18 Sep 18

Car Industry does not escape Argentina's Crisis

At the moment, Argentina has the world’s highest interest rate, showing the severity of the economic crisis the country is going through, which is felt in the car industry as well.

Argentina is in the middle of a severe economic crisis, however not as bad as the one of 2001. The rising dollar, among other factors, has caused the Argentinan peso to fall, by more than 50% so far this year. 

Stopping the Fall

To prevent the peso for falling even further, the Central Bank of Argentina raised the interest rate up to 60%, which is the highest in the world, and pledged not to lower it until December. 

Still, president Macri had to request a $50 billion credit line from the International Monetary Fund (IMF). Despite the plan to disburse the money gradually over this and next year, Macri asked for much or all of it up front. In combination with the bad perception of the IMF due to the economic crisis in 2001 (when Argentina reached a historical debt of $95 billion), Argentina lost its thrust in Macri’s decisions. 

Decreasing Sales

The crisis is affecting the car industry; which expected a near-record year in 2018, if the economic problems would not have came in between. A recession might be even on the look-out, resulting in a declining local demand for cars.  

After the record year 2013, the country’s recession in 2016 caused the industry to slump. Nevertheless, last year, light-vehicles sales went 26.4% up again, compared to 2016 according to Wards Intelligence; hence similar increased sales were expected this year, which happened in the first four months of 2018, before the value of the dollar surged.

Additionally, Capital Economics, a London-based research firm, lowered its growth forecast for Argentina for 2019 from 3.2% to 1.5%; and Ecolatina, an economic consultancy, expects inflation to be at 24%, almost ten percent higher than the official target of 15%. 

Increased Export

Nevertheless, the high inflation can offer opportunities for the Argentine export market. Volkswagen for example, lowered its growth expectation for Argentina from 20% to 5%, but had an increase of vehicle manufacturing in Argentina in the first quarter of the year, especially due to the rising export to Brazil. Moreover, Di Si, president of South America, Central America and the Caribbean, of Volkswagen’s car sales, said in Reuters to have increased the production program from Argentina to Brazil twice this year.

Decreased Import

On the other hand, the import side is another story. Brazil’s auto exports, for example, tumbled 21% in July compared to June. According to the sector,  the monetary crisis in Argentina is to blame, since Argentina is by far the largest buyer of Brazilian cars. 

If Argentina’s crisis is about to end soon is but the question, since structural measures are required. Additionally, the country will have national elections in one year, which might affect the political and economic landscape; especially if Macri wants to regain trust to be re-elected in October 2019. 

Authored by: Fien Van den steen