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Argentina Economic Crisis

Written By Brian Hicks

Posted December 4, 2013

Economic problems in Argentina are causing a lot of grief for residents and investors. As the country struggles to maintain its foreign currency reserves, it’s only digging a bigger hole.

Argentina beautiful Argentinian inflation is at 25% right now, and government officials believe this is due to tourism. As people travel to other countries for vacation, they end up taking money out of the Argentinian economy.

The government is now imposing strict rules for tourism. President Cristina Fernandez de Kirchner has increased the tax on credit card purchases in foreign currency to 35%. For some people, this limit where they can go and what they can spend, which could lead backlash or even expatriation.

That’s not the only reason why people might want to flee; the government has been restricting access to foreign currencies, according to Bloomberg, and it has limited the reasons people can make purchases in dollars.

Businesses may be hit the hardest by this. They won’t be able to buy all of the imports they need to run their business efficiently due to these limits the government. Instead, they may need to seek permission from the government before importing, and that may mean there will be a lower supply of some goods.

People interested in luxury goods will be seeing an increase in taxes too. Imported cars, yachts, and planes are just some of the items that will be affected. With people being restricted to what they can buy with foreign currency, they will need to buy these luxury goods in Argentina – which will, of course, bring more money into the economy.

Neighboring Countries Not So Bad

Neighboring countries like Chile are performing much better economically. This may come as a surprise, since Argentina’s economy used to be one of the biggest only a century ago. Now, Argentina’s economy is only 40% of the U.S.’s, and even Chile has surpassed Argentina.

The problem with Argentina is that it doesn’t run its economy well. This is obvious when you look at all of the potential the country has – including a population that is twice the size of Chile’s, high energy deposits, and a large capital city.

The government is always trying to control businesses and tighten its hold on international reserves to take care of debt payments. It’s not allowing the economy to grow and thrive because it’s so concentrated on keep money in the country.

Due to this, The Guardian reports, the International Monetary Fund expects the Argentina’s economy will continue to decline. In the coming years, it expects a weaker economy, higher inflation, and high unemployment rates.

How the U.S. Adds to the Problem

The instability of the U.S. economy has affected Argentina in more ways than one. But the biggest effect might come from the Federal Reserve, which has been very unclear on its plans to tapering the bond-buying program. Emerging markets and their investors don’t know if they should invest or scale back from the U.S.

The value of the dollar is determined by the stimulus, and if the Fed scales back soon, the dollar will increase in value, which will keep Argentinians away. However, until that time, they can get a lot for the peso, and this is hurting the Argentine economy by driving investors away.

The Fed will likely pull back a bit on the stimulus soon. Some analysts expect this to occur as early as March of 2014, but weak economic data could change that.

As counterintuitive as it may sound, you may want to look at Argentine investments, as there could be some incentives on the way. According to Wall Street Journal, cabinet chief Jorge Capitanich made this announcement during a televised address:

“We are going to provide incentives for foreign currency flows, job creation, and investment.”

What those incentives will be, no one knows. However, the government wants to do anything possible to get investors back into its country, so it may be worth your consideration.

If Argentina is too risky for you, consider its neighbors such as Chile. It’s obvious the country’s economy is thriving much more, and as Argentina continues to tighten its hold on foreign currencies, Chile will be growing, especially if people from Argentina start to move over. Real estate may be a good option, as well as exports.


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