Some Interesting Takeaways from Living in a Country with Very High Inflation!
This is going to be a long post. No TL;DR. Please read at leisure.
So about two weeks ago, I had made a post where I had compiled the interest rates of various countries and Argentina had topped that list with an interest rate of 60%.
What followed were interesting questions, answers, and insights! Especially about Argentina, because a Redditor who was an Argentine and into finance commented and responded to many questions (most were mine as I got really intrigued). Another Redditor who was also an Argentine chipped in, and both these Redditors made the whole post very insightful.
I had originally posted the following questions to these Redditors –
- What are the rates of interest on personal loans?
- What are the rates of interest on mortgages?
- What are the rates of interest on vehicle finance?
- What rates of interest do you guys actually get when depositing in banks? Or do you guys even deposit in banks, or it just doesn't make sense?
- Do prices of everyday goods actually change everyday/every week?
- Do you guys use any other currency or any stable "tip-toe"(can't use the word so used a rhyming word) for your transaction that offers more stability?
- Do you guys use more digital transactions/card transactions rather than cash because it gets burdensome and could be dangerous to walk around with that kind of cash?
- What in your opinion has led to multiple defaults and such high inflations?
- Do the youth believe in a better and brighter future? Or do they prefer moving out to another country or another continent?
- What are your thoughts on inflation, interest rates, and the future of Argentina?
A few of their answers collated and not in the order of the questions –
- Rates on term deposits are about 70%. Personal loans are at about 90% and mortgage is at about 120%. Some special purpose business loans are lesser than the inflation rate. The mortgage market isn't that big, because nobody wants to lend out that far in the future, no matter the rate they receive.
- When mortgages are given out, the tenure is usually 5 – 7 years and they are reserved for businesses or high cash flow situations
- People don't usually do term deposits because the money needs to be locked up and people don't want that. Because in the past 3 months, the Peso depreciated against the USD by about 40%, so people find it risky. And also, in the past the Government has just taken their money from their accounts, so no trust.
- Prices of goods actually change everyday and they use stable currencies such as the USD, for storing of value. One of the Redditors has a Construction Materials Business and these are their exact words – " I have a construction materials retail business. I change prices every day. Some of my providers will send weekly price lists, some monthly, some just whenever they feel like it. Supermarkets like Walmart have employees just for re-labeling prices."
- They use a lot of digital and card transactions because otherwise they would need to walk around with a lot of cash. Another quote from the same Redditor who has the Construction Materials Business – " Our biggest denomination bill is effectively a 3 dollar bill. So If you want to buy anything relevant with cash, you have to carry loads of it. Like I said I own a retail business, I have an employee that carries backpacks full of cash to the bank daily."
- The youth are moving out of the country to work somewhere else (especially the educated ones). And many try to get a job with remote working benefits and that pays in USD. So they earn in USD but spend in Pesos and as the value of the Peso drops, they basically just make a higher wage because their money is in USD.
Then these were some follow up questions to their responses –
- So do people even borrow at those rates? Because one has to literally pay back twice the amount in like 14 months. I understand the whole point of such high rates is to curb lending, but the ones who borrow (retail or commercial) might be having some crazy amount of earning power in a year because they need to basically earn twice and pay back and even have a profit (in the case of a business)
- If mortgages are so high, I believe mortgages might not be a thing in Argentina, right? So everyone buys in cash? And how dead is the real estate industry? Because if with these rates it is thriving then it’s crazy and I would definitely look into and probably even come up with some investment thesis.
- So do people deposit with banks or just let it be?
- What apps or services are the most famous out there? Like is it MasterCard/Visa or some other big name brand or some other brand which is more local or Lat-Am based?
- But the ones that are moving out, are they sending money back to their families or sending money back to the family isn’t in the culture? And also, the ones that move out, do they buy real estate in their home country?
To which their responses were –
- People still borrow at those rates because they exchange the Pesos to USD in the black market and then wait a few months for the Peso to depreciate and then convert back again and pay the loan. In the process they make a nice gain. So people borrow to speculate on the currency and not for spending or investments.
- The Redditor with the Construction Materials Business quotes – " Retail or Commercial will not have that hard a time repaying, considering their own prices rise all the time. My own business is selling with 84% growth YoY, but at least 60% of that is inflation. " (My personal key takeaway here – we all have read about how businesses with pricing power do well during times of inflation compared to other industries or compared to other companies in the same industry who do not have pricing power. This here is proof!)
- Quote from the Redditor with the Construction Materials Business on my question regarding Real Estate – " Most real estate deals are done in cash and in USD. The real estate market is my field of expertise. It's a lot slower for sure. However, keep in mind the following: the peso devalues fast. US dollar bills can be bought as a reserve of value, but due to a number of regulations, it has to be bought under the table. If you have a cash generating business, where do you go to store your value? bingo, to real estate. A LOT of the movement in real estate isn't people buying their homes. It's just people's way of saving money. It's a somewhat solid store of value."
- People don't deposit in banks but rather spend or invest it or buy USD. Nobody holds Pesos, as it burns in their hands.
- Mercado Libre is the leader in payment apps
- Quote from the other Redditor on my question regarding sending money back to family – " Yes, they do but its really fucked up because the gov automatically liquidates the dollars on arrival and sends pesos."
More follow up questions to the responses above –
- Wow! You know for this to be right and be profitable, the Peso should depreciate against the USD more than the interest rate in a year? But I believe that already happens and hence people are doing this. But tbh, the more people do this, the more the peso gets weaker, because all they are really doing is betting against the Peso.
- That’s a very risky thing to do honestly. Because in the very unlikely case that the peso gets stronger against the USD, people will get burnt. And they probably might rush to convert back, making the peso even more stronger. It’s actually a double edged sword and works both ways.
- So if the govt. is doing this, aren’t the people not sending through normal channels and possibly sending only USD on Mercado Pago?
To which their responses were –
- The government would just print more Pesos in the unlikely scenario that the Peso starts getting stronger than the USD. And the people are sure that they won't get burnt because historically the Peso has only depreciated against the USD.
- Quote from the Redditor with the Construction Materials Business on my question regarding transacting money on apps and other digital transactions – " This is a more complicated scenario. "Tip-toe" is being used a lot to move money in USD in and out of Argentina. Also platforms like PayPal, Payoneer, Wise, etc. On the other hand, if you have money outside the US, and need pesos here, why bring the money? just "sell" your money outside, to someone that wants it outside. Anyone generating money here is looking to move it abroad. So they pay with pesos to anyone that has dollars abroad in any platform, effectively never letting those dollars enter the Argentinean economy."
And one of my last questions (kept it for the last because the response blew my mind as it was something unexpected and something I never ever thought of) was –
- So then only real estate becomes the option of an inflation hedge?
To which the response by the Redditor with the Construction Materials Business was –
" yes, pretty much. Different people use different things as a value reserve, with different benefits. I was just a kid when we had hyper inflation, were talking 100% per month. My dad bought used cars as a reserve, and sold them when he need money. Not a great here but pretty liquid."
This is just so enterprising. Necessity is definitely the mother of innovation!
Here is the link if someone is interested in reading the whole thread verbatim.
If we ever have high inflation (hopefully not as high as Argentina) then some of the points mentioned above can be used in our context. Our context being the country we live in and our financial situation. I personally would trade second hand cars, because where I live, cars are a big thing.
Anyway, hope you had a good read, Cheers! 🙂
Submitted September 08, 2022 at 01:10PM by ThreeD710
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