Argentina’s Long Road to Recovery

BY YULIA NOVIK-Since 2002, when Argentina defaulted on it $95 billion debt, the country has been locked out from international creditors and experienced constant economic decline. Although no visible changes to Argentinian economy have been noted, some prognoses predict a further and more abrupt downfall, while others predict 2014 to be the beginning of Argentina’s recovery.

The last decade has been distinguished by extreme devaluation of Argentina’s currency and a very high inflation rate, which, according to Argentinian opposition, has reached twenty-eight percent in 2013. The Argentinian government, however, promotes prosecution of those who publish unofficial inflation rates, and provides that in 2013 the inflation has hardly reached eleven percent. Despite obvious discrepancies between official and unofficial data, in 2013 Argentina remained one of the top five countries with the highest inflation. Moreover, according to recent prognosis, in 2014 inflation will hit forty percent.

Continuing inflation and devaluation of the peso diminished Argentinian consumer’s purchasing power while also making imports more expensive. Remarkably, despite the country’s continuing all economic downfall, consumer spending has been on the rise. Fearing of future crisis, population prefers spending money now on goods or trips abroad than losing their savings with the next wave of devaluation. Although it is illegal to hold foreign currency, Argentinians are buying and selling U.S. dollars on the black market at the exchange rate reaching ten pesos per dollar, comparing to the official exchange rate of six pesos per dollar. Given the clear inconsistency in exchange rates, the sales of expensive merchandise such as luxuries cars in Argentina has risen dramatically in recent years. This trend can be explained by the possibility of selling U.S. Dollars at the higher exchange rate at the black market and purchasing a car in pesos at an official exchange rate, saving considerable amounts of money.

Argentinians remain skeptical about their own economy, preferring to spend their money rather than saving or investing in the national economy. Despite all the signs of the approaching economic downfall, the country can hope for some positive changes. Argentina has made some progress settling its old debts, what is expected to have positive effect on future relations with foreign creditors. Additionally, for the first time since 2002 foreign investors seem to be considering investing in the Argentinian market. While information has not yet been confirmed, Goldman Sachs proposed a two-year loan of $1 billion dollars to Argentinian government with an annual interest rate of 6.5 percent.  The loan might help the Argentinian government to demonstrate its improving economic status and reestablish its relations with foreign investors. It is hard to say what might have caused foreign creditors to reconsider its involvement with Argentina. However, it is possible that upcoming 2015 presidential elections, in which the current president cannot run, could have played a critical role in this decision.

While it seems like a risky move investing in Argentina, considering the country’s shattered economy and unsound political structure, given looming change in political power, investors can have a lot to gain from nationwide hunger for available credit while giving the nation a chance to recover from a long depression.




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