Argentina

John Zekany, Analyst, Americas Sales

03 November 2020

Drastically divergent exchange rates fuel sales in Argentina

June marked the first month of year-on-year growth in Argentina’s Light Vehicle market for the first time in two years. And although this positive momentum was not sustained in the months that followed, the market remained on an upward trend, improving from -40% year-on-year in July to -4% year-on-year in September. While admittedly still in negative territory, sales held up reasonably well when compared with the pre-pandemic performance. For Q3 as a whole, sales fell by 28% year-on-year, versus -30% in the same period last year.

Sky-high inflation is, of course, nothing new in Argentina. Over recent months, however, it has led to an interesting phenomenon and a resulting boon in Light Vehicle sales.

“The official peso-to-dollar exchange rate is set by the central bank and currently sits at ₱77 to the US dollar. On the black market, however, a dollar buys more than double that amount.”

High inflation caused consumer prices to rise by around 41% year-on-year in August, leading to a run on the US dollar, which is traditionally seen as a safe haven for personal savings. Argentina’s current capital control laws stipulate that individuals may purchase a maximum of US$200 per month. While this limit was put in place to avoid draining foreign currency reserves, it has inadvertently contributed to the creation of a parallel foreign exchange market in which so-called ‘blue dollars’ are bought and sold at a much higher premium than the official ‘white dollar’ exchange rate. The official peso-to-dollar exchange rate is set by the central bank and currently sits at ₱77 to the US dollar. On the black market, however, a dollar buys more than double that amount. Utilising arbitrage, those who hold savings in dollars can sell them on the black market for pesos, then purchase a new vehicle at a steep discount.

Some vehicles for sale in Argentina are priced in US dollars, but final transactions always take place in pesos, at the official exchange rate. As an example, the Porsche Macan costs roughly US$165,000 (inclusive of taxes), which translates to roughly ₱12.7 million. But thanks to the parallel exchange market, a buyer holding US dollars could sell US$73,000 at the black-market rate of ₱175 to the dollar and obtain the requisite funds to purchase the Macan, thus effectively paying only ₱5.6 million for the vehicle, based on the official exchange rate.

“But the boom came to an abrupt halt when the central bank neared the bottom of its foreign reserves, prompting the government to increase taxes and restrict vehicle imports.”

While this advantageous arbitrage certainly provides a bright spot in an otherwise lacklustre market, there is a considerable risk that it may be short-lived. We witnessed a similar phenomenon in 2013, when sales reached an all-time high of 922,000 units. But the boom came to an abrupt halt when the central bank neared the bottom of its foreign reserves, prompting the government to increase taxes and restrict vehicle imports. At the time, these constraints were put in place by the then president and current vice-president Cristina Kirchner.

We are now seeing similar measures coming into force, which could signal the beginning of the end for the parallel exchange market and, ultimately, the return to a gloomier reality for Argentina’s Light Vehicle market.