floated freely it would be worth $4.80-5.00 on the open market. So the fact that you can get $6.00 per dollar means a huge savings for people investing today.

 

[IvanCaes]

I'd disagree that small businesses are not impacted. Just here we 've seen restaurants, bars and even a candy store harassed and closed. Id never buy property or heavynequipment. I do agree there are a few businesses that stay under the radar doing wel here, but as someone who owns one of those, I constantly wait r the other shoe to drop. We can just go home but what about our dared employees?

 

[Camerer]

I work in the premium sector in BA, and we are definitely feeling it. Restaurants which were full on a Tuesday night in Puerto Madero, might be lucky if they are packed perhaps on a Friday night.

 

[earlyretirement]

Definitely there are many more challenges now vs. just a few short years ago. Much of the smart money is exiting Argentina now or recently have already. I'm not saying there will be a total collapse but historically there is some crises about every 10 years or so. They are due for another crises. The writing is clearly on the wall now, especially with this lunatic CFK at the helm. Who knows what wacko restriction will come next.

Many foreigners have either headed for the exits already or in the process of it. And I DEFINITELY don't see much foreign investors wanting to invest in Argentina now for good reason. The risk/reward ratio is just not there compared to a few years ago.

 

[TechNow]

I'd disagree that small businesses are not impacted. Just here we 've seen restaurants, bars and even a candy store harassed and closed. Id never buy property or heavynequipment. I do agree there are a few businesses that stay under the radar doing wel here, but as someone who owns one of those, I constantly wait r the other shoe to drop. We can just go home but what about our dared employees?

You're not going to see a restaurant or small property-holder nationalized.

The biggest problem a small business owner has in this economy is what looks to be the recession that is on the horizon. But that means what it has always meant: the marginal players with small profit margins are going to go under. During a recession you have to cut prices. Efficiency is key. I am preparing today, cutting costs to the bone, etc.

Businesses that serve a particular niche (instead of mass market) are going to do better in a recession because there won't be so much price pressure. This is all old news for those of us who have been in business a long time.

 

[JulianCE]

The company I work for has business in many countries in the world. We haven't been able to send profits to our head quarters in Europe for 6 months, something that used to be done every month. Also, we're not the most profitable company in the group (quite low, below average) due to very expansive work force and transportation costs with outstanding increases on regular basis. We do have a fantastic sales growth (both in quantity and money - transferring inflation to customer). We have 2 plants in Argentina, pay taxes, generate jobs and well, we're still screwed. If we manage to send the money out, it will be much less than people in Europe expected due to exchange rates being worse than when the profit was made. Of course we're using the money to finance our operations instead of having money come from the outside, but we do have to turn the profits sometime. I don't see how any company would want to invest here with this scenario.

 

[MDirtBoy]

If you are a foreign investor would you buy property here to rent? Would you do it now given the exchange rate? Would you be under the radar?

 

[earlyretirement]

The company I work for has business in many countries in the world. We haven't been able to send profits to our head quarters in Europe for 6 months, something that used to be done every month. Also, we're not the most profitable company in the group (quite low, below average) due to very expansive work force and transportation costs with outstanding increases on regular basis. We do have a fantastic sales growth (both in quantity and money - transferring inflation to customer). We have 2 plants in Argentina, pay taxes, generate jobs and well, we're still screwed. If we manage to send the money out, it will be much less than people in Europe expected due to exchange rates being worse than when the profit was made. Of course we're using the money to finance our operations instead of having money come from the outside, but we do have to turn the profits sometime. I don't see how any company would want to invest here with this scenario.

EXACTLY. I know many expats have been saying "the sky is falling" for many years. I disagreed with these forecasts years ago. But Argentina in 2012 isn't the same as Argentina just a few years ago. Just look at all the new restrictions and laws coming in place the last several months that weren't here before. That's a tell tale sign of the desperation.

You have to really be burying your head in the sand to deny there are severe severe problems in Argentina now and it's NOT a great place for foreigners to invest right now. I'm not saying there probably aren't opportunities to invest and make money. I just stand by my call that the risk/reward ratio for the vast majority of investments there aren't going to be good. Especially considering that Argentina doesn't have a working judicial system in case there are problems or disputes.

It's not even about nationalization fears. That is the furthest worry for small companies. It's just about survival due to all the controls and red tape involved with doing business in Argentina. Argentina, if you are running your business completely legal and white and paying all taxes is a VERY difficult country to make money in. That's the plain truth.

 

[TechNow]

The company I work for has business in many countries in the world. We haven't been able to send profits to our head quarters in Europe for 6 months, something that used to be done every month. Also, we're not the most profitable company in the group (quite low, below average) due to very expansive work force and transportation costs with outstanding increases on regular basis. We do have a fantastic sales growth (both in quantity and money - transferring inflation to customer). We have 2 plants in Argentina, pay taxes, generate jobs and well, we're still screwed. If we manage to send the money out, it will be much less than people in Europe expected due to exchange rates being worse than when the profit was made. Of course we're using the money to finance our operations instead of having money come from the outside, but we do have to turn the profits sometime. I don't see how any company would want to invest here with this scenario.

Your company should replace its CFO here in Argentina. There are still ways to get cash out of the country. Multinationals have dozens of options at their disposal: contado con liquidación, transfer pricing schemes, etc. Companies are sending cash abroad every day.

 

[earlyretirement]

If you are a foreign investor would you buy property here to rent? Would you do it now given the exchange rate? Would you be under the radar?

Well the exchange rate really doesn't matter because properties in Buenos Aires are priced in dollars and have been for some time. So you will still pay in dollars not pesos.

The only place the exchange rate comes into play that is a positive is your expenses are all in pesos and you can exchange them at higher amounts today. Your income will mostly be in dollars as you wouldn't want to charge peso rents.

But honestly, there is a glut of rental apartments now vs. just a few years ago. It seems like everyone and their brother, sister, mom, dad, aunt, uncle and friends are renting out their properties.

Rental yields are still decent even renting out to Portenos if you can find good rental tenants and demand the rental payment in dollars rather than pesos. Plus on long term rentals, the tenant pays for condo fees, all utilities, and sometimes ABL bills.

Yields are still decent but keep in mind it's not as easy as it was a few years ago.

 

[EricElvis]

In twenty years I have never seen anything like the current situation. It is obvious to me that the status quo can not be sustained forever. Cristina may be able to buy time but eventually (2-3 years?) inflation will be so out of control that a massive devaluation will have to occur. Property values will recover, though - same as they did after the last crisis. In the meantime foreigners who own property and want to sell may find it hard to get the money out of Argentina.

 

[earlyretirement]

I totally agree with chris. For me it's not a question if...it's just a question when now.

I also agree about property values over the long haul. Real estate and land are the ONLY safe investments in Argentina for the most part. That continues to be true today and it will continue to be true after the eventual crash. It's the one place where people will store their wealth and can do so effectively and safely.

Look at what is going on. Yeah, sales might be slower but prices are still fairly high and much higher than the last time we had a crash.

I switched over and renting some longer term to some locals I know and locking the rentals in dollars and it's still been a decent investment but partly because I bought so many years ago and the prices were much higher. But the prices today are much higher now.

Bricks and land will probably always retain their value well in Argentina over the long haul.

 

[Talute]

Definitely there are many more challenges now vs. just a few short years ago. Much of the smart money is exiting Argentina now or recently have already. I'm not saying there will be a total collapse but historically there is some crises about every 10 years or so. They are due for another crises. The writing is clearly on the wall now, especially with this lunatic CFK at the helm. Who knows what wacko restriction will come next.

Many foreigners have either headed for the exits already or in the process of it. And I DEFINITELY don't see much foreign investors wanting to invest in Argentina now for good reason. The risk/reward ratio is just not there compared to a few years ago.

But there's always a few ill- researched late "adopters" wanting to jump on the "Argentina is cheap bandwagon" even if it's x years too late for that. I saw it in Ireland early 2000s when the multinationals started to scale back and redirect work and small companies were leaving there were still new companies proudly trumpeting their arrival in Dublin like they invented it...It's only because we're living and working so close to the Ar economy that we know what it's like. Don't presume others with a burning desire to invest in Latam have as much of a clue-in.

 

[earlyretirement]

But there's always a few ill- researched late "adopters" wanting to jump on the "Argentina is cheap bandwagon" even if it's x years too late for that. I saw it in Ireland early 2000s when the multinationals started to scale back and redirect work and small companies were leaving there were still new companies proudly trumpeting their arrival in Dublin like they invented it...It's only because we're living and working so close to the Ar economy that we know what it's like. Don't presume others with a burning desire to invest in Latam have as much of a clue-in.

Talute you're absolutely correct. There are always people that come to the "party" too late. I don't think ANYONE thinks that Argentina is still cheap, especially Buenos Aires.

The most successful people are people that are able to move with the cycles. Everything moves in cycles. Nothing stays great forever and nothing goes down forever.

The key with Argentina I truly believe is taking advantage of these 10 year cycles and moving in and out with them.

Buenos Aires now is expensive. Nothing is too cheap there anymore. Taxis used to be ridiculously cheap. I still remember when the meters used to start below 1 peso and the meter moved very very slow. Meals used to feel like you were paying nothing. Now, many times I can pay more for a meal there than I can in any upscale restaurant in a major metro city in the USA. Some of my European clients tell me they eat cheaper in most of their home cities in Europe vs. BA.

I guess you can still live rather affordably if you own your property outright. Utilities are still cheap there but those will start going up now too. Same with expenses and HOA fees. If you can make dollars then you can live comfortably but if you have a peso based job.....forget about it...

It was worth putting up with all the red tape and BS in Argentina like waiting 45 minutes in line at the grocery store, waiting 1 hour in line to get a package at the post office, horrible drivers, corruption, lack of judicial system, lack of imported products, horribly expensive electronics, etc.... when things were dirt cheap.... But not so much when prices are more expensive vs. the USA or even Europe.

Don't get me wrong. I still love Argentina. Its a wonderful and beautiful country. But until they get effective, ethical and common sense leaders in place...the country won't change for the better and it will always be corrupt and run more like some far flung nation out in the middle of Africa.

The USA has it's fair share of problems but things just work here. People respect the laws, traffic is orderly, stuff at the grocery store is always fresh and efficient. And now everything is "on sale". Real estate is a bargain compared to the overpriced bubble prices during the peak years. Some desirable cities you can buy and pay prices 40% lower than just a few years ago.

Like I said...it's all about catching the cycles...

 

[MDirtBoy]

Talute you're absolutely correct. There are always people that come to the "party" too late. I don't think ANYONE thinks that Argentina is still cheap, especially Buenos Aires.

The most successful people are people that are able to move with the cycles. Everything moves in cycles. Nothing stays great forever and nothing goes down forever.

The key with Argentina I truly believe is taking advantage of these 10 year cycles and moving in and out with them.

Buenos Aires now is expensive. Nothing is too cheap there anymore. Taxis used to be ridiculously cheap. I still remember when the meters used to start below 1 peso and the meter moved very very slow. Meals used to feel like you were paying nothing. Now, many times I can pay more for a meal there than I can in any upscale restaurant in a major metro city in the USA. Some of my European clients tell me they eat cheaper in most of their home cities in Europe vs. BA.

I guess you can still live rather affordably if you own your property outright. Utilities are still cheap there but those will start going up now too. Same with expenses and HOA fees. If you can make dollars then you can live comfortably but if you have a peso based job.....forget about it...

It was worth putting up with all the red tape and BS in Argentina like waiting 45 minutes in line at the grocery store, waiting 1 hour in line to get a package at the post office, horrible drivers, corruption, lack of judicial system, lack of imported products, horribly expensive electronics, etc.... when things were dirt cheap.... But not so much when prices are more expensive vs. the USA or even Europe.

Don't get me wrong. I still love Argentina. Its a wonderful and beautiful country. But until they get effective, ethical and common sense leaders in place...the country won't change for the better and it will always be corrupt and run more like some far flung nation out in the middle of Africa.

The USA has it's fair share of problems but things just work here. People respect the laws, traffic is orderly, stuff at the grocery store is always fresh and efficient. And now everything is "on sale". Real estate is a bargain compared to the overpriced bubble prices during the peak years. Some desirable cities you can buy and pay prices 40% lower than just a few years ago.

Like I said...it's all about catching the cycles...

By what method are you using to consider whether BsAs is "expensive" vs. USA or Europe? Thank you.

 

[earlyretirement]

By what method are you using to consider whether BsAs is "expensive" vs. USA or Europe? Thank you.

Just general cost of living to include living in a good area and a good property. Quality property rentals in the best parts of Buenos Aires aren't cheap. Plus you have the hassles with dealing with some owners that want guarantees or pre-payment in advance, etc. Sure, there are exceptions to the rule but my point is that quality rentals aren't cheap there. Also, nice furniture and electronics are very expensive there vs. the USA.

And if you're speaking of buying...... Buenos Aires is more expensive to buy vs. most cities in the USA with the exception of New York City and a few others. But the cost per sq. foot is very expensive in Buenos Aires compared to the USA now. I sold a 2 bedroom apartment in Recoleta for $250,000 recently. You can buy an entire house in most cities in the USA for that. A friend just sold his 2 bedroom flat in Puerto Madero for $950,000 recently. Oh and his monthly condo fees were $1,500 US per month.

Dining out is also no super value in Buenos Aires vs. most cities in the USA. You can actually eat quite well in the USA now for not expensive prices and there are HUGE choices of the places you can eat and the types of food you can get. You name the type of food you want and you can find it in any metro city in the USA and usually very cheap as well.

Look at the grocery store and the prices you are paying in Buenos Aires vs. the USA and again BA is no value. Plus you can often times find rotting veggies or fruits in the supermarket in Buenos Aires (I know I did plenty of times). I often times saw meat in the supermarket that was expired. Just not a whole lot of quality and it's not cheap in Buenos Aires. I'm not saying the supermarkets in the USA are cheap. But you can go to places here in California like Trader Joe's, Sprouts and the like and it's not bad. And again everything is quality products.

Cars and insurance there aren't too cheap either plus you can't finance cheap like you can in the USA if you wanted to. I was paying more to insure my car in Buenos Aires vs. the USA! Plus the registration fees and annual taxes of having an import car in Buenos Aires are very high. Here in the USA now if you have good credit, they will finance for almost 0%. When I went to buy my wife's car we had the cash to buy it but they had 1.9% financing and if you used BMW financial they rebated back $1,500 so essentially it was a 0% loan.

Medical insurance in BA isn't so cheap anymore either. The amount I was paying at OSDE for my family coverage is about the same as I pay for private coverage here in the USA with an excellent plan.

And to be clear I'm speaking strictly from a consumer side. Not the employer side or why a company might want to hire there.

So from a pure logistics and common sense standpoint of housing, dining out, groceries, medical coverage which are the main elements/expense for most people... Buenos Aires is no bargain.

What method would you consider Buenos Aires cheap?

 

[Talute]

By what method are you using to consider whether BsAs is "expensive" vs. USA or Europe? Thank you.

I don't like to join the cheap Bsas v the rest of the world debates so I'll stand aside on that one but in terms of affordability, as an employer you think first and foremost about the cost of doing business and the total cost of staff if you're running a services company as we are. It was hard to miss a good opportunity in 2001 when the same highly qualified staff in 2000 were on "offer" for a 3rd of the price. Having just hired 2 PMs in Spain we're now seeing the cost of a qualified resource here versus Bsas as still about 20% more expensive than Bsas but the long term potential and stability as greater. Maybe the 20% is worth it for peace of mind and not to have the nightmare 25% -30%- salary increase discussions and general sense of despair...

 

[earlyretirement]

I don't like to join the cheap Bsas v the rest of the world debates so I'll stand aside on that one but in terms of affordability, as an employer you think first and foremost about the cost of doing business and the total cost of staff if you're running a services company as we are. It was hard to miss a good opportunity in 2001 when the same highly qualified staff in 2000 were on "offer" for a 3rd of the price. Having just hired 2 PMs in Spain we're now seeing the cost of a qualified resource here versus Bsas as still about 20% more expensive than Bsas but the long term potential and stability as greater. Maybe the 20% is worth it for peace of mind and not to have the nightmare 25% -30%- salary increase discussions and general sense of despair...

Yeah but you also have to factor in your equation the fact that running a business in Argentina is a much bigger hassle vs. most countries. I'm not sure about Spain as I've never owned a company there but I can't imagine it can be worse than Argentina.

Yes, salaries might be less in Argentina but the past several years by law they have forced you to pay employees on average about 27% more per year. So salaries can double in 3 years or even less! Plus you have horrible horrible pro employee laws on the books. So even if you fire employees for cause you typically end up paying them a severance. You have to factor that into the equation. The laws on the books for owning a company aren't efficient.

Even if you fire an employee for cause, they get a scum bag lawyer and if you fight it, you have tons of legal bills fighting them. And in the end, the judge usually finds some excuse for the employee to win. So it's typically cheaper to just settle and give them something. But you have to add all these effective costs into the equation. You can't just say, "salaries are 20% lower vs. X country" because you also have to factor into the mix all the BS pro-employee laws in place.

I'd say as an employer if you can outsource and not be forced to officially hire employees it's the best thing. But once you hire them and they are on the books for more than 6 months..... it's not always an "asset" having the employees but a huge eventual "liability".

 

[Mart]

I don't like to join the cheap Bsas v the rest of the world debates so I'll stand aside on that one but in terms of affordability, as an employer you think first and foremost about the cost of doing business and the total cost of staff if you're running a services company as we are. It was hard to miss a good opportunity in 2001 when the same highly qualified staff in 2000 were on "offer" for a 3rd of the price. Having just hired 2 PMs in Spain we're now seeing the cost of a qualified resource here versus Bsas as still about 20% more expensive than Bsas but the long term potential and stability as greater. Maybe the 20% is worth it for peace of mind and not to have the nightmare 25% -30%- salary increase discussions and general sense of despair...

And the ability to accurately forecast out for more than 3 months in advance

I posted a while back - we stopped adding projects and HC in Arg b/c of the ridiculous costs of doing business here.

My latest - I had an employee that I had to let go. He wasn't performing on one project, and client wanted him off the project I offered him a transfer to the other project b/c he wasn't bad, just wasn't a good fit at the same salary. he refused so we had to terminate him even though really, he defacto quit b/c he wouldn't accept the transfer (again, same salary, same level of responsiblity, same title even).
Total cost of pay out: about 3.5 months worth of salary.

I had an employee quit. The law here says that an employee has to give 30 days notice. The employee gave no notice. Puts me in a terrible position since there was no work handover, client is upset, I'm upset, directly impacted my project.
Things I can do even though the employee broke the law and handled it completely unethically: NOTHING. Zero. And I still have to pay out the employee.

You have to be a masochist to have employees here. It's the sad truth.