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The exchange gap, the unbeatable enemy that affects domestic consumption throughout the country

The exchange gap, the unbeatable enemy that affects domestic consumption throughout the country

The exchange rate difference and price gap situation on the border between Uruguay and Argentina It is far from being resolved, even when Argentine businesses feel the immediate impact of the latest measures announced by the Executive Branch to alleviate the negative effects on border businesses and employment on the coast. However, the medium and long-term scenario, which constitutes the structural basis of the problemit does not seem that it was going to change, with the neighboring country submerged in an economic crisis in the middle of the electoral year.

scope.com spoke with the analyst Florence Carriquiry, consulting partner lush, about this situation that already affects not only the businesses of the border departments —whose sales have fallen by as much as 22% during the first quarter compared to a year ago, according to the Consumption Radar of Scanntech—, but to all internal consumption, based on the logic that the money that is spent in Argentina is money that is later not available to spend in Uruguay.

— In what factors do you find the reasons for the huge difference in prices between one side of the border and the other?

There is a conjunction of elements. In some of these items, Uruguay has been structurally expensive for reasons of market structure and concentration in sales channels and suppliers, for example. Being a small economy with low scale tends to lead to these kinds of things of low levels of competition in some of these market segments which, in turn, tend to make the country relatively expensive.

But beyond that, there are conjunctural reasons that are associated with the cheapening of dollars in Argentina and the weakening of its currency in recent years. From the beginning of 2019 to the beginning of 2023, prices in dollars in Argentina fell enormously, almost 30%, always measured in relation to the blue dollar. While in the same period, prices in dollars in Uruguay increased by 20%.

That is leaving us with a relative price misalignment that today is at very important levels, with the worst real exchange rate levels in 30 years. This is a common indicator of competitiveness, which is also reflected in the fact that there are a number of products where price differences are really significant.

— What is the spending and impact of Uruguayan consumption in Argentina?

The information we have on spending is that which arises from the Emissive Tourism Survey what does he do Ministry of Tourismwhere the expenditure made by Uruguayans traveling to Argentina is estimated.

Today we are at peak levels of trips to the neighboring country: trips in the January-March quarter exceeded 1,140,000 trips by residents of Uruguay to the rest of the world, of which 900,000 went to Argentinaan extraordinarily high number that more than doubles what were the usual pre-pandemic levels of travel abroad and to Argentina, in particular.

In those 900,000 trips to Argentina just over $290 million was spent in just one quarter. It is a huge figure in historical perspective, and for the dimensions of the Uruguayan economy, also very important.

— Is it possible that this level of consumption abroad will be reduced as a result of government measures?

Our estimates suggest that this trend of high trips abroad and to Argentina will probably continue firm, and that within this framework, spending on trips abroad will be increasing by around 500 million dollars compared to what was the previous year. last year, with much of that spending going to the neighboring country.

This has a significant impact on domestic consumer businesses. In Exante we are projecting that total private consumption will increase by 3% this year, and practically a third of that total will be household spending that will not be carried out within borders but abroadand an important part, in Argentina.

— The coming months are expected to be unstable in Argentina due to presidential elections, so a new rise in the blue dollar is also to be expected. What are the projections on the exchange difference from this scenario?

Undoubtedly, the Argentine scenario has many uncertainties, instability is probably going to be the constant going forward and we cannot rule out that we will see some additional jump in the dollar in the coming months.

At the same time, we cannot ignore that inflation is having a strong rise in that countryfor which part of the cheapening that occurs when we see sudden corrections in the dollar, is eaten up by inflation itself.

But it does seem to us that it is quite probable that this situation of strong price misalignment with Argentina will be lastingthat for a long time we live with an Argentina that is extremely cheap in dollars and that, therefore, the situation that border businesses are facing and, in general, mass consumption businesses that are suffering from competition from Argentina, It will continue to be very present.

— What is your assessment of the government’s measures regarding the exchange difference, also considering the future Argentine scenario?

From the perspective of Argentine instability, we say that the measures that have been announced will probably not change the situation much in substance. We would not be expecting this to change the decision of Uruguayans to travel or those who are border consumers to cross the bridge to consume on the other side.

It seems to us that the strategy when it comes to thinking about how to deal with this situation, the impacts that this is generating in the economies, in the workers of the coastal zone and in the most affected sectors in general, has to keep in mind that this will last over timeand that probably these types of measures that are palliative or short-term are not going to be very effective in changing the situation.

— Do you have any perspective of what type of initiatives or measures should be carried out in the face of the scenario of the lasting exchange rate difference? Either to cope or to try to solve the problem.

The truth is that it is very difficult to think of effective measures to avoid the impacts of this situation in the short term. While it will not be transitory, the strategy must aim to manage or administer the costs of this situation with a medium and long-term perspective.

Source: Ambito

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