THE ARGENTINE PARADOX Case Study Solution
ARGENTINA CURRENCY WOES:
Country’s local businesses needs merchandise to run their business which they get from the foreign country. The peso dollar parity has been crucial to their profitability and with the loss in Peso’s value against the dollar their import bills have also been increased. Currently, the local currency increased twice in the year 2018 brought a 50% devaluation to the Peso. This caused local industry a sizeable loss as much of the raw materials are imported from the outside world. The increase in the cost of goods basically decreased their operational income and made it difficult for the companies to survive.
The problem is unavoidable as the local businessmen cannot stop importing their merchandise as they are the essential part of their business. Restricting raw material imports means that they have to close down their business sooner than later. Therefore, it’s better to increase the price of their products constantly rather than lesser imports.
HIGH INFLATION:
Economist have calculated that there is a positively strong relationship between the rise in exchange rate and inflation. With the increase in exchange rate there have been 45% increase in the inflation rate. The affect could be clearly seen when people around the Argentina faced hit in the buying power.
The rise in foreign exchange rate has pushed the inflation rate up and higher prices are one of the reasons of low aggregate demand. With the aggregate demand curve going to the left, the companies have to adjust their supply and hence the production level will see a decline. The sales volume have not been good for the companies on the back of low demand. With low sales the profitability of these firms have seen a serious downtrend.
Many small business owners have complained that it was difficult for them to predict the sales of the company as they do not see any stability in the near future. They are still unsure that if the prices will further increase or not and that too when they know that Argentina-IMF deal may cause further inflation.
CONCLUSION & RECOMMENDATION
Argentina’s worsening economic conditions have forced the local business to deteriorate continuously since couple of decades. The domestic business hasn’t been able to provide a tough competition to the international market because of the unhealthy macroeconomic environment of the country. Unlike America, Argentina doesn’t have a proper financial system that can support the local business with debt financing. Apart from this, the Argentina-IMF deal has paved way for an increase in the interest rate and Peso devaluation. With the 40% increase in interest rate the cost of debt has already increased putting a downward pressure on the company’s profitability. With the rise in exchange rate the cost of imported goods has been increased and the prices of goods has also gone up. With the inflation rate moving up, locals buying power has been affected and therefore, the local business is having a hard time in increasing their sales.
When setting up my own business I have to be extra careful regarding the economic issues of the country. Firstly, I have to make sure that we are using the local raw material for our product. The simple reason being the looming threat of peso devaluation. With the use of local raw material we won’t be affected by the currency devaluation as our import bill will be minimal. Our emphasis should be to produce a product which can compete in the international market. Therefore, becoming an export oriented organization will do wonders for our organization. Value of dollar getting higher means that our income based upon the foreign currency will be higher.
Other than this, we have to look for other investors rather than the banks as with the high interest rate the cost of debt will be unbearable for our company. The equity market can be one of the option for funding our business. This will allow us to avoid the credit risk and we can save a great amount of money by avoiding the interest expense..............
This is just a sample partical work. Please place the order on the website to get your own originally done case solution.
Related Case Solutions & Analyses:
Innovation at Mahindra & Mahindra (B)
Aid Debt Relief and Trade: An Agenda for Fighting World Poverty (B)
Introducing … The XFL
Look at Three Regulatory Forces Influencing Content and Distribution in the Motion Picture and Television Industries
Selecting a New Name for Security Capital Pacific Trust
Note on Questionable Payments in Business
GMO: The Value Versus Growth Dilemma
Food for Thought: The “Junk Food” Act in Peru
Two Ways to Fly South: LAN Airlines and Southwest Airlines
Accenture Human Capital Strategy
