ARGENTINAARGENTINA Currency Devaluation and Its Effects on Currency Devaluation and Its Effects on

IndustriesIndustries

TEAM 3TEAM 3Dave HeylDave Heyl

Deep PatelDeep PatelHilary ShahHilary Shah

Charles PatersonCharles Paterson

ARGENTINAARGENTINA

• Population: 38,740,807

• Government: Republic

• GDP: $391 billion

Key IndustriesKey Industries

• Agriculture– Some major exports: corn, wheat, soy, beef– Accounts for about 7.0% GDP

• Services– Financial– Travel and Tourism

• Automotive– Industry and Growth

• E-Commerce– Impact on consumers

AGRICULTUREAGRICULTURE

• Represents 7% of the Gross Domestic Product (GDP)

• Produces 10% of world trade in wheat, 12.5% in corn, and 13.5% in soy

• 3rd largest organic meat producer, with 90% of it destined for export markets

• Remained fairly stable throughout devaluation

AGRICULTUREAGRICULTURE

• Exports could reach US$15.3 billion in 2003

• Exchange rate: US $1 = 1.4 pesos– Seems like a 40% price advantage– Doesn’t necessarily translate into a price advantage.

• “Look for world commodity prices to be little impacted by this devaluation. Inflation will rear its ugly head in Argentina and wipe out any price advantage expected by their farmers and ranchers.”

• American Farm Bureau Federation Senior Economist John Skorburg

AGRICULTUREAGRICULTURE

• Example:– If wheat were selling at $3 a unit in the world

market and Argentina is devalued by 40%, the assumption would be that Argentina will sell into the world market at $1.80. However, world prices for agricultural commodities have not plummeted since the devaluation and the real impact will be an inflated peso in Argentina.

AGRICULTUREAGRICULTURE

• 30% of the economy is still dependent on agriculture.

• Employs 1million people– 420,000 farms small family operations– “Almost our entire sector is made up of

individual farmers…They generate large numbers of jobs and are the backbone of the country.”

• Secretary of agriculture, livestock, fish and food

AGRICULTUREAGRICULTURE

• Farmers are seen as the country’s solution, since 90% of the consumed food and 70% of the nations exports come from local farming activity.

• President Eduardo Duhalde hopes devaluation will boost exports and increase investment in the ailing economy. The devaluation is attracting new investors, but John Skorburg believes that producers will hold on to their product until the internal price of it adjusts to the new peso.

Service IndustryService Industry

• Financial Services- Banking- Capital Markets

• Travel and Tourism- Hotels- Airlines- Car Rentals

Financial ServicesFinancial Services

• Banking– Past

• Decreasing Number of Banks• Changes in Regulation

– Affect Operations of Banks (“pesification”)– Deters Investments

– Present• Foreign Banks Have Majority Share

– Citibank, Bank Boston, and TSB Lloyds• Government Compensates Loss With Treasury Bonds

Financial ServicesFinancial Services

• Capital Markets– Past

• Increasing Country Risk (Equity Market)– High Cost of Capital– Public Debt – Supply and Demand for Private Sector Limited

– Present• Stock Exchange Re-emerging (Capital Investment)• Bill to Create New Futures and Options Market

– Self-regulated Market– Independent Clearing House

Travel and TourismTravel and Tourism

• Hotels– Past

• Occupancy Levels Declining– Dropped 6% From 2000-2001

• Average Room Rates Declining– Dropped $31 US From 2000-2001

– Present• Hotel Sector Experiences Growth

– Hilton, Howard Johnson, Marroitt, Radisson, etc.• Double-digit Growth in Occupancy Levels and Average

Room Rates

Travel and TourismTravel and Tourism

• Airlines– Past

• Reduction of Air Carriers• National Airline in Bankruptcy

– Aerolineas Argentinas

– Present• Air Carries Announce Increase in Flights

– Iberia, American Airlines, and Lufthansa• Aerolineas Argentinas record Profits

– Owner Will Invest $30m US

Travel and TourismTravel and Tourism

• Car Rental– Past

• Lack of Tourism • No Demand for Car Rentals

– Present• Tourism Boom

– Particularly From The US and Europe• Sales Increase $6.5m US in Last 5 Years• Expansion of Car Rental Agencies

– Alamo, National, Avis, Hertz, Localiza, and Europcar

Argentina’s Automotive Argentina’s Automotive IndustryIndustry

•1995-1998 Auto Industry Investments1995-1998 Auto Industry Investments•Brazilian real devaluationBrazilian real devaluation•Argentine peso devaluationArgentine peso devaluation•Annual & Monthly AnalysisAnnual & Monthly Analysis

Auto Manufacturer InvestmentsAuto Manufacturer Investments

• Chrysler $100M• Ciadea $200M• Fiat $600M• Ford $1B• GM $1B• Sevel $300M• Toyota $100M• VW $500M

• 3.9B Invested in Argentina Between 1995-1998

• Exported to Brazil

Brazilian real DevaluationBrazilian real Devaluation

• February 1999 the Brazilian real devalues– Worth 25% less than the Argentine Peso– Thus making cost of importing Argentine carsToo expensive– Causing production to shift to Brazil– 2002 Argentine automotive production is at

15%– Argentina was no longer a domestic

consumption based economy

Argentine peso DevaluesArgentine peso Devalues

• January 11, 2002 USD 1/Arp 1 convertibility regime is ended

• Peso was pegged to the dollar for 10 years

• Production gradually rises in automobile production in Argentina

1995-2002 Annual Analysis1995-2002 Annual Analysis

Production Exports Domestic SalesUnits % Change Units % Change Units % Change

1995 285,435 -30.2 52,746 36.4 224,965 -37.61996 313,152 9.7 108,990 106.6 215,143 -4.41997 446,306 42.5 210,386 93 228,297 6.11998 457,957 2.6 237,497 12.9 221,971 -2.81999 304,809 -33.4 98,362 -58.6 220,553 -0.62000 339,246 11.3 135,760 38 186,400 -15.52001 235,577 -30.6 155,123 14.3 93,833 -49.72002 159,401 -32.3 123,062 -20.7 46,294 -50.7

2002-2003 Monthly Analysis2002-2003 Monthly Analysis Production Exports Domestic Sales

Units % Change Units % Change Units % Change2002JAN 4416 -42.2 3573 -45.4 1816 -55FEB 7818 77 8543 139.1 4542 150.1MAR 11155 42.7 9976 16.8 7419 63.3APR 16473 47.7 11090 11.2 6086 -18MAY 15247 -7.4 11973 8 3933 -35.4JUN 13887 -8.9 9527 -20.4 2706 -31.2JUL 15830 14 12402 30.2 2874 6.2AUG 15238 -3.7 11578 -6.6 2938 2.2SEP 15721 3.2 12810 10.6 2954 0.5OCT 16124 2.6 11432 -10.8 3162 7NOV 15787 -2.1 11027 -3.5 4181 32.2DEC 11705 -25.9 9131 -17.2 3683 -11.9

2003JAN 8919 -23.8 9504 4.1 3701 0.5FEB 9909 11.1 7216 -24.1 3241 -12.4MAR 13911 40.4 8839 22.5 3660 12.9APR 15559 11.8 10656 20.6 4229 15.5MAY 14106 -9.3 8671 -18.6 5123 21.1JUN 13728 -2.7 8715 0.5 5319 3.8JUL 12138 -11.6 8633 -0.9 5301 -0.3

Currency DevaluationCurrency Devaluation

• The e-commerce and internet industry:

– Brief Background– The effects from devaluation on the industry– The future

Brief BackgroundBrief Background

• Argentine’s Economy has finally come unraveled.

• Pegging the peso to the dollar has resulted in a rapid devaluation.

• Country’s neighbors are bracing for the aftershocks this latest devaluation is likely to produce.

The Impact on Argentina’s The Impact on Argentina’s E-commerce IndustryE-commerce Industry

• Devaluation of the peso leaves Argentines to limited access to their savings

• eMarketer study showed that the percentage of Argentine internet users shopping online had declined from 2000 to 2001.

• However, Neighboring countries remain largely unaffected

E-commerce UsageE-commerce Usage

• E-commerce users declined in 2001, yet the number of internet users increased by 36%

The Future The Future

• Will Argentina’s fiscal woes have an impact on internet usage on a regional level?

• How will the industry be impacted?

• Will the internet help the Argentinean people or hurt them?

NOTESNOTES

• Euromonitor• Trade Partners• Hotel Resource• Travel Latin America• Trade Partners• Canning House News

letter• E- Marketer

• CIA• Capital Magazine• Fiscal Studies• Business Week• Business Week• Business Week• Business Week