Update from Uruguay - Argentina’s Economic Situation, A Problem Or Opportunity?

Located south of the equator, South America is counter-seasonal to the northern hemisphere.  Meaning it’s almost summer in Uruguay!  For the chic resort town of Punta del Este it’s time for the annual influx of Argentines to enjoy its beaches, rent overpriced apartments, and spend lavishly on food and entertainment. Or is it?

In this article we’ll take a quick look at the current economic landscape in Argentina and see why business and property owners in Uruguay are nervous, while investors with cash wait to see what opportunities will arise from Argentina’s next decennial default.

Argentina Continues to Implode

Since my last article on the subject, “Update from Uruguay,” nothing good has happened to Argentina’s economy. In fact, it’s getting uglier by the day. So bad that many top international brands have already fled the country, including Louis Vuitton, Polo Ralph Lauren, Cartier, Yves Saint Laurent, and more.

To cover the country’s fiscal shortfall, the Argentine Central Bank has resorted to issuing increasingly large “transitory advances” (101 billion pesos so far, with more expected before year’s end) to the Argentine treasury. That’s one arm of the Argentine government lending to the other – I’m sure that will end well.

Meanwhile, the Argentine government continues to institute more rigorous capital controls to prevent wealth from fleeing the country. At this point only the richest and most connected Argentines have access to foreign currency markets. Even the purchase of gold has been “suspended.” The end result is that middle class Argentines are trapped into holding Argentine pesos, which everyone fears will be devalued in the near future.

Many government agencies are also unable to access US dollars.  Just recently two Argentine provinces “Pesified” their debt, because the Central Bank did not allow them to access foreign currency markets. The bondholders were obviously not pleased. And given Argentina’s economic situation, how long before it announces the “Pesification” of its own national debt, or perhaps a full default as it did in 2001? If one believes credit rating agencies – something I normally advise against – it appears that default is just around the corner, as top credit rating agency Fitch recently downgraded Argentine debt, fearing a “probable default.”

And finally, in what appears to be a fatal blow for those hoping to see Argentina’s economic woes solved through political change, Argentina’s Congress recently approved a law to lower the voting age to 16. Many believe this move ensures that President Cristina Fernandez’s political party will continue to dominate Argentine politics, and possibly paves the way for Fernandez to run again for president (in violation of the current Argentine constitution).

So, we, as investors, should expect to see increasingly worse economic policies put in place over the coming months. Thus, the question is not if Argentina’s economy is going to crash, but when Argentina’s economy is going to crash.

Uruguay’s Summer

Naturally, many investors on this side of the river are worried.  A critical portion of the Uruguayan economy relies on Argentine tourism, especially in resort towns like Punta del Este. When Argentina sneezes, Uruguay catches a cold. So, with Argentina’s economic woes and the inability of its middle class to access foreign currency, fewer visitors are expected in Uruguay. That means fewer renters and shoppers.

To its credit, the Uruguayan government is taking proactive steps to ameliorate the economic situation.  They’ve eliminated VAT on a variety of credit card purchases (e.g., food, rental cars, hotels, clothing, and gasoline) and offered a 10% refund on short-term apartment rentals.  These actions will have some positive impact in encouraging more Argentines to visit.  But will they be enough?

On the record, most Uruguayan government officials believe so. They state that the economic measures will be sufficient to weather the storm and that, while this summer may be “slow,” it will not be catastrophic. And it appears that some real estate developers have decided to plow forward as well. Just recently Donald Trump announced a new project here. Trump Tower Punta Del Este will be a 24-story luxury tower, which touts itself as the first luxury project of its kind in South America.

However, many savvy investors are simply sitting on the sidelines waiting for the right moment to deploy their capital. In 2002, just after Argentina’s last crash, the situation in Uruguay’s real estate market was plain ugly. Bank accounts were frozen, the Uruguayan peso collapsed, and real estate fell off a cliff. Will 2013 present similar opportunities?

What to do Now?

Despite the seemingly dire short-term economic prospects for the region, this article isn’t about doom and gloom. In fact, the current situation should be viewed as an opportunity. Financial crises have happened before, and they will happen again. Still, Uruguay is not falling off the map.

And regardless of what happens to real estate prices in Uruguay during the short-term, it’s still one of the best options for expats looking to relocate to South America. It’s safe, affordable, and offers its residents an incredibly high quality of life. And with 400 miles of coastline, endless farmland, and cities with old-world European charm, you’re sure to find whatever you’re looking for here.

These are reasons more expats are moving to Uruguay each year.  Some come to retire, others to invest.  And some just to take advantage of one of the easiest residency programs around. In fact, since the US elections in November, many people have already decided to move to safer and greener pastures here in Uruguay. Residency applications processed through our office have increased significantly, as it appears that many people in the US have reached their breaking point.  Have you?


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