ARGENTINA Currency Devaluation and Its Effects on Industries

1. ARGENTINACurrency Devaluation and Its Effects on Industries TEAM 3 Dave Heyl Deep Patel Hilary Shah Charles Paterson

2. Population: 38,740,807 Government: Republic GDP: $391 billion ARGENTINA

3. Key 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

4. AGRICULTURE • 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

5. AGRICULTURE • 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

6. AGRICULTURE • 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.

7. AGRICULTURE • 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

8. AGRICULTURE • 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.

9. Service Industry • Financial Services - Banking - Capital Markets • Travel and Tourism - Hotels - Airlines - Car Rentals

10. Financial 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

11. Financial 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

12. Travel 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

13. Travel 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

14. Travel 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

15. Argentina’s Automotive Industry 1995-1998 Auto Industry Investments Brazilian real devaluation Argentine peso devaluation Annual & Monthly Analysis

16. Auto 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

17. Brazilian real Devaluation • February 1999 the Brazilian real devalues • Worth 25% less than the Argentine Peso • Thus making cost of importing Argentine cars Too expensive • Causing production to shift to Brazil • 2002 Argentine automotive production is at 15% • Argentina was no longer a domestic consumption based economy

18. Argentine 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

19. 1995-2002 Annual Analysis

20. 2002-2003 Monthly Analysis

21. Currency Devaluation • The e-commerce and internet industry: • Brief Background • The effects from devaluation on the industry • The future

22. Brief 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.

23. The Impact on Argentina’s E-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

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

25. 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?

26. Euromonitor Trade Partners Hotel Resource Travel Latin America Trade Partners Canning House Newsletter E- Marketer CIA Capital Magazine Fiscal Studies Business Week Business Week Business Week Business Week NOTES