Argentina is now officially in default. In plain English: it has not reached an agreement on how to pay its debts. You will find a lot of analysis (not without bias, by the way, it’s amazing how financial markets can stir up so many emotions!) on global sites like The Economist, The Wall Street Journal and CNN Money, and also on local and regional media.
However, too much information can be confusing for British exporters who are trying to make practical decisions as well as strategic ones regarding their exports to South America’s second largest economy. In the last few months (yes, we could see it coming!), we’ve been approached with questions about what the situation is really like in Argentina and how an imminent default could hit UK exporters. So here is a very brief, far from exhaustive but down-to-earth analysis of some of the things to watch out for.
How will Argentina’s default affect our business in that country?
Economists (like me!) don’t agree on the likely short term repercussions of the default and it all depends on how the already weak Argentine economy reacts to the (highly expected) news of a default. Personally, this is what I can tell you:
1- This is no catastrophe. And this is not the 2001 crisis. It was predictable and the country won’t run into chaos now. Businesses and individuals are used to these crises, could see this one coming, and were almost surely starting to prepare for this.
2- In my opinion, the biggest consequence that British exporters will feel from this default is an increase in instability and uncertainty. Projects and purchases will be on hold for longer than expected. Your distributor might not be too keen to experiment with a new line of products or might not be too tempted to place a large order just now. It’s important that you are aware of what’s going on in the country and give your local partners some time to adjust.
3- Argentina’s economy was already weak before this default and British exporters were already concerned about measures like import restrictions, for example. The default will worsen import restrictions and make your life even more difficult, but you’re probably used to this already.
4- Inflation, economists say, will inevitably increase (long story). If you are selling consumer goods to Argentina, for example, remember that every day they will become more expensive to your clients. Pricing and market segmentation will be key.
5- Importing into Argentina will continue to be tricky because the government needs the foreign currency the economy still has to stay put. Also, the gap between the official exchange rate and the unofficial one will widen, which means that your local partners will again face a period of high risk and uncertainty, which tends to slow down business decisions.
6- Social unrest will increase. Again, not new to Argentina, but it could affect your business.
7- Austerity will increase (that’s what happens when we need to pay our debts), so if you’re dealing with the Argentine government (for example, in infrastructure projects), expect some turbulence.
8- Investment going into Argentina will decrease even more (credit agencies are already downgrading their ratings), which means that there will be less cash to finance infrastructure projects, for example (the situation couldn’t be more different in Peru, Chile or Colombia, for comparison).
9- Finally, an important repercussion of the default will be the lack of credit for Argentine businesses. If your local partner or client requires credit to finance purchases from your business, these could be indeed very tough times.
We are not doing business with Argentina yet, should we even consider it given these circumstances?
Well, that’s your call. It depends on your business and your sector. A lot of British businesses and those from other countries are exporting very successfully to Argentina and many will continue to do so. The country is not at a standstill. People still buy goods and services, and so do businesses and the government. Whether it’s the right market for you – right now – is something that only in-depth market research can tell, when combined with your own company strategy, including your resources, tolerance to risk and cashflow position.
What is clear is that you will face import restrictions (higher than before) as well as a period of economic crisis, unrest, uncertainty and instability. Risks are high, but Argentina is one country you need to think twice before ruling it out altogether.
We hope you found this article useful and practical. We would really appreciate your comments below: what else would you like to know? how do you feel about doing business with Argentina?