Despite the slowdown in global growth, which now appears to have stabilised, very few countries are currently suffering a proper recession. The notable exceptions are Hong Kong and Argentina.


As an economist, holidays are a chance to study the anatomy of a downturn first hand (and to be described as an ‘econ geek’ by my 14-year-old daughter). As I live with a currently weak currency in Britain, a dollar-pegged Hong Kong and riots were not appealing; more enticing was the two-thirds depreciation of the Argentine peso (ARS) over the past couple of years.


Strolling through Buenos Aires revealed a country in crisis and the ravaging effects on poverty of a 50% inflation rate. As Magda highlighted over a year ago, Argentina has become stuck in its high inflation, high external debt and depreciation quicksand, which assistance from the International Monetary Fund (IMF) has so far been unable to solve.


Some prices had failed to adjust to the currency collapse and so appear remarkably cheap for tourists, while imported luxury brands had risen in line with the depreciation. Restaurant prices were about one-third the cost of London. Regulated taxi fares meant a 10-minute cab journey was around 100 pesos (barely over a dollar). The tips were gratefully received. The underground was embarrassingly cheap at 20 pesos (due to price freezes since March which implies increased subsidy and fiscal cost). But they were also clean, punctual and air conditioned – South West Trains, please note!


Setting the peso


The one business which is clearly booming is clandestine foreign exchange. There is a desperate shortage of dollars due to capital controls, the impending sovereign debt restructuring, and punitive taxes on trade. Furthermore, nobody wants to save in pesos because of the expected future depreciation, preferring dollars in bank safety deposit boxes.


Official foreign exchange outlets are a bureaucratic nightmare with restrictions on the amounts of dollars which can be exchanged. The banks are unattractive with huge fees and severe limits on cash withdrawals. This has led to cries of ‘cambio, cambio’ on every street corner in the centre of Buenos Aires.


After negotiating a price, clients are led into tiny rooms down side streets (known as ‘Cueva’ – an exchange office hidden inside a regular business unit which is a façade to cover the real transactions) to see the boss and receive rates currently at least 20% better than the official exchange rate.


If like me you don’t fancy the risk of dealing with an unlicensed entity, many of the shops and restaurants took card payments and were happy to offer discounts to tourists or take dollars at favourable exchange rates. The unofficial exchange rate is posted on the blue dollar website or can be calculated by taking the dollar and peso prices of the same assets listed on different stock exchanges.



So what’s the trade recommendation (other than visiting Argentina with a suitcase full of dollars and a security guard)?


The real depreciation is already substantial and, while confidence is unlikely to be restored under fears of another profligate Peronist Fernandez-Kirchner government, it is hard to short the peso given the carry costs and exchange-rate management. Sovereign bonds are already priced for a major default.


So perhaps one should look across the Rio de la Plata? When Argentina sneezes, Uruguay usually catches a cold. Nowhere was this more obvious than in Punta del Este (the Saint-Tropez of Latin America – Suarez and Messi were whizzing around town in their Ferraris over Christmas). The whole place is up for sale. Work on a luxury beachfront Trump tower (which began in 2014 and was supposed to be completed in 2016) has come to standstill. 70% of real-estate transactions are done by Argentines. Uruguay has become very expensive for them and now it appears there is a rush to get their money out.


There is certainly no desire to let Argentine pesos in. While the spot rate has fallen to 0.6 Uruguayan pesos (UYU) per ARS, you can’t find a rate better than a miserly 0.3. Real estate prices are falling, but financial asset prices have so far been immune to this pressure, buoyed by investor confidence in the new government, the macroeconomic framework and global hunt for yield.


Yet inflation is stubbornly high, the economy is barely growing, and external debt is a vulnerability. The relatively small risk premium on sovereign bonds does not look big enough to me.