1.What are the major factors that caused the peso to fall in value against the dollar? What has the government done to reverse the recession? Answer:
Argentina was rated as one of the world’s 10 richest countries in the beginning of the twentieth century. But in 1980s inflation plagued the country and as a result Argentina lost trust in the peso and invested in U.S. dollars and shipping their capital abroad. To solve this carols Menem in 1989 took control of the country and set out to implement free market reform and to restructure monetary and economic policies .He tightened fiscal management and also established the convertibility law which pegged the Argentine peso 1:1 with the U.S. dollar, but the government’s ability to respond to external shocks was severely reduced. In effect, Argentina’s exchange-rate and monetary policies were determined de facto by the United States, and Argentina’s interest rates were determined by the U.S. Federal Reserve.
When world commodity prices declined, the U.S. dollar, and hence the Argentine peso, strengthened against other currencies. Concurrently, Argentina’s main trading partner, Brazil, devalued its currency. As deflation set in, both the Argentine government and many private companies found it difficult to pay their debts. Tax revenues fell, while public spending increased. Interest rates payments went primarily to overseas investors, thus further draining the economy. When Argentine banks were pressured to buy government bonds, a bank run ensued. Following the government’s default on its debt, the currency board was abandoned, and the peso was allowed to float against the dollar. In the latter half of 2002, the Argentine peso was trading at about 27 cents to the dollar.
2. What has been Argentina’s experience with the IMF? Has the IMF been helpful or not?
Argentina has had a somewhat tumultuous relationship with the IMF. Initially when the country sought help from the IMF, the IMF refused saying that Argentina would have to restructure its banking system, fiscal policy, and exchange rate policy. Eventually the IMF did grant loans to Argentina, but then was difficult to negotiate with when Argentina had trouble repaying those loans. Argentina allow to pay interest only on $ 21 billion debt over the next three years to repay most of the debt, including overdue interest, Argentina proposed a plan to its creditors asking them to write off 70 percent of the present net value of their government bonds .The IMF and Argentina did finally agree to terms, this way Argentina closed on the biggest debt restructuring in history with the help of IMF however, both are working to establish a long term relationship.
3. How has the fall in the value of the peso affected business opportunities for companies doing business in Argentina and in exporting and importing?
The biggest effect of the fall in the value of the peso for companies doing business in Argentina was hyperinflation. The central bank printed pesos to keep banks solvent but this led to increase inflation. Also, companies with dollar denominated debt were badly hurt as the cost to repay that debt escalated rapidly. In 2003 new president of Argentina nester Kirchner economy of Argentina rebounded significantly the country experience hyperinflation after the abandonment of the peso’s peg to the dollar; the devaluated peso is now one of the causes of the economy recovery. The pesos were trading at 0.9920 pesos per dollar on December 31, 2001, but it fell to 3.39 pesos on December 31, 2002. Next few years the peso is nearly 70% cheaper against the dollar than it was in the 1990s, resulting in increased exports of farm product and other commodities. The devaluation has also resulted in new foreign direct investment and increased business with Brazil. The declining peso helped exporters to be more competitive but made the prices of imported goods increase faster than the prices of domestic goods.
4. Should HSBC invest more money in its operations in Argentina? What factors should they monitor as they make their decision?
HSBC should continue to be cautious in its approach to increased investment in Argentina HSBC is one of the top banks in the world in foreign-exchange trading in 1998 HSBC entered in Argentina .in their first year of operation the bank had loss of $13 million but earned a profit of $67 million in 1999 and expected profits to continue growing at 100 percent but due to the depreciation of the peso in Argentina HSBC forced to rethink loans and to decide if the political and economic instability of the country was worth the risk of continued operations. Although the situation appears to be stabilized, it is still potentially volatile. The company should monitor the government’s actions carefully, particularly its actions regarding the repayment of foreign debt. Also, if the government requires that dollar denominated loans issued by HSBC and other banks in the past be allowed to be repaid in Pesos, HSBC should be very reluctant to issue any more dollar denominated loans. After suffering a $210 million loss in 2002, the Argentina subsidiary of HSBC recorded profit of $48 and$156 million in 2003 and 2004, respectively.