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1、230 Part I Case Studies Case I.1Will Argentina Devalue Its Peso? In November 2000, Mike Lanning was reacting to reports that Argentina might devalue its peso. Such a decision would have important ramifi ca- tions for his company, Wessen Development Inc., (WDI). WDI is contemplating entering a joint
2、ven- ture with IRSA, the largest developer of shopping malls in Argentina, to construct a new shopping mall on the outskirts of Buenos Aires. The new shopping center, codenamed Mega, would include a Jumbo supermarket, 150 retail outlets, a movie theater with sixteen screens, a video game center, and
3、 a bowling alley. Mr. Lanning believes there is still much room for growth in shopping centers, especially outside of Buenos Aires. He notes that Argentina has 0.04 square meters of shopping center space per habitant. By comparison, in the U.S. there are 0.7 square meters of shopping cen- ter space
4、per habitant, or nearly twenty times the space found in Argentina. Moreover, in Argentinas interior, where entertainment opportunities are limited, shopping centerswith their movie theaters, entertainment centers, restaurants, and storesmake a good place for a family outing. Despite these promising
5、prospects for Mega and other shopping projects, he is greatly con- cerned that the slowdown in Argentine economic activity and high unemployment rate could lead to renewed pressure to rescind the Convertibility Act and devalue the peso. Exhibit I 1.1 contains key Argentine economic indicators. One o
6、f the problems pointed to by opponents of convertibili- ty is that Argentina is especially vulnerable to external shocks because of its currency board, which fi xes the peso at par with the dollar and requires that the monetary base be fully backed by international reserves. Any turmoil in global ca
7、pital markets, such as occurred during the Mexican, Asian, Russian, and Brazilian crises, leads to capital outfl ows, which push interest rates up and restrict the governments access to interna- tional debt markets. The currency board also makes Argentina exposed to devaluations by its Brazilian nei
8、ghbor, such as occurred in January 1999. Argentina sends more than 30% of its exports to Brazil, so a devaluation of the Brazilian real makes Argentine business less competitive in its most important market. A real devaluation also gives Brazilian producers a competitive edge over their Argentinian
9、counterparts in the Argentine market as well. A rise in interest rates and reduced access to capital or a devaluation of the real will slow down economic growth or even push the country deeper into recession, something Argentina does not need with its double-digit unemployment rate.1Under the curren
10、cy board system, Argentine prices will drop in response to a recession, thereby bringing the economy back to equilibrium, but the adjust- ment mechanism is costly and protracted. A peso devaluation, on the other hand, could improve the competitiveness of Argentine exports and import-competing produc
11、ts as well as reduce real interest rates (once the threat of devaluation was gone). A decline in real interest rates along with improved trade prospects, in turn, would stimulate Argentine economic activity and reduce unemployment. The latter effects would help boost government tax revenues as well
12、and could reduce its unemployment compensation and other social spending. 1It should be noted that many analysts attribute the high unem- ployment rate to Argentinas rigid labor laws rather than to peso overvaluation. Other analysts have pointed to the deteriorating education system as causing wage
13、stagnation and increased demands by the Peronist labor unions for job security. 41504_Pt1_Case_Studies_p230-238 2/22/02 10:15 AM Page 230 Case I.1Will Argentina Devalue Its Peso?231 However, devaluation has its own problems. For one thing, most of Argentinas liabilities are denominated in dollars (s
14、ee Exhibit I 1.2 for an accounting of these dollar-denominated liabil- ities). A devaluation of the peso would lead to a redistribution of wealth to creditors from debtors, with much of this redistribution occur- ring between foreign creditors and Argentine debtors. However, the infl ation that woul
15、d follow a devaluation of the peso would mitigate this wealth redistribution somewhat although it would bring its own set of problems. Peso devaluation would also reduce the equity of Argentine banks and private companies. Even if all domestic private and public dollar-denom- inated debt were to be
16、honored in pesos, a deval- uation of the peso would put substantial pressure on bank capital. As shown in Exhibit I 1.3, at a new peso:dollar exchange rate of 1.7:1, bank capital would go to zero. It would take a much Exhibit I 1.2Dollar-Denominated Argentine Liabilities LocalForeign creditorscreditorsTotal Non-fi nancial public sector and central bank32,20081,000113,200 Non-fi nancial private sector46,70035,10081,800 Financial sector2,10023,60025,700 U.S. dollar liabilities (total)81,000
