I am still in South America, Argentina to be exact.
It is probably unfair to make generalizations about a nation’s business prospects with only a short visit but I plan to do so anyways.
If the Jim Roger’s Border Theory is true, the theory suggests you can tell whether a country is worth investing in by how easy it is to cross the border, then Uruguay tops Argentina.
Getting in to Argentina required standing in line for 2 hours, having my photo and digital finger print taken and then the process repeated upon leaving by ferry to Uruguay. Entering and exiting Uruguay consisted of scanning my bag and showing my passport. I am not even certain the employee was watching the screen as they scanned my bag. She appeared to be playing on her phone.
Argentina vs. Uruguay
For both countries the GDP at constant prices has increased but Argentina appears to have peaked. The volatility is also higher in Argentina.
Per capita GDP in Argentina used to outpace Uruguay. Argentina has fallen behind over the last decade.
Inflation peaked in Uruguay in the early 1990s and has been declining or stable for the past 20 plus years.
The Bolsa in Montevideo appears to only trade bonds and there is no international ETF for the country so I cannot show a stock chart, but interest rate spreads over US bonds have consistently narrowed, as has inflation.
This first chart is described on the BVM webpage as the credit risk spread or the excess interest on Uruguayan debt above Treasury rates for bonds issued in the US. As you can see other than during the financial crisis this spread has been stable.
This next chart is of the annual rate of return, weighted by the value of the capital, of the Uruguayan sovereign bond universe in USD. The left index is interest in basis points.
The below chart is the yield on Uruguayan universe of bonds issued in URU Pesos indexed to inflation. Tasa translates to rates (right axis) and precio translates to price (left axis). As you can see rates have been rising as the economy has strengthened since the Great Financial Crisis however, the price of the bonds has maintained almost 100, indicating that the central bank is not devaluing or monetizing their debt.
Over the period that the data is available it appears that Uruguay has become more fiscally responsible.
Plus on the Bolsa de Valores Montevideo site (this data is from the BEVM the electronic trading exchange website) there is an investor holding a cat. It seems kind of weird but awesome at the same time.
This is not the case in Argentina. Inflation is a consistent problem. The Peso has been continually devalued and sovereign bonds have been defaulted on twice since 2001.
The below chart depicts the number of Argentina Pesos required to buy a US Dollar. From around 3 in 2007 it now costs more than 15 Pesos.
The stock market looks to have performed well in local currency but this is hyperinflation where capital flees currency into corporate and real assets. Some of the other best performing stock markets – in local currency – of the past decade have included Zimbabwe and Venezuela (other hyperinflations).
I hate to be pessimistic but I do not ever think the situation can be fixed in Argentina. I think that the problem is related to how the country developed. I am making a sociological generalization but this is my argument. In a recent Economist article discussing failed states the author discusses the excellent book Why Nations Fail which argues that
“the politics of the vast majority of societies throughout history has led, and still leads today, to extractive institutions.” These tend to last because they give rulers the resources to pay armies, bribe judges and rig elections to stay in power. These rulers adopt bad policies not because they are ignorant of good ones but on purpose. Letting your relatives embezzle is bad for the nation but great for your family finances.”
Argentina is far from a failed state. The Fund for Peace has Argentina listed in the top 50 states for stability under there “more stable category”. But this does not mean the analysis in Why Nations Fail does not apply.
According to Reuters
“In the early 20th century, the South American country was one of the worlds richest, thanks to its production of beef, wheat and other farm goods, plus an educated workforce made up mostly of European immigrants and their descendants…
The military staged a coup in 1930 against democratically elected President Hipolito Yrigoyen, setting a precedent for throwing out governments in times of economic trouble. For the remainder of the 20th century, more generals (14) than civilians (11) would run the country.”
As you walk around Buenos Aires it appears every single person in the history of Argentina has a statue of them in a park. This is a slight exaggeration, but Argentines are hero worshippers. They must believe in the Great Man Theory. This theory believes that history is shaped by “Great Men” and that there are “special people” that forge a path forward. This creates heroes. Personally I believe the events dictate who is remembered and statistically a small number of ordinary people will do great things. I do not believe a person is destined to be great.
Prestige is important in Argentine society. Visit the Recoleta Cemetary and this becomes apparent.
Former President Cristina Kirchner named a cultural centre after herself (while still alive) and had an entire floor of the national museum devoted in her honour (self-created of course). This desire for prestige leads to corruption. Corruption leads to electing strongmen (military leaders) or members of the 1%. The linked Reuters article mentions more generals lead the country in the 20th century than civilians. Entrenched corruption turns society into a zero sum game. This means nobody cooperates. This makes people selfish.
It is often suggested you can tell a lot about a person by how they treat restaurant servers or cab drivers. I believe this insight transfers to cultures as well. It is the small things that give insights to a society and like how Jim Roger’s border theory gives clues about the business climate, I believe how people drive provides insight into culture. If you watch the drivers in Argentina they push through cross walks while people are walking. They do not care, they do not wait. The pedestrians do the same. Zero sum
There is a general strike planned for the day for April 6th, 2017. No transit, no trains, no taxis, all flights cancelled. This means travelers cannot enter or leave the country. It means some cannot get to work. It means some businesses will have to stay closed.
The union does not care they are causing an inconvenience for others. This does not happen in nations where life is not considered a zero sum equation. For example Canada has laws that classify some workers as essential services so that life is not interrupted. The unions even agree to this stipulation. Canadians would not treat foreigners visiting that way.
Argentina and Canada both are resource countries. Both have large agriculture sectors. Both are in rich minerals and energy resources. Canada has the oil sands and Argentina has the 4th largest shale gas deposit in the world (after Russia, US and China). However, GDP per capita in Argentina is one fifth of Canada’s GDP per capita. Argentina has the ingredients to be as wealthy as Canada. Why isn’t it?
I believe this is routed in how the two countries developed differently. The Conquistadors came and took everything they could and exported it to Europe and in the process making a few wealthy. This created a zero sum view of life. This view leads to jealousy and then corruption. Canada was also colonized and populated by immigrants but the climate is cold and required communities to work together to survive and with a spread out population required the division of labour and trade. This leads to cooperation and admiration if others did well. It lead to capitalism and not socialismo. It is why doing business in Canada does not require a bribe, but has in Argentina and why the leaders in Argentina may intentionally choose bad policies and the wealth and potential pre-1930 has been squandered.
Maybe I am being harsh but I cannot see Argentina changing. There is a century of data saying one should not send their investment dollars this way. Uruguay on the other hand probably warrants more research into its developing capital markets.
Both are worth a visit but I think only one is worth your investment dollars. I would only invest in Argentina if you were wanting to buy a cheap vacation property, as I see inflation as entrenched in society and culture.
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