Economic Observations from Argentina

on cash, investing and society in a developing country

I spent the last month visiting friends in Argentina and Uruguay and I wanted to reflect on some of the economic observations I made on my trip. Argentina is a running joke in investment circles as a place foreign capital goes to die. In recent memory, there was the meme existence of the 2017 century bond foreign investors bought $2.75bn of that subsequently fell apart just 3 years later, with investors receiving a little over half of par value. This is the most recent of many such incidents. Argentina truly deserves its title as the world’s greatest serial defaulter.

A century? That barely lasted 3 years!

the main takeaways from my trip were:

1) The US dollar is king in capital control regimes

2) The cost of living is the most important consideration in the day-to-day experience of people

3) To the local EM retail investor, the purpose of investing is to preserve capital first and to grow it second

According to Google, Argentina has a GDP per capita of ~$8.8k, down from $15k in 2017. I assume this is a majority due to currency deflation, though there is also high unemployment and 1 economic crisis in this region per decade. The peso is free floating but considerable capital controls make it basically impossible to buy dollars at a bank. The current “official rate” for the argentine peso is ~103/ $1, but I first exchanged dollars at ~197 from a black-market dealer in mid-December and then exchanged at ~205 just 3 weeks later. Most citizens who are swapping currency are doing so on the black market.

The official exchange rate for 1 peso, according to Google

What does this mean for locals? A few things – Firstly, a considerable amount of under-the-table, tax evading dealings are done in dollars overseas for assets in Argentina (as an implicit FX hedge and tax dodge). For peso transactions done locally, most exchanges of property and any expensive item that might be subject to entry or exit taxes are intentionally misquoted to the government to keep taxes lower. Then, the full prices of the assets are settled domestically in cash, either in pesos or dollars or overseas in banked dollars. There are a lot of knock-on effects from this, but the important thing to keep in mind is that 80%+ of the wealthiest 25% of Argentineans are participating in the black-market currency economy. It’s possible it’s 100%, but I’m being conservative. People have such little faith in the government to spend their money well. Simultaneously, they have little faith the government will make the effort to chase up tax evaders, which is essentially everyone. The government can attempt to make policy to alleviate these issues, like with goods taxes, but merchants fight back via cash transactions. This opens the door for criminals to take advantage of the large amounts of black currency that flows through the country.

The main effect of this situation is that most of the economy functions totally in cash. From a western investor’s standpoint, this is a major headwind to the transition to fintech products because people DO NOT want to be banked as they do not have the ease of transacting in the cash currency that’s most efficient to them. Credit card penetration is exceptionally low in Argentina, around 15% of transactions, and the economic reality of how people interact with their currency is also a headwind for card pick-up. From a domestic investor’s perspective, it is difficult to do transactions if you can’t do them in cash. There isn’t real brokerage infrastructure anyway for trading stocks, but assuming there was it’s hard for providers to KYC their customers when they show up with 10m pesos in cash to try and start investing. By the way, the highest denomination note is the 1000 peso note, roughly ~5 USD.

This stack of 100 peso notes is worth ~$10

This means that people that are investing are often doing it via handshake deals, without legal recourse if someone steals your money. And this is Argentina we’re talking about here – people are looking to steal your money. So how does this affect people’s decision making? It means that investors aren’t chasing the high returns you might expect for an emerging economy. Instead, local investors are optimizing for capital preservation. People here put their money into their home and their farm first, by building (sometimes really nice) houses and buying livestock and crops. if they have excess to invest, they may put it in construction projects or family and friends’ businesses’ that are buying hard assets. In the words of my friend, who has no investing experience: “It’s important I can see the thing I am investing in. Whether it’s an apartment building or a processing plant or something, I just want to know what the thing my money is going to so I know what can get stolen from me.” Digital investing, buying stocks on your phone, crypto currencies: to Argentineans these are ways you get your capital permanently impaired by your agent or your government. My friend told me that he expects roughly an 8% return in peso terms, which sounds bad especially when considering inflation, but to him it is perfectly fine since he doesn’t want to bank his cash anyway. God forbid you do that, you’d have to pay taxes on it! The cultural mentality of nonchalance towards government rules permeates the economy and society. When a car crashes on the highway, all the cars turn around and drive in the wrong direction down the highway (contra mano, as they would say) to get to the nearest exit. When I offered, “well, that seems kind of dangerous” the indifferent response was “Si, pero if I don’t turn around then I make a traffic y I don’t want to waste time!”. Similar logic was used when we crossed back into Argentina at the Uruguay border and my friend said, “I stay in the car I don’t want to wait in the line.” This is at passport control. After I got my passport stamped, we simply continued our way; the border guards were too preoccupied to stop and check and see if the car’s passengers had gone into the immigration building.

Also, if you get paid in dollars, even a salary considered “low” in the US (say $30k a year) you can live extremely well in Argentina. That’s because cost of living is incredibly low, compounded by the black-market rate for pesos you can get if you’re importing dollars. Let me share some prices of important goods to you and me: beer at a bar costs 300 pesos ($1.50) and a 6-pack at the supermarket costs 600 pesos ($3). A nice cut of steak will set you back another 800 pesos ($4) and two baguettes to go along with it will be 200 pesos ($1). To fill up your car you bought under the table from your buddy (in dollars) will cost 300 pesos a gallon ($1.50). Labor is cheap, so if you wanted to add a new room to your house it would cost you less than a 1/10th of what it would cost in the US. Brand name household goods and consumer beverages are all available in the grocery store, each for less than $1. The conclusion of this observation is somewhat trivial, and yet eye-opening when observed: it’s not so hard to live on $10,000 a year if the products you buy every day are 1/5th of that they are in the US. For people that earn a decent living in Argentina, or if you are earning below the poverty line in the US and then importing your dollars back home, you can live a comfortable lifestyle here, with all the modern amenities you would enjoy in the West. You must be careful with security, okay that’s true, but if you’re out in the countryside you’re safe anyway. No wonder these guys are so laid back all the time!

I don’t want to diminish the difficulty of poverty for those who live in it in Argentina. From a macro perspective the country is a wreck: high unemployment, no access to credit, poor central bank controls et cetera. Actively ignoring laws and doing as you please is not a constructive way for a society to function. Without addressing those fundamental issues, it will be difficult for countries like Argentina to materially improve their health and wealth. It isn’t an easy place to live if you’re poor. My point though is that it can sometimes be hard to contextualize what cost of living can look like in another society that you’re not used to. It’s also hard to realize that while Argentina is an economic wreck on paper, that doesn’t mean construction isn’t happening, investments aren’t being made, and society isn’t progressing. There are hundreds of thousands of business deals happening globally that you are not aware of. Driving down the highway and seeing the cranes building things is a reminder that investment and society is not zero sum and progress through investing is about more utility for more people. People who can afford to invest in this environment are buying tangible assets that are producing some product or providing some utility to their users: either a consumer good or commodity that keeps up with domestic inflation or real estate. If you are paying labor in pesos, construction materials in pesos, and selling your product in peso, you don’t really care if your currency is devaluing relative to the dollar since all that matters is keeping up with domestic price inflation. In fact, for the people importing dollars annually, they celebrate peso devaluation. They love bringing $15,000 cash and seeing the peso trading at 200 instead of 190 – you can buy that much more stuff back home. The major drawback of this regime is that it’s not remotely inviting for foreign investors, who need to convert back to their local currency at some point and can’t deal with the blatant under the table tax avoidance that is a prerequisite for much investing in Argentina. But if you’re a local Argentine, this is a lifestyle you could easily adjust to.

As I drove back to the airport to come home yesterday, I wondered who owned the stores and buildings on the outskirts of Buenos Aires, a city of three million people. I imagined for a second renting a lavish 5-bedroom apartment in the best part of the town for the $1800 a month that gets you a shoebox in Manhattan. My daydream was rudely interrupted by my friend repeatedly honking his horn as we pulled towards the toll booths. “What are you doing?” I asked. “Well,” he said, “if you honk, then the guy next to you starts honking. Then, everyone is honking, and then the toll booth workers open the gates and let everyone through, just to make you shut up. I don’t want to pay no freaking tolls!” Argentine logic - you have to love it.