Falling Peso Dampens Argentine Automakers’ Optimism

BUENOS AIRES – Argentina’s auto industry had expected a near-record year in 2018, but unexpected financial problems that have hit the country in recent weeks could push the economy into recession and dampen local demand for cars.

These problems are a far cry from the optimism expressed April 4, when the heads of three automakers spoke bullishly about production and sales growth at a business conference here.

“We are on track to possibly equal or surpass 2013,” said Luis Fernando Peláez Gamboa, director general of Renault Argentina. That was a record year, with production of 791,000 vehicles and sales reaching 964,000 units, according to data from the Argentine Association of Auto Manufacturers (ADEFA), a trade group.

The industry slumped after 2013, however, as the country slid into recession in 2016. Production stabilized and rebounded to 473,408 units last year.

Light-vehicle sales last year totaled 862,672 units, up 26.4% from 682,527 in 2016, according to Wards Intelligence.

Peláez Gamboa, who doubles as president of ADEFA, predicted in April this year’s production could reach 570,000 units and see sales of 950,000 vehicles. The industry got off to a good start; in the first four months production shot up 20% year-on-year to 156,400 units and sales rose 13.8% to 290,495, according to ADEFA.

Cristiano Rattazzi, president of FCA Automobiles Argentina, said at the conference sales of 1 million units was not a long shot. “If not this year, it will be next year or the year after,” he said.
Judging by Argentina’s declining economy since mid-April, however, this target will take until at least 2019 to be hit.

A surge in the value of the U.S. dollar from mid-April led to a tumble in emerging-market currencies, and the Argentine peso was one of the biggest losers, declining 21% to AP24.33 per $1 on May 17 from AP20.16 on April 3.

To defend the peso, the Central Bank of Argentina this month raised interest rates to 40%, but with little success. The currency has continued to lose value against the dollar, stoking inflation and pushing the government to seek a $30 billion standby credit line from the International Monetary Fund.

Add a severe drought with subsequent heavy rains, and the farm sector, a motor of the economy and a big buyer of pickups such as the Toyota Hilux, is struggling as crop yields worsen in waterlogged fields. The government likely will have to slow its public works plans (which would boost employment and hence car sales, as well as improve transport infrastructure).

Cars Seen as Hedge Against Inflation, Analyst Says

Private companies will struggle to invest – or even operate – at 40%-plus interest rates, says Federico MacDougall, a director at First Corporate Finance Advisors in Buenos Aires. “A recession is inevitable,” he says.

Capital Economics, a London-based research firm, expects a 0.5% contraction this year, down from the previous consensus of 2.5% among economists, and has lowered its 2019 growth forecast to 1.5% from 3.2%. Inflation is pegged at 24% this year, far from the official target of 15%, according to Ecolatina, an economic consultancy.

What does this mean for automakers? While households are cutting back on spending, there is a silver lining for the sector, says Federico Filipponi, commercial director of Kantar Worldpanel, an Argentine market-research firm.

Unlike in much of the rest of the world, cars, like U.S. dollars, are seen in Argentina as a way to protect savings against inflation and currency depreciation, he says.

Indeed, FCA’s Rattazzi says SUVs have been leading sales this year, as motorists seek a more comfortable and safer-feeling automobile.

Rattazzi is confident about the country’s automotive potential in the longer term, including widening exports beyond Brazil, the destination of 70% of its shipments, trailed by Central America, Peru, Chile and Colombia.

The problem is that the industry is sorely uncompetitive in its output and costs, he says.

A recent industry-sponsored study by Bain & Co., a management consultancy, found it costs 25% more to make a car in Argentina than in Brazil – and 70% more than in Mexico.

To narrow the difference, Federico Eisner, a managing partner at Bain, says costs in Argentina must be shaved across the board from labor to logistics, production and taxes.

The right-of-center government of President Mauricio Macri has started to gradually reduce corporate taxes, but – ironically, given the short-term disruption caused by the peso’s fall – the weaker currency may do the most to make the industry more competitive.

“I hope that one day we can reach many more markets other than Brazil,” Rattazzi says.

The FCA executive says automakers should seek to expand exports to Mexico, a big destination between 2004 and 2007, when a weak Argentine peso had made the industry more competitive. But a rise in costs since has made it harder for Argentine manufacturers to sell to Mexico, says Daniel Herrero, president of Toyota Argentina.

The recent weakening of the peso exchange rate may help expand exports as a driver of production growth, so that Argentina can seek to become a global exporter in the vein of the Czech Republic, Croatia, Mexico and Turkey, Rattazzi says.

“This is the road that we can start down,” he says. “This is the mission for Argentina over the next five to 10 years.”