A version of this article was originally published on Rosa & Roubini Associates
When Argentina’s president Mauricio Macri was elected at the end of 2015, investors rejoiced to see the end of the two Kircheners, Nestor (president from 2003-2007) and Cristina (president from 2007-2015). Argentina’s stock market boom, which began in 2013 but faltered just prior to the 2015 election, then continued until this past February. By the start of 2018, Argentina’s stock market had risen tenfold in value in only five years.
Macri had poor timing, however. Just as he was coming into office, commodity prices were falling worldwide. Crude oil prices had been over 110$ a little over a year before he was elected; they fell below 30$ during his first month in office. Soybean prices experienced a similar decline, albeit less sharp of one. This has been painful for Argentina, which is a significant commodity exporter and the world’s largest soy exporter apart from the US or Brazil.
Food exports account for an estimated 62% of Argentina’s total merchandise exports. To put that into perspective, the next highest “food exports as a % of merchandise exports” figure among major economies is Brazil’s, at 32%, followed by Spain at just 16%. Food prices may not have caused the current peso crash — that has been the result of a mix of factors, including the fact that Argentina holds a large amount of USD-denominated debt at a time when the value of the USD is rising. But food prices (and drought) have played a part as well.
The irony, however, is that while Argentina is now struggling as much as almost any country, even having to go back to the IMF which Argentininans have such distaste for, the country is actually uniquely well-suited to facing two of the major, global trends that most pundits and many economists think are likely to occur: rising interest rates and rising tariffs.
The case of tariffs is fairly obvious: Argentina’s exports are equal to only an estimated 11 % of its GDP, lower than any major economy (only the US, Japan, and Brazil even come close). Very few of these exports are to the US. Indeed, Argentina may to an extent even benefit as the US raises tariffs, since doing so leads countries to retaliate by placing tariffs on American food exports that compete directly with Argentinan food exports.
The case of interest rates could similarly benefit Argentina by hurting its competitors’ food exports — in this case, those of Paraguay, Bolivia, and especially Brazil — while leaving its own economy relatively unscathed. Argentina can withstand higher interest rates because it is not a capital-intensive economy; neither in its agricultural sector nor in its non-agricultural sectors. Argentina has low food production costs because its farmland is fertile and has access to ports via navigable rivers. In Brazil, in contrast, farming requires capital-intensive techniques to coax harvests out of acidic, nutrient-poor soils. Those harvests must then be trucked across Brazil’s mountains to reach the sea.
Argentina’s general economy is also not capital-intensive, owing to characteristics particular to its population. To begin with, it s in that goldilocks position of having relatively few elderly citizens or children that require expensively taking care of. It is, moreover, almost wholly urban. 92% of Argentinians live in cities, higher than in any major country apart from Japan or the Netherlands. This can create efficiencies, especially as it is a uniquely concentrated urban population: 38% lives in Buenos Aires. No other major economy surpasses this: the next highest is Tokyo, at 32% of Japan’s total urban population, followed by Paris at 21% of France’s total urban population. With such a large, working-age population, Buenos Aires could be a true economy of scale.
A concievable scenario for Argentina is that rising interest rates will limit soybean and other food production in countries like Brazil, Paraguay, and Bolivia, while at the same time rising tariffs will limit US soybean and other commodity exports. Both will boost Argentina’s export revenues, even as Argentina itself is not hurt very much by rising tariffs or interest rates. If this occurs, Argentina may become a darling of investors yet again.