The nationalization of YPF S.A. (YPF), corrupted inflation data, mounting street protests and volatile commodity prices are all fascinating points for the international community to examine in any assessment of the unfolding crisis in Argentina. And what Argentina's economy does in the coming months will have ripple effects for an array of other such holdings as the Global X FTSE Argentina 20 ETF (ARGT), Guggenheim Frontier Markets ETF (FRN), Petrobras Argentina S.A. (PZE), Cresud Sociedad An (CRESY), Banco Macro S.A. (BMA), BBVA Banco Franc (BFR), Telecom Argentina S.A. (TEO), Tenaris S.A. (TS) and Transportadora de Gas Del Sur S.A. (TGS). But easily one of the most underreported phenomena there right now is the impact of Kirchner government policies upon the layman, particularly beyond the confines of Buenos Aires. To wit:
Money supply challenges
- It is now almost impossible to buy dollars. Legal foreign exchange vendors are all but closed, and illegal money-changers have been severely curtailed. It is also illegal to sell dollars -- not that anyone is rushing to do this. In Buenos Aires, the illegal market is still more accessible than in the provinces, and quoted unofficially by a variety of outlets. The following two charts depict the value of the divergence between the official USD/ARS rate versus the black market rate from the beginning of 2011 through the end of August 2012 (aggregated by Dolar Blue) and the concurrent steady decline of ARGT, respectively:
- Even when one can find access to the black market for dollars, the spreads vary widely and can be quite volatile. Personal referrals are increasingly becoming the preferred method for changing money. Those with dollars make a few phone calls to friends, and fairly quickly someone with excess pesos will emerge. A growing number of transactions are completely private and do not even pass through black market money changers.
- This difficulty in obtaining foreign exchange has resulted in a de-facto travel ban. In order to buy dollars legitimately, one must prove the origin of the funds and that all taxes are currently paid up, conditions which immediately exclude the majority of Argentines. This apparently also applies to buying pre-paid package holidays abroad. Those who do secure special permission from Argentina's Federal Public Revenue Administration (AFIP) to buy dollars can frequently only do so for a trivial amount -- perhaps $100. No one, including AFIP, understands how these values are calculated.
- Regulations cover withdrawals in ATMs abroad drawn on Argentine bank accounts, so foreign cash reserves can only be accessed for those who have foreign cash accounts, which is a very small minority.
- Those who are able are increasingly going to Ecuador to buy U.S. dollars, where the dollar has been adopted as legal tender. Those who bring dollars back into Argentina to sell in the informal economy can enjoy profit margins of up to 40 percent.
Consumer spending has hit a wall
- Neither domestic nor foreign tourists are traveling south, the former because they are too poor, the latter because it is too expensive at the official exchange rate, spelling economic disaster for the tourism sector. A day pass to ski in Bariloche costs 300 Argentine pesos per day, or about $US65 at the official exchange rate. Accommodations are fast approaching European prices. Food and wine are among the few relatively cheap items remaining.
- The price difference offered by going to Chile to buy goods is so large now that even taking into account the US$500 import tax and the expense of traveling, it still makes the final bill about 30 percent cheaper.
- There is a one month waiting list to buy non-domestic light bulbs, which are smuggled in from Chile. Bizarrely, they are cheaper now than previously, when they could be legally imported.
- Smuggling is rampant and enough people are doing it now that customs officers are overwhelmed, making it easy to get away with. The mark-up on skis is more than 100 percent. Smuggling a laptop into the country could earn enough to just about cover the cost of a flight to the United States.
- Some items are impossible to buy: Apple (AAPL) products, English tea, most technology, high-end designer brand clothes (although decent domestic fakes abound), Mexican chiles. Computer repairs are becoming awkward since unless the needed part is made in Argentina, it is all but impossible to import, so a minor, easily-repaired computer problem renders the unit useless.
- Item-specific inflation has taken a turn for the bizarre. Pizzas have become far more expensive as cheese is now a scarce good, but petrol prices remain stable. The price of milk has increased threefold in the past three years. Meanwhile, alcohol consumption has shifted to entirely domestic names in the form of fernet, beer and locally produced wine. Gin and tonics are out.
Banking and property have stagnated, crime and social unrest are rising
- Credit from banks at interest rates considered reasonable by any conventional standard does not exist. Money-lenders -- many who are semi-legal and charge extortionate interest rates, much in the manner of payday lenders -- are about the only source of credit, and are flourishing, particularly in poorer communities.
- The real estate market has effectively ceased functioning since no one is selling and no one buying. Part of the reason is that real estate is traditionally exchanged in dollars, which are already scarce and it should go without saying that those able to bring substantial amounts of dollars into the country have huge negotiating power. But thus far most Argentines not under any pressure to sell appear to be waiting out the current crisis rather than selling at reduced prices. Supply and demand barely overlap.
- There is zero trust in the local banking industry as the 2001-02 crisis, when deposits were forcibly converted to pesos and devalued, is still fresh in the minds of many. Keeping savings at home or in safety deposit boxes (another good becoming more and more scarce) are therefore increasingly considered more preferable alternatives. But with social problems concurrently mounting, thieves know that many Argentines literally keep cash under their mattresses and so burglaries are rising as a result.
- Social unrest, protests and crime are all increasing, and there are waiting lists of up to one month to buy burglar alarms. Violent crime is also increasing, which is otherwise relatively unheard of in the provinces. House robberies are the most common problem, but an understaffed police force acts as little more than post-robbery officials required to write a report for insurance claims.
- Parcels are almost impossible to receive in the mail. They are either stolen or the recipient must pay a substantial tax.
- Power cuts are becoming extremely common and coping with the upcoming summer will become more difficult. Installed generation capacity is not keeping up with rising demand, although energy remains subsidized. Foreigners were already hesitant to invest in energy infrastructure and after the nationalization of YPF are even less inclined to do so. The typical gas and electricity bill in the winter comes to about US$75 per month for a family. A good salary is about US$1,000 per month per full-time employee.
- Anything to do with renewable energy has been shelved. It is considered a luxury product with the huge subsidies for regular energy eliminating any economic justification. There is a minor subsidy apparently available for renewable energy products, but how much this has caught on remains an open question.
- Functional voltage regulators for Argentina must be purchased in Chile.
With the U.S. dollar trading informally at about A$6.30 versus the official rate of $4.65 to the dollar, devaluation is imminent, so holding wealth in pesos is unwise. Those benefiting in the current climate are limited to the following:
- Anyone earning hard currency paid to a foreign bank account with access via the ATM network ideally in a different name.
- Anyone with access to cash dollars who can sell them at such a spread over the official rate that this mitigates the effect of inflation.
- Anyone with means to convert pesos to dollars and get them out of the country, but accessible if required.
- Anyone who can buy airline tickets on foreign credit cards and lives close to a border. An increasing number of people are choosing to cross the border to Chile and fly from there.
How much lower the Argentine economy sinks under President Kirchner remains to be seen. But the following possible measures are worth keeping an eye on:
- Restrictions on foreign credit card cash withdrawals in local ATMs. Such a measure would destroy the tourism sector, but it is an obvious loophole that the government could seek to close.
- Breaching the Warsaw Pact on the permitted importation of cash dollars, currently permitted up to US$10,000 per person.
- Increased scrutiny of people who frequently cross the border.
In sum, extreme caution is advised for anyone considering relocating, visiting, or investing in Argentina. Surely such conditions are ripe for those in the market for distressed assets, but judging across a range of indicators both macro and micro, the market bottom still has yet to come.
There are increasing rumors circulating that President Kirchner is seeking a constitutional amendment to permit her to stand for a third term, a maneuver previously favored elsewhere in the world by heads of state ranging from Venezuela to Nigeria. How likely this is to happen remains to be seen, but her administration enjoys enough support that it cannot be considered a non-starter. If the Kirchner administration's policies to date are any indication of what's to come, Argentina's economy may have to get worse before it gets better.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.