Group Blog Economic Investment (Phil Gadomski, Rachel Benkeser, and John Winn)
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Investing in Argentine industry has enabled large corporations to profit pleasurably and yet has forced others to fall, especially surrounding the economic crisis in the early 21st century. The wise investor will not turn a blind eye to Argentina, especially since the strength of the US Dollar and Euro are so extreme in the post devaluation days of Argentina. In investing in Argentina you are not just working to ensure your own future comfort, but that of millions of Argentines as well since the country will soon be dependent on substantial foreign investment to procure continued financial success. With these in mind, below is a basic guideline of the industries in Argentina in which to avoid investment and those in which investment is highly advised.
Sectors to Avoid
Several years ago, Argentina was one of the premier places to invest in bonds. However, in late 2001 and early 2002, Argentina was forced to default on its debt due to economic crisis driven by decades of poor economic management. The investments held in Argentine bonds turned out to be an extraordinary loss of money for thousands of investors. According to a source the debt was “totalling no less than 93,000 million dollars.” (http://en.wikipedia.org/wiki/Argentine_economic_crisis). Even though the economic crisis has since come to an end and economic growth is now on the rise. In fact, “GNP jumped 8.8% in 2003, 9.0% in 2004, and 9.1% in 2005 (with expectations of 7.5% for 2006)” (http://www.amisa.com/arg_econ_rep.html). It is still too early to confidently recommend investing in bonds. Argentina defaulted on their debt before without any penalty, the moral hazard this action established means there is nothing to keep Argentina from doing the same in the future.
Grocery store and Supermarket Companies, particularly within the city of Buenos Aires
The government has placed price fixes on the sale of produce items in order to combat hyperinflation within the city and to promote competition. This has directly affected the store owners and investors as time goes by, because the cost of supplies and goods increases, benefiting those already established in business, but greatly harming those seeking a foot in the door. By fixing prices owners and investors are not able to make their needed profit. The customers also suffer from this system because without the price fixing, which effectively eliminates price competition. This is ironic since the price fixings were instituted by the economic department designed to encourage competition. (This notion was discussed at the Economic Consul in the United States Embassy).
Energy and other state-owned industries
The energy industries within Argentina are struggling and are predicted to worsen in the future. One of the main components for such a dreary future is the state implemented price caps. Even the United States Ambassador to Argentina made the comment that one should stay away from this industry when making investments. State-owned industries or industries with a strong presence of state involvement should not be considered for investment for a variety of reasons, the first of which is the unsteady history of these industries within Argentina dating back to the days of ISI. State-owned industries as well as banks have been unreliable and have been connected with a great deal of corruption and “disappearing” assets. According to the economic speaker at the US embassy there are harsh restrictions and formalities are also included when investing in these industries.
Sectors to Consider
The Agricultural industry in Argentina has been and is still booming which makes agriculture a very promising investment. It would be beneficial to invest in agriculture because soybean and beef, the two major agricultural goods of Argentina, prices are continuing to climb. By analyzing future soybean prices, projections show the price of soybeans to rise by 1.5 or more percent within the next year. (http://www.cbot.com/cbot/pub/page/0,3181,959,00.html). Argentina’s agricultural goods are affordable in world markets due to the recent currency devaluation. The devaluation also allowed for a lower cost of land needed for the production of soybeans and cattle. Despite the potential for successful investment in agriculture, it is important to note the potential troubles associated with this industry. For example, even though the prices for these goods are on the rise, they are commodity items, which tend to have cyclical prices. The idea of cyclical commodity prices were first introduced during one of Dr. Bowman’s lectures last week, and it was echoed in the US Embassy discussion with the economic advisor. In other words, the agricultural boom will decline in the near future, but it will likely rise again at some later date. The continual up and down shift in prices often makes it difficult to predict the future return on such an investment. The soybean industry in addition to having a cyclical price is suffering from a large black market operation involving genetically modified beans. This black market on soybeans is greatly damaging the return and profits of investments. (http://www.mindfully.org/GE/2004/Monsanto-Exits-Argentina18jan04.htm). If something isn’t done to combat such a black market, the return on one’s investment may also be greatly damaged.
After considering the pros and cons of investing in the agricultural industry, it is in an investor’s best interest to do one of two things. The first is to make a short term investment without a huge rate of return, and sell when the market reaches its peak. This method will guarantee a return although it may not be a huge amount of money. Secondly, if the investment can wait until a later date it could be profitable to let the agricultural market fall. Once the prices have reached a low, begin investing and ride this investment out until it reaches a peak once again.
Since the economic collapse in 2002, many Americans and Europeans have been flooding into the country to experience the culture and to spend, spend, spend since the devaluation of the peso has left US Dollars and the Euro artificially strong. And with the continued international success of Argentine culture including soccer clubs like Boca Juniors and the Gotan Project CD’s (Tango music accompanied with electronic music), Argentina’s tourism is very promising indeed. Yet, no investment goes without risks. Currently, Argentina’s tourism success is based on the favorable exchange rate, but as Argentina recovers quickly from its crisis, the exchange rate will only become worse and worse for foreigners. Argentina needs to establish itself and promote itself as a great tourism nation before this happens, otherwise, this industry could suffer. This industry would be more favorable if Argentina’s growth in the next ten years would be minimal, but the 9% growth of the last few years does not show this as likely.
Weighing both sides, it appears that there is a good possibility for a long term investment in this sector. Yet, it would be wise to invest money in specific tourism divisions, such as ecotourism and cultural tourism, which are experiencing global rises in popularity. Some groups in Argentina have already begun to invest in these divisions and have experienced tremendous success in the past three years with cultural tourism divisions (where students and often younger adults come to volunteer and truly experience the life in a culture) tripling their participation since the century began.
Infrastructure and Public Works Industries
Even though it was advised to stay away from state-involved industries, these are most certainly the exception to the rule. If tourism is to continue to grow and boom, so will the nation’s infrastructure and public works sectors, as the improvement of these will be necessary in allowing millions of tourists to pass through the country. Furthermore, just recently in the news it has been stated that the World Bank has agreed to give Argentina $3.3 Billion USD for improvements in such sectors, demonstrating that this is indeed a promising area of the country, and has great potential for profit. However, as with many of these public works and infrastructure projects, there is a high possibility of corruption. Just take the Big Dig in Boston, for example, which milked investors dry of billions of dollars only to be abandoned. Therefore, these sectors have a huge upside, but still run the risk of turning a deficit if the projects do not pan out.
The real estate industry has been booming since the economic crisis in the early 2000’s. Since the peso dropped in value, real estate and land have become extremely cheap for foreign investors. As tourists pour into the country and realize how high the standard of living is here, despite Argentina´s third world status, with such low cost, they may be interested to purchase. And as Argentina rapidly recovers from its collapse, not only the peso’s value, but property value as well, will increase. Clearly, large profits are there for the making. However, in terms of cons, the longer one waits to invest, the less the returns will be. Property values have already been rising since the collapse, and many investors bought up land immediately after the crash, so getting into the real estate game at this point may not be an easy task. On top of this, experts predict that Argentina will not continue to grow at 9%, but rather, will grow at 3-4% over the next 5-10 years, which means that property value may also begin to plateau within that time period. (US Embassy discussion). Overall, if you are going to invest, stay away from the countryside, unless you are interested in agriculture, and focus on newer areas of Buenos Aires, such as Puerto Madero, and other cities that are within a day’s trip from the capital. It is these areas that will have the most appeal to those looking to buy, due to Buenos Aires being Argentina’s main hub.
Argentina has many potential economic successes for foreign investors. It should be noted that certain sectors, however, if not avoided could lead to financial failures. These sectors include Argentine bonds, supermarkets or grocery stores, and energy or other state-owned industries. As an investor, it is important to pay close attention to the sectors that have a likely chance for economic success. According to trends in Argentina’s economy and world demand, strong investment arenas within this country include