Why many Argentines prefer to ‘save by spending’

Accustomed to one of the highest inflations and one of the most devalued currencies in the world, Argentines are used to adopting a series of strategies to make their monthly salary pay off.

After all, in this country, something as simple as doing the weekly shopping requires planning.

Argentines plan which day to go and which supermarket. Also what products to buy. Thus, they take advantage of the best offers, discounts and payment methods offered by markets, banks and even the main newspapers in the country.

But the acceleration of inflation in 2022, which has already reached a high of 64% in 12 months and continues to rise, and the rapid depreciation of the peso, the country’s official currency, which lost a quarter of its value against the dollar in the first six months. of the year, make Argentines have to hone their tactics even further when it comes to managing personal finances.

Now, they don’t just have to think about the most efficient way to spend their money. They also need to plan how to protect the value of their savings—if they manage to save anything at the end of the month.

This is because traditional forms of savings today are limited or unprofitable.

Argentines traditionally used the dollar as a reserve currency or placed their pesos in fixed income — investments with a predetermined term and yield.

But tight capital controls — known as “stumps” — severely restricted access to the dollar.

Today, in Argentina, you cannot buy dollars at their official value (about 135 pesos). To acquire American currency, you have to pay 65% ​​fees, and the maximum you can buy is US$ 200 per month – something allowed only for those who have a formal contract and for companies that did not receive financial aid from the State during the Covid pandemic. -19.

Resorting to the informal market — as was the custom for many middle- and upper-class people — is also not an alternative for most, due to the vertiginous rise of the American currency, which has already surpassed the 320 peso barrier, a record price that makes this option inaccessible. to common people.

Meanwhile, with interest rates below inflation, fixed income investments are not very attractive and, although there are some that are corrected, there are many obstacles to accessing them.

Faced with this scenario, those who have salaries with “parity” (or readjusted for inflation), and manage to reach the end of the month with some money in their pocket, increasingly choose to do something that, at first glance, sounds like an economic paradox: “save by spending”.

Instead of buying dollars or depositing their surplus pesos in the bank, many consider it a better investment to use them to buy products that last, from tuna cans, shampoo and bottles of wine, to durable goods like clothes, cell phones, appliances and motorcycles.

Weights that ‘melt’

Luis, a 35-year-old pizza chef, carefully examines a window full of hair clippers on a popular shopping street in San Fernando, a middle-class neighborhood on the outskirts of Buenos Aires.

He tells BBC News Mundo (the BBC’s Spanish-language news service) that he plans to buy one of them worth 3,000 pesos.

“I’d rather buy it now, before it’s worth 6,000 pesos,” he says. “It’s a better deal than buying dollars.”

“This is known as consumption flight”, explains economist Santiago Manoukian, from Ecolatina consultancy.

“People who have pesos try to get rid of them because they ‘melt’, so they use it to consume goods, particularly those that have a lot of imported components, and so keep their money’s value,” he says.

Why do Argentine pesos melt? On the one hand, due to monthly inflation, which has been fluctuating between 5% and 8%, making the currency lose value quickly.

But also because the strong rise in the informal or “blue” dollar – which has risen by almost 100 pesos so far in July and is already trading almost 140% above the value of the official dollar – increases the pressure for a strong devaluation of the peso. , although the authorities assure that this will not happen.

It is this combination of accelerated inflation and the expectation of devaluation that leads many, like Luis, to anticipate consumption, which they believe will be more expensive in the near future.

“Now I can buy it, maybe next month it will double and I can’t anymore”, calculates the pizzaiolo.

According to Manoukian, from Ecolatina, “savings and investment are nothing more than sacrificing present consumption to have more consumption in the future. But, if you don’t believe that, most likely you will spend now, not later”.

‘Spend it now’

Daniel has owned a home products store for 30 years and tells BBC News Mundo that demand, especially for home appliances, is high.

“We see that people arrive desperate to get rid of their weight, because they know that in the following month they will lose value”, he says.

Daniel says that most buyers are not people with high purchasing power.

“These are middle-class and lower-middle-class people, and the products they most look for are stoves, washing machines, refrigerators, televisions and cell phones, goods that today for many are practically luxury items.”

But how can someone from the middle or lower middle class afford the price of these “luxury” devices? Most finance.

“In general, they pay with a credit card, taking advantage of the six, 12 or 18 installment plans offered by the government”, says the merchant.

Although the installment has interest, the value is lower than annual inflation, which makes this payment method convenient, he explains.

consumption explosion

The strong demand, facilitated by these financing plans, led to a veritable explosion of purchases.

Private consumption grew 9.3% in the first quarter of the year, compared to the same period of the previous year, according to Indec (National Institute of Statistics and Censuses).

Sales of home appliances and electronics grew by 23.6% between January and May this year year-on-year, according to market analysis firm GfK.

Another popular product is motorcycles: there were 31.2% more registrations in the first half of 2022, compared to the same period last year, according to Acara (Association of Automobile Distributors of the Argentine Republic).

And the consumer confidence index in the purchase of durable goods is the highest since 2018, according to the Center for Research in Finance at Torcuato Di Tella University.

There are also those who prefer to spend their savings on pleasant experiences such as going out to eat, going to the theater, to concerts or traveling, activities that had to be postponed during the long confinement due to the coronavirus.

This explains why, despite the country going through an economic crisis, restaurants are crowded — with a 126% increase in movement between January and May, in the annual comparison, according to the Volume Index in Traditional Restaurants of the city of Buenos Aires.

There is also a record for domestic tourism: 20% more than in 2019, pre-pandemic.

And British band Coldplay has just broken the country’s record for sold-out shows: it will sell out River Plate’s Monumental stadium ten times between October and November, ending its world tour.

the good and the bad

The government of Alberto Fernández celebrates this explosion in consumption and considers it part of the economic reactivation that allowed Argentina to reverse in a single year the drop of almost 10% in GDP (Gross Domestic Product) that the pandemic had caused the previous year.

For the president, consumption was also fundamental for the country to continue growing 6% in the first quarter of the year.

“Argentina is a country that consumes 70% of what it produces. When consumption is affected, it directly affects production. When it affects production, it affects employment. And when it affects employment, it generates poverty,” he said before taking over, explaining why one of its main objectives would be to “recover consumption”.

Despite this strategy having managed to keep unemployment at the lowest levels since 2016 (7% in the first quarter of the year), some warn that the other side has been the reduction of income and the greater precariousness of work.

In fact, although at first glance the high level of consumption by Argentines seems to suggest that there has been an improvement in purchasing power, in reality the opposite has happened.

Real wages have been falling since 2018 and in the first five months of this year it was 4.7% lower than the same period in 2019, before the arrival of the coronavirus, according to Ripte (Average Taxable Remuneration of Stable Workers).

For Manoukian, this is a paradox of the Argentine economy.

“What is expected is that when inflation accelerates a lot in a country and real wages fall, consumption drops drastically, but here this is not happening because people want to get rid of their pesos to maintain the value of what they have in goods,” he says.

Another paradox he notes is that, while the Consumer Confidence Index shows optimism in the purchase of durable goods, there is pessimism regarding the state of the economy and personal situation.

Many economists also warn that this “consumer party” is uneven.

Although the sale of durable goods has increased, a report by consultancy Scentia, which measures mass consumption, indicated that spending on food in May and June fell compared to the previous year.

What this shows, experts say, is that while a sector of the population, with wages rising in line with inflation, protects its savings by buying goods, the most vulnerable sector — such as the nearly 40% of informal workers, or those who depend on pensions or government benefits—cannot meet their basic needs.

To make matters worse, those with extra pesos are so desperate to spend them before they lose value that they are validating price increases well above inflation, making products more expensive for everyone.

The fear is that this will increase poverty rates, currently close to 40%, according to the UCA (Observatory of the Social Debt of the Catholic University of Argentina).

Is it sustainable?

Another concern is that consumption-driven economic growth will slow down due to a problem that afflicts Argentina every time its production is reactivated: the so-called “external constraint” or lack of dollars.

The national industry is highly dependent on imported machinery and inputs, so when production increases, so do imports (which are paid for with Central Bank dollars).

In the first five months of the year, Argentina had more exports than imports. But as of June, the trade balance was reversed and more dollars began to flow out than entered, according to Indec.

The fall in the Central Bank’s international reserves — which were already scarce and therefore had “stumps” to protect them — became so pronounced that it forced the government to limit imports.

Without parts, many companies are slowing or reducing production.

Daniel, who owns the home improvement store, says this is already taking a toll on his business.

“People come to buy and leave in a bad mood because we can’t sell some appliances, since factories have suspended deliveries because they can’t import certain products,” he explains.

He also recognizes that he is currently trying to sell “as little as possible”, because he does not know “at what price we will be able to replace these products”.

These problems lead all private consultants to estimate that economic activity will “cool off” in the second half of the year.

Ecolatina projects GDP growth of 3.8% for 2022, 0.2 percentage point above the OECD (Organization for Economic Cooperation and Development) projection of 3.6%.

The IMF (International Monetary Fund) and the World Bank have slightly more optimistic perspectives, with growth estimated at 4% and 4.5%, respectively.

“Without a doubt, there was a recovery in economic activity that was accompanied by a pronounced improvement in domestic sales”, summarizes Manoukian. “But the question is how much of this growth is sustainable.”

This text was originally published here.