case_studies_1

case_studies_1 - c06.cs.qxd 3:59 PM Page 177 Case Studies...

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Case I.1 Will Argentina Devalue Its Peso? In November 2000, Mike Lanning was reacting to reports that Argentina might devalue its peso. Such a decision would have important ramifications for his company, Wessen Development Inc., (WDI). WDI is contemplating entering a joint venture with IRSA, the largest developer of shopping malls in Argentina, to construct a new shopping mall on the outskirts of Buenos Aires. The new shopping center, codenamed Mega, would include a Jumbo supermarket, 150 retail outlets, a movie theater with sixteen screens, a video game center, and a bowling alley. Mr. Lanning believes there is still much room for growth in shopping cen- ters, especially outside of Buenos Aires. He notes that Argentina has 0.04 square meters of shopping center space per habitant. By comparison, in the United States there are 0.7 square meters of shopping center space per habitant, or nearly twenty times the space found in Argentina. Moreover, in Argentina’s interior, where entertainment opportunities are limited, shop- ping centers—with their movie theaters, entertain- ment centers, restaurants, and stores—make a good place for a family outing. Despite these promising prospects for Mega and other shopping projects, he is greatly concerned that the slowdown in Argentine economic activity and high unemployment rate could lead to renewed pres- sure to rescind the Convertibility Act and devalue the peso. Exhibit I 1.1 contains key Argentine economic indicators. One of the problems pointed to by oppo- nents of convertibility is that Argentina is especially vulnerable to external shocks because of its currency board, which fixes the peso at par with the dollar and requires that the monetary base be fully backed by international reserves. Any turmoil in global capital markets, such as occurred during the Mexican, Asian, Russian, and Brazilian crises, leads to capital outflows, which push interest rates up and restrict the government’s access to international debt mar- kets. The currency board also makes Argentina exposed to devaluations by its Brazilian neighbor, such as occurred in January 1999. Argentina sends more than 30 percent of its exports to Brazil, so a devaluation of the Brazilian real makes Argentine business less competitive in its most important mar- ket. A real devaluation also gives Brazilian producers a competitive edge over their Argentinian counter- parts in the Argentine market as well. Case Studies 177 PART I Case Studies EXHIBIT I 1.1 Key Argentine Economic Indicators Key indicators 1997 1998 1999 GDP ($ billions) 293.0 298.3 282.9 Real GDP growth (%) 8.1 3.9 2 3.1 Consumer price inflation (%) 0.5 0.9 2 1.2 Population (millions) 35.7 36.1 36.6 Exports of goods ($ millions) 26,431 26,441 23,316 Imports of goods ($ millions) 28,554 29,558 24,145 Current-account balance ($ millions) 2 11,954 2 14,274 2 12,152 Foreign-exchange reserves excluding gold ($ billions) 22,320 24,752 26,252 Total external debt ($ billions) 130.8 144.1
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