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Argentina's macroeconomic situation is even worse up close
A guest post by Karl T. Muth
This is the third annual Noahpinion guest post by Karl T. Muth. People have been asking me to write a post about Argentina for a long time, so I was quite happy when Karl offered to write a post about his trip there. It’s a sad but fascinating portrait of what a country looks like when it commits itself to bad macroeconomic policy for literally decades on end.
Karl is a Professor at UChicago who teaches New Venture Strategy at the business school and created the Innovation Management curriculum at Northwestern, which he taught for over a decade. He earned his MPhil/PhD at the London School of Economics and also holds a law degree from the University of Illinois. He is an expert on early stage companies and was a senior mentor at Microsoft Ventures earlier in his career; more recently, he was a 702 expert witness in a nationally-publicized trial involving an alleged billion-dollar startup financing fraud.
All parallels between his experiences and Jack Ryan’s are coincidental.
All photos are by the author unless otherwise specified.
Premise and Perspective: The Noahpinion Intelligence Unit
This is your field intelligence report. What do I mean by that?
I very much enjoyed Noah’s 15 September blog [paid Substack subscribers only] that asserts writing pieces like this is very similar to being a “public-domain CIA analyst” and he’s right–The Economist even leverages this in the branding of its “Economist Intelligence Unit” advisory and consultancy business.
As a few econ peeps and panel wonks have (mostly jokingly!) recently noted, my background and experiences are sometimes amusingly similar to the Shadow Recruit / Krasinski rebooted Jack Ryan character: a PhD from the London School of Economics, an early-career deep interest in U.S. and international securities law enforcement and insider trading investigations, taking an expert role in a federal criminal trial involving a billion-dollar complex alleged fraud (albeit not El Cartel de Cali in my case…), scarce enthusiasm for time spent in Djibouti (Jack Ryan: Season 2, Episode 8) and–relevant here–a contributor to a few provocative field reports (in my case, in support of Combined Task Force 150/151’s work) I hope helped keep some assets safe…
Consider this your field intelligence report from the next-best-thing to “[y]our man in Argentina” so… let’s get started!
Argentine Policy: Putting the Tango in Whiskey Tango Foxtrot
Argentina is a strange place that breeds and exports excellent economic minds while operating a domestic insane asylum for blunder-grade economic policy ideas; Noah wrote on this back in 2015.
I’m not an expert on Argentina’s politics or macro history. But I was hungry for a nation-specific context or framework within which to situate the recent wave of economic policy critique I’ve been reading, so I decided to spend most of September 2023 in Argentina. I split my time on this trip between urban environs and the countryside to better-understand, if not fully decipher, what’s going on. In the course of exploring, I took five flights among four Argentine airports, rode aboard two ferry routes and an inflatable boat, talked to locals and visitors (and even had drinks with a visiting British politician!), and in the process had surprisingly-positive experiences with the much-derided national airline.
In some ways, the reality on the ground was very different from what I’d expected having read mainstream Western media, which has focused on the macrorealities of indebtedness and peso inflation rates and the question of who will lead Argentina after the coming 22 October election. These are important news cycle milestones, but do not capture (or explain) everything happening.
As I wrote this blog, the Argentine central bankers (along with the loosest concept of credibility) were stretched to the limit (and international lenders’ patience nearly exhausted) with a claimed quasi-peg at 350 Argentine pesos to 1 U.S. dollar. The official statistics from 18 September claimed for the running month Monday, August 14 to Saturday, September 13 of 2023 the number of pesos equal to one U.S. dollar in value bounced in a narrow range between 349.08 and 352.28 which, if true, is quite a macromanagerial achievement!
Especially since recent stability has seemingly been achieved simply by buying USD with CNY while selling a modest volume of bonds. Hey, managing an economy–how hard could it be?
But, if it seems too good to be true, it probably is… I was able to get around 700 pesos to the dollar at a periódicos (newsagent) by calle Florida on September 8, 2023 and my friend Alex’s family was able to get 720 that same day; that’s the day I reached out to Noah to write this blog. Exaggerating one’s currency’s stability is one thing, but being wrong by a factor of two or more with a straight face is enough to earn a medal (or an honorary policy degree?) in Zimbabwe (Argentina has a publicized rate, and then a variety of sector- and purpose-specific rates, plus rates that integrate subsidies or taxes).
And the tale here isn’t one of moneychangers hidden in the phonebooth-sized backrooms of newsagent stands or speculators fleeing to Bitcoin and U.S. dollars and gold. The tale here is much larger and involves everyday people, prices on chalkboards that have been erased and crossed out and corrected more times than an election-night Fox News infographic, and goods and services being sold at exchange rates meaningfully different from, or even totally alien to, the official story.
This means Argentina isn’t just a place of multiple truths and ready arbitrage, it’s a place in real crisis where the pegs and stories and chewing gum holding things together are all failing.
Abundance, Turbulence, and the Current Predicament: Una Pequeña Historia
If there is a podium of national pastimes in Argentina, they might be enology, fútbol, and lying about the prevailing exchange rate, in no particular hierarchy; all three have rich, more-than-century-long traditions. On the third point, official rates were so unbelievable from 2014 to 2017 that The Economist published an article on why it didn’t trust Argentina’s government’s exchange rate reporting enough to include it in their indices (but cautiously took notice of the official rate again in their statistics in 2017-18). Since its independence from Spain, the country has defaulted on its debts nine or ten times, depending how you count, and has suffered two-, three-, and even mid-four-digit (4,750%) inflation, always underestimated by the then-contemporary government(s).
How bad is the situation with the peso today?
I reached out to an old friend in London who is a hotshot at a brand-name white-shoe law firm and represents celebrities and sportsmen, from soccer (er… fútbol…) stars to Formula 1 folks. I asked him what the considerations would be if he were asked to negotiate for a footballer a contract that stated compensation nominally in Argentine pesos. His answer was simple: failing to advise against this would be foolhardy and might even rise to the level of malpractice. I agree.
After accumulating enormous wealth (hence the expression “rich as an Argentine”) and weathering the (nearly) global depression of the 1930s, Argentina suffered enormous instability in the postwar period, substantially overestimating the size and heterogeneity of its domestic production capabilities and implementing an ambitious-but-doomed policy of import substitution while marching toward the Perónesque mirage of quasi-isolationist self-sufficiency.
While the rest of the world became enormously wealthier, Argentina continued its decline. The 1960-75 epoch is the context for Simon Kuznets’s oft-quoted and even-more-often-misunderstood development economics quip that there are four kinds of countries: developed, underdeveloped, Japan, and Argentina. During that time, Argentina went from being wealthier than Japan on nearly every metric (see this piece on non-Western development from last year) to being worse-off on almost every dimension.
Argentina’s economy is an airplane in flight where people are so busy proposing new engine designs that nobody has time to glance at the altimeter. Those Argentine airplane engines are often designed with Theranos-style engineering, and it’s hard for passengers (the general public) to distinguish between descending and crashing, especially in the near-zero-visibility offered by Argentine political airspace.
After multiple failed pegs and discredited claims of dollar-parity stability (including a peg to the dollar during the Clinton administration that was continuously assaulted and finally broken, to the glee of FX traders), the government auctioned state assets (particularly agriculture-adjacent holding companies but also select infrastructure managers and regional utilities) but still could not make its bond payments. This resulted in defaults in 2014 and 2020 (two events connected to varying degrees, depending which historian or politician is narrating), with remaining ambiguity around whether the government will meet its next cycle of obligations.
Volumes have been written by economists with enormously more understanding of the nuances of macroeconomic, trade, and central bank policy in Argentina, but these are the basics of the timeline.
The Cornell Queue Indicator
But where does one go to observe what’s going on and what choices people are making when the government insists things are fine but every gust on the street blows in the opposite direction?
On my first day in Argentina, I was in a familiar spot: a Western Union in a central neighborhood.
For those development economics students reading this prior to (or while on) fieldwork, I have a handy four-level taxonomy of what one sees at a Western Union. The first level of distress is very long queues. The second level is guys with NFL neck sizes moving suitcase amounts of cash. The third level of distress is Sharpie-written “no dollars” or similar signage on-site. The final level is… well, usually the Western Union has closed down and the looters, vandals, and arsonists have taken care of the rest.
Argentina is in “level one,” but for a surprisingly-prolonged period.
I suspect part of how Argentina maintains a reasonable degree of order is its strength of core institutions, its prioritization of utilities and services (including police and its military), and what I can only call a species of momentum: a societal belief that things can keep moving with a degree of friction and uncertainty in the street-level economy that other societies would find crisis-level unbearable (see Alan Taylor’s 1992 piece mentioning Argentina’s willingness to be enormously and persistently and even enthusiastically dependent on foreign hard-money financing).
Argentina has such a high tolerance for crisis; it is the Uber driver who is very concerned about what music is playing and can’t be bothered to investigate the check-engine light. Note this tolerance for crisis conditions is very different from good governance; it may even be associated with a tolerance for bad governance, as Duncan and Fogarty argued in their classic 1984 volume on the topic (that’s a year of publication, not a dystopian allusion, to avoid what might be understandable reader confusion…).
But, as I’ve said for years in my microeconomic analysis for public policy course, in the Newtonian physics of economics, inertia is always easy to overestimate and gravity easy to underestimate. I fear I’ll be proven right again in 2023-24 Argentina.
When Pesos Collide with Reality
People send money to Argentina, and that’s pretty straightforward in terms of both the economic effect and the underlying accounting. But what about when other parts of the global economy interact with Argentina’s markets? Well, as renowned and implicitly-believable physicist and nuclear weapons expert Dr. Christmas Jones taught us: “It’s complicated!”
Would a dollarized peso make remittances and other street-level functions easier? Sure.
But, as per the esteemed Dr. Jones, it isn’t that simple.
Every generation in Argentina has a peg-related memory. Older people remember the loss of credibility in the 1970s, leading to late-1980s debates over dollarization (full dollarization never happened, but the idea significantly influenced Domingo Cavallo and others). People my age remember the Clinton-era peg to the dollar (the “Convertibility” plan of early 1991), created under Carlos Menem, shattering. Young people speak of friends who tried to store money in Terra’s algorithmic stablecoin ecosystem (oh don’t worry, there’s more “innovation” in this area coming soon…).
The problem with pegs is they’re hard to manage and they don’t break gently; it isn’t a wall crumbling (a favorite analogy of finance academics and broadsheet journalists), it’s a wall failing when tested by enemy artillery (the artillery is typically fired from a trading desk in London or New York or Singapore). There is only so much one can do to defend; relaxing (quasi-peg or “soft peg”) parity while raising short-term interest rates is the classic move, but this inevitably creates “credit crunch” dynamics and disadvantages capital-intensive domestic ventures. More exotic defensive maneuvers are available, but all are expensive to implement and maintain.
You know people are running out of options when a New York Times economics reporter thinks a piece about his experience asking Chat GPT-4 how it would solve the Argentine crisis qualifies as news.
Frustration with the peso has reached a point where Argentines are willing to consider any alternative; a local bodega’s Bitcoin ATM advertisement perhaps said it best, “cualquier cosa es major que pesos,” or “anything is better than pesos.” This, more than any protest slogan or political signage, is what stuck in my head throughout my trip. And, to be fair, Bitcoin has been a decent store of value for Argentines compared to pesos and even compared to other weaker currencies; attractively, it can be bought and sold 24 hours a day and can be converted and withdrawn in pesos or USD at convenience stores.
Unlike USD-ARS, a parity the government closely monitors, manages, and distributes disinformation around, pairs like BTC-ARS or ETH-ARS are not subject to local rate-setting interventions. I was able to withdraw (as a test) 0.05 ETH (worth 81.25 USD on 17 September) and receive 56,000 pesos, which implies a parity among the three at 690 pesos per U.S. dollar net of fees. That’s a great deal on a day when the Argentine government was still insisting a U.S. dollar was worth less than 350 pesos.
And though store-of-value is an unpopular Bitcoin use case among econ folks, regardless of your macroperspective on crypto, holding Bitcoin has been a decent hedge against Argentine inflationpalooza over the past year (below).
Without credible parity (which, long-term, requires a liquidity backstop in dollars or dollar-denominated instruments, a burden that Argentina either cannot bear or cannot be trusted to meet) and with a growing chasm between published FX rates and observed auction rate pesos (the 290 published rate versus 565 on the street that Mary O’Grady cites in this 6 August 2023 piece for the WSJ already looks like a candidate for next month’s “good old days”) it is increasingly-difficult for international, foreign-domiciled firms to do business in Argentina. While this was not a problem in earlier Argentine default cycles, the current “limping default” is a slow-motion failure that puts strain on foreign firms.
Incidentally, you’ll note I said “credible parity”–my view is not that all parity systems slip and fail. In fact, credible systems for dollar pegs (and soft pegs or parity regimes) not only exist but endure well, albeit usually with help, or at least cooperation, from the Federal Reserve and the U.S. Treasury Department (see the LERS system for a durable example). Under-reserved unilateral pegging to the dollar has… let’s just call it a more dubious history. But at least we now have better models for what failure looks like and can better-anticipate the dynamics involved.
While I was visiting, the Uber app stopped accepting PayPal accounts denominated in USD and GBP because the government’s misleading published FX rates essentially ask vendors (like Uber) or payment processors (like PayPal) to absorb or share the difference. The local Volkswagen dealer I visited in Buenos Aires was not able to quote forward-looking peso-denominated payments on leased vehicles even for the duration of the shortest lease term offered, as the number of Argentine pesos a month owed for a Golf or Amarok might conceivably double (or quadruple?) in peso terms. ATMs that had either run out of pesos or had obsolete maximums of nearly-unusably-small amounts were not an uncommon sight; an ATM in Palermo near calle Gurruchaga demanded a 10 USD fee to dispense 25,000 pesos, which is less than 15 USD at the prevailing rate.
While we can debate the nature and severity of the disease, these are not promising symptoms.
Reconciling (and Contrasting) Fieldwork Observations with Mainstream Commentary
Oft-critiqued by economists and financial journalists is the national airline, Aerolineas Argentinas.
Sitting on an Aerolineas Argentinas (hereafter simply Aerolineas) flight from Buenos Aires (EZE) to Ushuaia (USH) on 11 September, one wouldn’t know the airline operated at such enormous deficits or received such generous government life support. After losing $680M USD in 2019 and $900M USD in 2020, the airline is not exactly in the cash cow quadrant of the analysis, and some Argentina experts posit the government systematically understates the airline’s losses.
However, until one visits Argentina on more than business trips to Buenos Aires (my only recent exposure prior to this visit), one cannot fully appreciate how important air travel is to Argentina.
Argentina is huge and Aerolineas carries not only people but cargo all over the country and the broader region. A victim of Mercator distortion, many underestimate the fact that Argentina is incredibly long north-south; the flight EZE-USH is over three hours and only covers just over half of Argentina’s latitudinal height. Demand and distances dictate the use of mid-sized, medium-range, single-aisle jets like the Boeing 737 and Airbus 330, which are often filled to the brim with domestic cargo below.
In 2022, Aerolineas transported 11.68 million passengers and I’ll be among the 13.12 million passengers projected for 2023. Aerolineas is also vital to international business travel in the region, connecting businesspeople and services in Brazil, Chile, Peru, and elsewhere with 21 cities within Argentina with just one connection (38 domestic cities reachable with two connections). And to Aerolineas’s credit, the pecuniary bleeding is clotting, if not stopping.
Yes, many academic analysts and financial journalists would love to see something happen with Aerolineas that is comparable to the comparative success story of Avianca, Colombia’s flag carrier which I’ve flown many times and which (through loan repayments and payment of various taxes) is often cited as an industrial policy win for Colombia, without a huge impact on Colombia’s national budget and with shares in Avianca listed and good volumes trading.
This overlooks, however, that Avianca’s much-heralded survival of COVID (and its post-COVID solvency) depended upon piling accumulated obligations into a May 10, 2020 bankruptcy in the Southern District of New York (I’ve told both economics and law students for years that airlines receive an often-underappreciated subsidy via the preferential treatment they expect and usually get in the U.S. bankruptcy courts; US Airways, United, Northwest, and Delta all filed for bankruptcy protection between 2002 and 2005, with management of all four airlines receiving kudos for the maneuver). And 2020 wasn’t the only time in recent memory Avianca resorted to this (see 345 B.R. 120 (BK. S.D.N.Y. 2006) (Gropper, J.)) and its strong post-bankruptcy posture includes proceeds from quietly liquidating its Peruvian subsidiary.
Further, Avianca is the oldest airline in the Western Hemisphere and created the air cargo industry’s very first product offering. None of these historical advantages or tactical maneuvers were available to Aerolineas, as it has no access to foreign bankruptcy courts accustomed to giving enormous preference to airlines over creditors and has no legal authority to engage in the kinds of strategic divestments from which Avianca benefited. To compare these two carriers is not just unfair, it’s unhelpful.
Though it’s an area of interest and enthusiasm for me, let’s now rotate away from airlines.
The day after I arrived in Argentina, on 7 September, The Economist ran a provocative piece entitled “Argentina Needs to Default, Not Dollarise.” I’ve spent time (half a dozen non-contiguous weeks, admittedly not months) in Haiti and nearly three years living in some of the poorest countries in Africa. I’ve seen default debates up-close. They aren’t trivial, aren’t pretty, and often aren’t non-violent.
There is an American (and more recently, British) feeling that default is akin to bankruptcy, an unfortunate consequence of missteps in matters fiscal, a mostly-destigmatized procedural baptism.
But that’s not how defaults work. And even if it were, it’s not a get-out-of-jail-free scenario.
I was brought on as a prime negotiator on a wind-down of a medium-sized bank under FDIC supervision post-2008-crisis. The target bank needed to be delisted from the NASDAQ and wrapped up in what, in total, was a long weekend. Our team did well and bargained with finesse, but I’ll never forget the floor of my war room on Monday morning was littered with checklist Post-It notes, not champagne corks. And that was an orderly bankruptcy, a scenario where most got to retire with unstained careers. Today’s reality is 13:00 tee times, second homes, and third wives; going down with the ship is for suckers.
And that was one of the bigger small-enough-to-fail banks.
But that isn’t what sovereign default is like, as Sri Lanka and Zambia recently learned.
I’ve spoken and written extensively on the topic of borrowing and defaults in the context of development economics and, in particular, relative to credit-challenged countries that use Chinese development credit facilities as lenders of last resort. The blast radius from defaults is huge and it’s the little people who get incinerated; in the prophetic cautionary words of Sarah Connor, “anybody not wearing two million sunblock is going to have a real bad day.”
On the near-anniversary of my speaking at Harvard on what I see as China’s diplomatically-decorated predatory lending (often in Africa, Latin America, and the Caribbean), Harvard’s Africa Policy Journal published a piece I wrote during COVID on the then-imminent seizure of African port rights and rail infrastructure collateral by the Chinese. In a rare flash of foreign relations promiscuity, Chinese have already pledged to revitalize Argentine energy infrastructure, praised the Argentine coastline’s trove of natural deepwater harbors, and discussed Ushuaia as an interesting place for a naval facility and an antipolar satellite/space base (Argentina joined China’s Belt & Road Initiative as a partner state about ninety days ago).
How would the Chinese acquire these assets or rights to operate in these locations? There is no direct Chinese translation of “loansharking,” but perhaps that is a live-fire demonstration of mainland China’s protective, inadequately-autobiographical linguistic immune system.
Argentina, despite its wealth during its (literal) golden age, is now nine (or ten, again the matter of how to count…) defaults away from its gilt-edged reputation and another default won’t help matters. Almost certainly it will be China, the world’s macropawnbroker, who will become Argentina’s key lender. I know some readers will be like “oh, this is hongkongphilic guy whining about mainland China again” but that’s not the point; Chinese indebtedness really is part of the debt calculus in the developing world.
This Sinophilic orientation for Argentina’s near-term borrowing and foreign policy seems unavoidable, especially when one looks up and down the waterfront from the Puente de la Mujer bridge, from which the logos of four Chinese financial institutions are conspicuously visible, including the Bank of China, whose offices look down the edge of the Rio Darsena Sur’s east bank in the general direction of the Puerto Madero Yacht Club. One can almost hear the squeak of a junior Chinese banker’s Sharpie on the calendar, ex’ing off another day of interest, favors, and transpacific 關係 (guanxi) owed by the Argentines to their Chinese masters.
It's an ugly situation, no doubt.
And it isn’t that a default is the wrong strategy. It’s that The Economist provides the wrong context.
Milei and a Word on the “Three-Year Curse”
The Newspaper (as The Economist is called in London) alleges that presidential candidate (and favorite, according to polling) Javier Milei’s enthusiasm for dollarization is traced principally to Milton Friedman. Milei and Friedman are often linked in international discourse, and the fact that Milei has a dog named Milton probably doesn’t help discourage this.
But it is wrong to view Milei’s plan as dollar-affection rather than peso-skepticism (including skepticism about how the peso is examined and framed in international policy discussions).
Much of Milei’s soundbiting and sloganeering is less dollarphilic and more similar to that motto mentioned supra at a bodega’s Bitcoin ATM in Buenos Aires: cualquier cosa es major que pesos (“Anything is better than pesos.”). The Economist quotes Melei, accurately, as having said the Argentine central bank’s performance managing the peso has been “the worst thing in the universe” (or “the worst garbage that exists on earth” if you prefer this translation). Nobody can argue with the statistics; annual inflation today is over 100% and Ecuador’s experience with dollarization two decades ago (despite similar gloomy predictions from the press) was one of stabilization and calm… but this doesn’t provide a foolproof recipe for Argentina’s fiscal salvation.
Unlike some other recent political darlings, Milei talks rarely about Argentina’s golden age or the miraculous GDP growth from 1870-ish until the First World War. At that time, economic historians recite like a line from their favorite movie, Argentina was wealthier than France and Italy combined and even wealthier than mighty Germany. But, today, those peddling nostalgia find few customers.
Instead, Milei speaks in metaphors of crisis, disease, and war, which suggests to me that he’s on the right page: the crisis is real, imminent, and serious. And it is the right rhetoric for the moment; the Paris Club and other creditor cartels won’t step up to finance an Argentina led by a person who uses any less urgent language.
The press, however, is right to point out that changing currencies will not by itself constrain Argentina’s legendary spendthrift tendencies (the nation has been running a fiscal deficit for thirteen years and the money printer is still going “brrrrrr!”). Argentina has had, on average, an IMF bailout every three years since the U.S. Eisenhower administration–and currently owes the IMF about $45B. And the press, including the FT and the WSJ, have correctly done the basic arithmetic that the small changes politicians (including Milei) discuss in public will not substantially reduce public spending, let alone repay the IMF or Chinese creditors. For perspective, Argentina’s debt represents about a quarter of all outstanding IMF loan principal and the IMF loan must be repaid in hard currency, the one thing soybean-rich, lithium-rich, tradition-rich, malbec-rich, tango-rich Argentina doesn’t have easily to hand.
I want to linger on that three-years-on-average stat for a second, because it’s been (incorrectly) embraced by journalists and political commentators, and even by Milei’s opponents, who’ve claimed he is claiming to be saving the day from momentous catastrophe when he’s really just proposing approaches to manage a cyclical Argentine phenomenon. Let’s pause and remember our brains are awesome at seeing patterns where they don’t exist, and even better at imagining (or failing to see) causation.
We discard what seems unlikely according to our cultural priors (like that the terms laissez-faire and ketchup originated in China) and are too willing to accept arbitrary cyclical explanations, for example the Muth Conflict-Cuisine Hypothesis (my joke theory that 30 years after the U.S. ceases hostilities in a country, that place’s food becomes trendy in California, evidenced by sushi/yakitori/ramen in the 70s, Korean BBQ places in 80s, the boom in Vietnamese food’s popularity in the 2000s, etc.–I eagerly await the
forefauxcasted wave of good Afghan restaurants in the early 2050s…).
Though recent history (a 2014 default, the 2017 caracolear which was a miscue recovery; caracolear is a “fake out” soccer maneuver, a 2020 default, and the current 2023 crisis) does make a three-year cadence an attractive theory of Argentine crisis, Milei and others correctly point out that the causes of these events are distinguishable and that while some crises are connected (the 2017 mirage of economic recovery, a brief 2.5% economic expansion followed by a 2.5+% contraction and a fresh peso crisis, led to an impasse that arguably teed up the 2020 default), they do not point to some grand horologie-de-crise.
And, frankly, if Argentina had a crisis every three years, it would be the only thing vaguely punctual or predictable in the whole economy… which invites the question: if each crisis is a cumulation of unique and disorderly things, how would these disorderly things coalesce into a predictable rhythm (and, no, this isn’t entropy)? In short, the three-year crisis rhythm might make for a good “hot takes” news item, but it’s total economic nonsense.
Though I stop short of endorsing his thinking, I appreciate and share Milei’s sense of urgency, even if it is not reflected in the café culture and slow pace on the sidewalks of Buenos Aires. Spending weeks in this country, once an emblem of wealth and now a mascot of decline, it’s tempting to juxtapose Churchill’s famous 1942 chaptering: it may not be the end of the beginning (prosperity) in Argentina, but it is the beginning of the end (another likely default).
So How Should We Think About (or Gather?) Argentine Economic Data?
Spoiler alert: skeptically.
Inflation is the number that is most relevant in street-level, headline-level conversations with Argentines, but it’s also one of the most easily-distorted statistics. And sector subsidies so skew the exchange rate (one exchange rate if you’re selling soybeans, another if you’re selling petrol) that different people experience inflation very differently. Even without this sector-level distortion, the Argentine government has not been particularly consistent, and at times has been downright misleading (oh, sorry, strategic), about what it chooses to include in the pricing basket from which the official inflation rate is computed.
And even when the basket is consistent, its measured locus is occasionally magically transported hundreds or thousands of miles.
Less-politicized bimonthly CPI numbers are available (and often used by international media) and, basket-to-basket, year-on-year, it looks like this (below), though the government and international organizations (including the IMF) have had disagreements as to how inflation should be measured in 2023 and January of 2023 is the most recent year of (at least tentative) unanimity on this topic.
Ignoring the hailstorm of proposed numbers from the Argentine government, presidential candidates, and international groups, let’s stick with “things are bad” as the null hypothesis.
When I see data I don’t trust, or something confusing, or history I don’t understand, I look to an industry I know well for answers: automotive.
What assumptions are integrated in savvy multinationals’ calculations?
Though dealers are reluctant to quote full-term, all-in amounts in pesos, we can look carefully at published leasing rates with stated, broken-out residuals, which Citroen, Fiat, Renault, and Volkswagen publish for Argentina, and using equivalent rates with similar residuals for Peru and Colombia, I see these leases integrating at least an anticipated 160% peso-native (nominal) inflation rate across a three-year lease, with the French (Citroen and Renault) being the most pessimistic and integrating a 200% inflation rate, which shows up both in payments and peso-denominated depreciation. Isolating depreciation by using the residuals from nearby markets, the anticipated inflation is 160-215%.
I should mention that Renault aren’t dummies who know their way around wrenches but not economics; in fact, well-regarded industrial and institutional economists in France are very involved historically and in the recent period in setting the rates, FX coefficients, and default expectations on which Renault’s financial products rely. Similarly, Fiat’s parent, a Dutch holding company, Stellantis, is risk-averse and resells a hefty chunk of its leasing- and lending-related liabilities, so it has no incentive to subsidize Argentine leases (as non-market lease terms would then encumber the securities that are aggregated and resold). The inflation numbers implicitly predicted by these firms are not unimaginable.
In short, folks (dealerships for inventory and customers as well) are buying (and leasing) cars, but aren’t buying the government’s stable peso story… perhaps with one conspicuous exception, the International and Commercial Bank of China, which will happily write you a full-term, zero-down third-party lease in pesos. Bring-your-own financing is somewhat rare in Latin America (I consulted on the construction of a local credit facility for an international bank writing leases and loans in Brazil many years ago) and offers of third-party leasing are somewhat unusual also; both will soon be Chinese imports here.
In Ushuaia, the capital city of Tierra del Fuego (Antártida e Islas del Atlántico Sur Province), hard currency flows to a degree rare in rural Argentina, which makes it a great place to gather one’s thoughts about the trip and the financial estuaries within Argentina where dollars and pesos mix. Here, a nice late model Toyota Landcruiser was offered for sale on the roadside with no price listed, but “dollars only” written on the windshield; clearly, while price was up for negotiation, currency involved was not.
It is impossible to responsibly, or even imaginatively, report that dollarization would save Argentina. First of all, there is an unimaginably-large backstop of dollars the country would need to hold and resist spending, which feels like a country-level Stanford marshmallow experiment any administration in recent memory would have failed. Second, the unit of account is not the problem, as no matter how the spending is tallied, it outruns and dwarfs the fundamentals of the Argentine economy. Third, the loss of control over core central bank functions may seem like a needed straitjacket for policymakers, but long-term it means domestic monetary policymaking capacity may erode even further.
The lack of clarity about government monetary policy moving forward, the lack of constraints imposed by the IMF, the temptation of taking recourse loans from the Chinese, and the institutional inability to implement binding capital controls combine in Argentina for an exciting election cycle, a strange on-the-ground experience, and an uncertain future.
But you should consider visiting and drawing your own conclusions. As the white and pink prematurely-blooming trees encircling Plaza de Mayo in Buenos Aires indicate, time marches on… and it’s going to be a hot summer, literally, politically, and economically, kicking off with the 22 October presidential election.