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The Effect of Argentina’s Economy on Investments

Essay 2016 7 Pages

Business economics - Investment and Finance

Excerpt

Table of Contents

Introduction

Analyzing Inflation in Argentina against Investment

Analyzing Argentina’s Major Industries for Export and Import against Investment

Conclusion

Works Cited

Introduction

The economic stability of Argentina has been uneven for a very long time. Normally, the nation experiences periods of the economic boom followed by a recession period, which has made it hard for investors to establish the best kind of investment and the time to invest in the country. The state interference with the financial sector has been one of the major challenges in Argentina’s economic development. In most cases, the real financial situation and economic statistics are under-reported for political reasons, thus making the nation questionable for effective investments. Rising taxes and high levels of inflation have been a major concern for the government, especially those seeking political positions in the nation (Cohen 49). Principally, the nation is still indebted to the American hedge funds, but investors are beginning to show confidence in the stock market of the country.

Regardless of the challenges, Argentina is among the G-20 nations that provide an ideal platform for investment for people across the world. Some of the industries, namely manufacturing, commerce and tourism, real estate and business as well as health and education, have maintained a solid level of stability over the years. Therefore, any investment in these areas can guarantee high returns for investors. The current paper will discuss two key economic issues in Argentina (inflation and the major industries for export and import) with an aim of evaluating the relationship between these factors and investment. Understanding the inflation rates and the major industries involved in maintaining a positive trade balance in a nation is essential for financial and investment decision making.

Analyzing Inflation in Argentina against Investment

Inflation in Argentina has been a central point of concern. Most of the inflation data is rarely presented to the public because the government is highly involved in the financial aspect of the nation. The lack of ideal knowledge on the levels of inflation affects investment greatly, especially because there is a combination of bad economy and high inflation in Argentina. The former president of Argentina once revealed that the nation’s economy was badly influenced by inflation, which was about 40% (Norden and Russel108). Stagflation, which is the combination of both high inflation and bad economy, makes Argentina a risky destination for investment in many ways. Most specifically, stagflation has a negative impact on the purchasing power of a company or an investor. Fixed investors constitute a group highly affected by this kind of inflation. For instance, a person investing in a treasury bill at an interest of 10% in a nation with 4% inflation will lose about 4% of the purchasing power if inflation remains positive throughout the year.

The difference between the nominal interest rates and real interest rates determines the purchasing power of an investment. The real interest rate is the actual purchasing power of an investment. For instance, if one earns 5% interest annually on savings in their bank, and inflation stands at 4% per annum, then the real interest rate that can be realized is 1% (5% - 4% = 1%). Thus, the actual value of one’s savings only increases by 1% per annum. The point worth noting here is that high inflation rates greatly reduce the purchasing power of a company or a stakeholder (Comley 142).Therefore, it is necessary to consider the difference between the nominal interest rates and real interest rates while determining the viability of an investment.

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Figure 1: Argentina’s Inflation Rate in 2015 (Source: www.tradingeconomics.com)

The effects of inflation on portfolios depend on the nature and the kind of securities held. Stocks are rarely affected by inflation, but the current state of Argentina’s economy is an exception. With an inflation rate of as high as 40% in combination with the bad economy (figure 1), it is possible to miscalculate the return on stocks. Companies have the capacity to grow at the same rate to inflation levels in the end, but stagflation hinders progressive financial growth for both companies and shareholders. In fact, the returns of a company can be overrated because of the high levels of inflation. The aforementioned issues complicate the process of valuing an investment, especially because the inflation statistics are kept away from the public in Argentina by the government. With the current levels of inflation in Argentina, it is possible for companies and stocks to appear as though they are growing economically (Muritala 31). However, such an orthodox growth can lead to massive losses when the economic stability of the nation changes. The economy of Argentina is highly unstable as mentioned earlier; therefore, it is hard to determine the fluctuation of inflation, which is dangerous for investments.

The use of inflation-indexed bonds is an ideal course of action for investors in Argentina. The treasury inflation protected securities guarantees return on investment and constancy in the purchasing power of an investor (Piotr and Andrzej 77). The safety of the stocks and the securities is not attractive to many investors because inflation has not been an issue in the recent past. However, with the trend of inflation and the economic predictions that the rate of inflation in Argentina and the general economic stability of the nation might worsen in the near future, the stocks are a safer investment opportunity. The stock market in the nation is quite promising because investors are buying the debt out. Therefore, stock investments guarantee better returns in Argentina as they are rarely affected by inflation and have a higher magnitude of growth in the near future.

Analyzing Argentina’s Major Industries for Export and Import against Investment

The stability of the major industries in Argentina is quite promising. Over the years of recession and the periods of an unstable economy, agriculture, manufacturing, tourism, real estate as well as health and education industries have remained profitable. According to the monetarist theory, a positive trade balance is actually a profitable business transaction that helps developing nations and struggling economies to stabilize. Additionally, a positive trade balance shows a flow of wealth from one nation to another, which is ideal for economic development. Although the Keynesian theory argues against the exploitation of other nations for personal gain, a positive trade balance can help to stabilize the economies of the world by attracting wealth from one nation to another. The positive trade balance is an indication that the economy of the nation is headed in the right direction and that the nation is ripe for domestic and foreign investment. The two main industries worth that may be of special attraction to foreign investments are agriculture and tourism.

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Figure 2: Argentina’s Major Industries for Export and Import against Investment as at November, 2015 (Source: www.tradingeconomics.com)

To start with, agriculture contributes greatly to the stability of the nation’s trade balance. In the last three years, Argentina has enjoyed a positive trade balance, which places the nation in an ideal position for foreign investment (Sheinin 97). Argentina is the greatest exporter of soy around the world. Various companies are involved in the production of soybean meal, which is exported to different parts globally, including China, the United States, and Brazil among other places. Additionally, agricultural products, which are the raw material for the manufacturing companies, are readily available in Argentina, thus reducing the need for outsourcing and importing them. Thus, the success of the agricultural sector reduces the amount of money used to outsource products, hence translating to a positive trade balance (Nouzeilles and Montaldo 44).

The tourism sector also plays an important role in Argentina’s export business.

As the country’s president pointed out in a press release to the United Nations World Tourism Organization (UNWTO), the tourism sector is very important since it solely generates wealth and decent work. According to the Argentine president, the travel and tourism sector in the country makes contributes immensely to the national economy Sreekumar (n. pag.). Moreover, the industry remains a powerful lead towards territorial development. Tourism statistics for the country have been quite encouraging, and the amounts of dollars entering Argentina have more than doubled since 2003. Additionally, worth noting is the marked improvement in conference marketing in the country which was ranked 40th globally in 2003 after hosting 17 conferences. After the launch of an aggressive marketing plan in 2008, the country managed to hold 115 events, thereby climbing the ranks to number 22 globally. In 2009, the country stood at position 19 after hosting 145 events, which is a great sign of marked growth.

Furthermore, investment in lodges, hotels, and motels has leaped 1,000 per cent since 2003, with the country’s major cities getting fully incorporated into the global tourism circuit. Evidently, tourism is better placed to be a major revenue generator for Argentina. Besides, the latest Marketing Plan for the country will ensure that it joins the leading world destinations which drive growth in the tourism sector. Thus, the continued excellence in the industry will guarantee return on investment and an ideal opportunity for economic evolvement in the future. Moreover, the robust tourism industry in Argentina, which is active all year round, enables it to cope with the country’s economic fluctuations. As Sreekumar (n.d) observes, tourism is the only industry that has exceeded the 1990 industry growth statistics. Therefore, investing in the two industries (agriculture and tourism) is an ideal choice for any investor.

Conclusion

The economic stability of Argentina has been quite uneven over time. However, the nation still enjoys an ideal position in the most powerful nations around the world. Argentina is part of the G-20 group, a position that has enhanced the country’s export and import earnings. As pertains to inflation, stock investments would be a wise move for any investor since they guarantee better returns. With regard to the export and import industries, investing in agriculture (soy bean trade), and tourism would, definitely, be a smart move by any serious investor. Particularly, these two industries are the most likely to provide high returns on investment for stocks, bonds, or fixed investments. As evidenced in figure 2, the two industries are least affected by the country’s economic fluctuations. Therefore, with a carefully calculated investment strategy, and taking into consideration the investment analysis that has been highlighted in this paper, any serious investor would not find betting their money on Argentina a bad idea after all.

Works Cited

Cohen, Michael A. Argentina's Economic Growth, and Recovery the Economy in a Time of Default. London, New York: Routledge, 2012. Print.

Comley, Pete. Inflation Matters.S.l: Pete Comley, 2015. Print.

Muritala, Taiwa. “Investment, Inflation, and Economic Growth: Empirical Evidence. Research Journal of Finance and Accounting 2.5 (2011): 22-47.

Norden, Deborah L., and Roberto Russell. The United States and Argentina: Changing Relations in a Changing World. New York: Routledge, 2013. Print.

Nouzeilles, Gabriela, and Graciela R. Montaldo. The Argentina Reader History, Culture, Politics. Durham: Duke University Press, 2009. Print.

Piotr, Cizkowicz, and Andrzej, Rzonca. Does Inflation Harm Corporate Investment? Empirical Evidence from OECD Countries. Economics Discussion Papers, No 2012-63. Jan 2012. Web. Nov 2015.

Sheinin, David. Argentina and the United States an Alliance Contained. Athens: University of Georgia Press, 2013. Print.

Sreekumar, KS. South America: Argentina, realising the strength of tourism. Tourism in the Middle East (2015). Web.

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Details

Pages
7
Year
2016
ISBN (eBook)
9783668726215
ISBN (Book)
9783668726222
File size
550 KB
Language
English
Catalog Number
v428474
Grade
7.1
Tags
effect argentina’s economy investments

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Title: The Effect of Argentina’s Economy on Investments