The Tango Revival & Property Investment Success Argentina!

Property Investment Buenos Aires

Many people ask me about my views on the Argentine property sector and the economy. Quite rightly, investors feel that understanding the economy in Argentina is important before they take any decisions about a potential investment commitment…

Most of my contacts are pleasantly surprised to learn that the property sector in certain key regions in Argentina is actually one of the few stable and progressively successful sectors of the Argentine economy.

In this article, I explain how the Argentine economy has developed from the 1970s and how a poor economic record and the ‘positive-peculiarities’ of the property sector in Argentina intrinsically link.

I will chart almost 40 years of economic Argentine history.  I will pinpoint the fiscal milestones and financial issues that have dogged the long-suffering Argentine people, and lead you towards the clear understanding that the dichotomy of a strong property sector that has emerged from a sometimes-unstable economy actually makes absolute and fundamental sense.

Charting Argentina’s Volatile Economic History

The origins of Argentina’s recent economic problems and the economic meltdown the nation suffered in 2001 actually started during the ‘National Reorganisation Process’ instigated by the fascist military dictatorship that was in place from 1976 to 1983.

In the dying days of the dictatorship, the state took over substantial amounts of internal private corporate debt.  Seemingly, ‘sweeteners’ for those who would continue to wield power – at this point I will mention the name Cavallo, he was an instrumental player in the process and I will come back to him shortly.  Argentina’s international debt grew at an astronomical rate, large-scale infrastructure projects failed, unemployment rose and inflation crippled the economy.

From 1983 to 2001 came a series of unstable, ineffective and sometimes corrupt democratically elected governments who wrestled with an unstable economic legacy bequeathed to them by the former military dictatorship.  The economic models of Presidents Raul Alfonsin, Carlos Menem and Fernando del la Rua each helped to fuel the impending financial disaster.

The late Alfonsin’s administration failed to curb hyperinflation for example; it reached 1,200% in 1985 leading to austerity measures and the creation of a new currency called the austral, (1 austral was equal to 1000 pesos).  The new currency – launched at enormous expense that ironically incurred even more debt for Argentina – failed dismally when the country defaulted on debt repayments, and inflation spiralled a staggering 5,000% in just one year.

In 1989, Menem took power just when the regional economies began to ‘emerge’.  The Argentine economy recovered somewhat at this point, and austerity measures combined with free market reforms and the selling off of national industries were positive factors influencing economic recovery in the short-term.  However, during Menem’s first term inflation began rising again to reach 1,300% in 1990, and in April 1991 Domingo Cavallo, (the not so new economic minister I mentioned earlier), introduced the ‘Convertibility Plan.’  This created a currency board that fixed the dollar/peso exchange rate at 1 peso to 1 US dollar.

With this new measure, Cavallo did succeed in defeating inflation, and his ‘Convertibility Plan’ caused a short-term boom with GDP increasing and poverty falling for the first time in Argentina since the 1970s.

With the Argentinean peso pegged one-to-one with the US dollar, Argentine consumers falsely enjoyed a brief period of feel-good prosperity; but international economists were very concerned that the over-inflation of the peso’s value was a fiscal disaster waiting to happen.

The fixed exchange rate made imports cheap, but it also resulted in the erosion of Argentina’s industrial infrastructure, which in turn exacerbated unemployment.

Most economic pundits now agree that the early successes of the dollar/peso pegging were simply due to the dollar falling in value at the same time, and the near immediate relief on the massive inflationary pressures that had been the absolute scourge of Argentina for so long.  However, as we now know, the successes were short lived.

Notwithstanding industrial privatisations, a staggering increase in GDP and Cavallo’s tight fiscal controls, Argentina’s public debt continued to grow enormously during the 1990s, and this began to unsettle the Argentine people once again.  Although congressional committees have since gone back and investigated the significant black holes in Argentina’s public finances that developed during this period, nobody has successfully determined what really happened to all that money.

Suffice to say, the foundations on which the Argentine economy were built remained in a very poor and tenuous state, so that Argentina began suffering badly from any ‘global economic tremor’ that occurred.

For example, the growing value of the dollar and the so-called ‘Tequila Crisis’ in Mexico in 1995 shook Argentina’s economic fundamentals, and unemployment reached 18% in 1995.  There was just sufficient recovery in the next 12 months to buy Carlos Menem another term in government in 1996, but there followed the East Asian financial crisis and then the Russian financial crisis and both took their toll on the Argentine economy.

Menem’s attempt to run for a third Presidential term in 1999 was unsuccessful, and opposition candidate Fernando de la Rúa succeeded him.  The economic poisoned chalice passed to him and astonishingly he also invited Cavallo, the aforementioned economic advisor to the military and then to Menem’s government, back into office!  Clearly, some lessons are hard learned.

The economic problems that had begun back in the early 1980s, which were compounded by poor governments, bad economic policies, and massive corruption, ultimately came to a head in December 2001 when the Argentine economy finally collapsed.

Throughout 2001, the country and the entire region were in economic trouble, which in turn caused unprecedented levels of peso to dollar exchange, capital flight and a run on the banks.  On the 20th of December 2001 the government took decisive action and froze bank accounts as well as foreign exchange in Argentina, and they strictly limited monthly cash withdrawals.  The freeze became known as the ‘corralito,’ which translates to mean a small corral or enclosure – such an innocuous word and yet one that still causes alarm in Argentina to this day.

On January the 1st 2002, as the economic crisis raged on, Eduardo Dulhade became the third President appointed in just seven days.  He took decisive action and un-pegged the fixed peso to dollar exchange rate and the Argentine currency devalued rapidly to reach a value of four pesos to one dollar.

Argentines effectively lost 75% of their buying power and their wealth almost overnight caused by both the corralito and a 1-peso for 1-dollar compulsory conversion of dollars held on deposit – but those who had locked their wealth into property suffered less in certain regions of Argentina.

By March 2002 over 24% of Argentines were unemployed, over 40% were living on or below the poverty line, production had fallen 24% and tax revenues had decreased by almost 30%.  Argentina’s gross national product was steadily decreasing, its factories were idle and beggars lined the nation’s streets.  With budgets shrinking in sectors such as science, technology and education, record numbers of educated workers went into economic exile abroad.  Foreign debt was skyrocketing and reached a record level of 100 billion US dollars in default.

Charting Argentina’s Recovery – Explaining the ‘Tango Revival’

Eight years on, it’s fair to say that things have changed dramatically in Argentina!

Nestor Kirchner came to power as president in May 2003 – and during his presidency Argentina saw its GDP increase by 50% and left the country with 46 billion US dollars in Central Bank reserves by 2007.

The government’s economic model from 2003 was to boost government spending to stimulate the economy, and it was largely successful as it coincided with a global economic upswing and soaring commodity prices.

By 2007, Nestor Kirchner had served his term and his wife Cristina won the next presidential race.  Although, opposition commentators like to state that Mr. Kirchner is still very much in power. By this time, Argentina was recovering and green shoots were growing across multiple economic sectors – but then the economy slowed right down because of the latest global recession, and now economists seem unsure whether 2009 was a flat year or a year of recession in Argentina.

This is worrying because it shows that there is still a lack of quality information and transparency when it comes to the Argentine economy – and this leaves uncertainty raging.

Recent economic trend analysis announced by the government predicts forecasted growth of between 3 – 4% for 2010, but I think Argentina might overshoot their forecasts: but this might not be enough to avoid another financial disaster from occurring, particularly if inflation – fuelled by public spending and debt – cripples the economy.

The current government wants to re-enter the world economic market by paying off its defaulted debt.  Even if moderately successful, this proposed deal to swap debt with holdout bondholders may only help to restore some short-term confidence in Argentina.  And, even if the swap is successful, this government may still not inspire new lending on favourable terms.  Going back to one of my earlier points, the government must ensure transparency.

A major concern for Argentina is that the international markets are shouting for austerity measures in Europe and elsewhere, whilst the government of Argentina is going against current and orthodox economic thinking and is seeking to deepen their model of boosting the economy with increased government spending through borrowing.

It seems that the government intends to carry on spending whilst effectively gambling on both a speedy recovery taking place, and on their ability to tap into cheap external credit to help them plug the holes in the economy.  Moreover, with the 2011 election year looming, the government cannot afford not to spend if it wants to seek re-election.

To maintain spending at current levels the government has tapped central bank reserves, nationalised pension funds, and agreed to pay a whopping 15% in interest on 7 billion US dollars that is has borrowed from its ‘ally’ Hugo Chavez in Venezuela.

Many worry that Argentina is headed right back to where it started in 2001: however, I feel that regional stability and growth might just save the country this time around.

I do agree with economists however, who point out that Argentina needs a much longer-term economic plan with cross party consensus for creating wealth, rather than just spending it, if it is ever to achieve stability.  Yet history shows us that Argentine politics is not about consensus; even within a single party there are political doctrines of the right, centre right, centre left and so on, not to mention too many ‘wannabe’ presidents sitting in waiting.

Most external commentators on the economic and political positions in Argentina state that the dogmatic nature of successive governments and their radical policies seem as relentless as the corruption. Pundits state that too much murkiness lie behind many of the political movements – but we should keep in mind that these are early days for democracy in Argentina and I tend to think that things are looking up.

The positives do seem to outweigh the negatives.  Argentina can compete in the world market; the peso is worth roughly one-fourth of the value of the US dollar which makes Argentina competitive.  As a result industrial output is growing, local industries are doing better, and tourism, (when the rest of the world feels a little more fiscally confident again), is set to boom.

Positive factors specifically in the current government’s favour are its strength and determination; it is seemingly a ‘whip-driven’ political machine constantly advancing the ruling party’s strength and rolling over a lacklustre opposition.

Economists call this huge turnaround of the Argentine economy the ‘Tango Revival.’

Argentina Property Investment after the ‘Tango Revival’

I am sure you will agree that in charting the fiscal and political difficulties that Argentina has suffered in recent decades, our assessment and presentation of the facts as laid out above, is brutally honest.  At the same time, this level of frank assessment of the facts transfers to our views relating to the investment potential of property and land purchases made in carefully selected regions in Argentina.  Our views remain upbeat and positive for this sector.

Recent history also supports our view that informed and selective property investment following the ‘Tango Revival’ is both safe and stable.

Today our view for the medium and long-term development of the Argentine property sector remains the same – Argentine property in certain key regions holds its value even in a crisis, and properties will appreciate at the same rate throughout the next decade as they have done during the ‘noughties.’

To find out more about my own personal reasons for investing in property in Argentina and why my company is helping more investors than ever enter the Argentine property sector, may I suggest you read my recent article that demonstrates why the economy and ineffective governments actually serve to make the property economy in Argentina so robust: –

Why Careful and Selective Property Investment in Argentina Makes Absolute Sense for Long-Term Financial Success

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