How are Argentine businesses coping with recession?

29th August 2019

By Irene Caselli

How are Argentine businesses coping with recession?

Argentina’s economic crisis has been getting increasingly harsher. Even before yesterday’s debt-restructuring announcement, businessmen were struggling to keep a semblance of normalcy in their firms.

Owners are selling their businesses at the prices they can get, struggling with delayed payments and painful day-to-day decision making including firing and cutting costs. Speaking with The Essential, multiple small and medium-sized business owners and managers explained their daily struggles and perspectives.

</p> <p>Pedro Mendiberri is 40 years old and spent more than half of his life working independently. Until last year when, trying to avoid the effects of a new economic recession in Argentina, for the first time he decided to let go of his own business and preferred to become somebody else’s employee.</p> <p>“As an owner, there is a lot more pressure and responsibility. It used to be worth it because it was profitable. Now, in many cases, you can earn more by working for somebody else than when you are an independent, especially when it comes to small businesses,” says Mendiberri, who now works as a manager at JOU café, in the upscale Recoleta neighborhood of Buenos Aires.</p> <h2><strong>A sad recurrence</strong></h2> <p>The recession that began in 2018 is not a novelty for Argentina, a country accustomed to economic crises over the past decades. Argentines have suffered 14 recessions only between 1950 and 2016, says <a href="">a World Bank report</a> released in May. Over the past 69 years, there were 23 in which Argentina registered a negative growth. The only country with a worse record is the Democratic Republic of Congo, which has been in intermittent civil war for decades.</p> <p>At the end of 2018, Mendiberri sold half of his business to his partner &#8211; it was the only way the two found to make ends meet. The business was another café, Blas Parera, located in Palermo. While Mendiberri became an employee for the first time, his partner did what many companies have been doing to overcome the crisis: he reduced staff and expenses, while putting in more work hours and getting by with a much smaller profit margin.</p> <p>“Customers who would come out five times a week started coming three times. Those who would come on weekends to have breakfast, lunch or just a snack, stopped coming all together. There were fewer and fewer regulars. We sold 30 percent less and costs had risen by 30 percent. That equation makes you go bust. There was no alternative, that&#8217;s why I left,” says Mendiberri, who in 2015 voted for Mauricio Macri, and would vote for him again in a potential run-off vote later this year.</p> <p>With a declining economy and after two exchange interventions that triggered inflation, the Macri government agreed in 2018 to a record aid of more than <a href="">US$57 billion with the International Monetary Fund (IMF)</a>, which included a tough adjustment plan with which Argentina promised to reach primary fiscal balance in 2019 and a surplus in 2020.</p> <p>The country underwent such adjustments but the trend did not buck. With activity falling, price increases still continued and even gained pace. By the time Macri’s presidential period ends in December, accumulated inflation will be at least 250 percent over the last four years, the price of the US dollar against the Argentine peso will be up 400 percent and real wages down by more than 20 percent. And with the crisis spiraling into even more dangerous territory over the last few weeks, figures could still get worse.</p> <h2><strong>Crisis mode</strong></h2> <p>Low consumption and general unease among businessmen are now the norm, as they are once again forced to find a way out to survive while operating in crisis mode.</p> <p>&#8220;Consumption dropped significantly,&#8221; says Mendiberri. “People start by cutting out the least necessary expenses. Personally, I work downtown and live in the Greater Buenos Aires area. I no longer drive every day into town. Between gas, toll and parking, it has become very expensive, so I travel by bus. It is a way to adapt to the new economy. I have also changed my consumption habits: instead of buying everything in one supermarket, I now buy in several ones, looking for special discounts in each place.”</p> <p>Other people no longer go to the gym or stop drinking coffee. “I have friends who have moved their children into a different school. They continue to pick private school, but found a more accessible one. People who do not make it to the end of the month move to smaller apartments. In all the families that I know you have two or three examples of changes in habits of this type,” says Mendiberri.</p> <p>In its report, the World Bank said that Argentina has spent 33 percent of the time in recession since 1950, while Brazil &#8211; its largest neighbor &#8211; lived through a recession 12 percent of that time. Argentine businessmen learn to cope with these deep economic shocks.</p> <h2><strong>Broken chain of payments</strong></h2> <p>Gustavo Grahmann, manager of Megamix, a wholesaler in the Once neighborhood, said he has no doubts that the economy has deteriorated in recent years. “From our business we have noticed that year after year the inflation of costs deteriorated profitability, expenses increased more than turnover, and unlike what happened with the previous government, consumption deteriorated, that is, the level of sales decreased, which generates serious problems for business continuity,” he explained.</p> <p>To cope with the crisis, Megamix has done the same as many companies: it has optimized processes and resources, reduced personnel and has sought external financing and capital contributions from partners. But it has not been that simple, says Grahmann: “Reducing the operating structure has a high cost. You have to pay for a move and for canceling contracts. The reduction of personnel implies large compensation. It is always preferable to &#8216;resist the crisis&#8217; until reactivation arrives.”</p> <p>Problems get worse when the crisis happens over a long period of time and the money is not enough, because financing costs come with <a href="">interest rates</a> that now start at a 75 percent yearly rate. “Taking money with these rates makes any type of productive business impossible to support and the payment chain suffers. Customers do not meet the agreed deadlines and it is almost impossible to maintain a cashflow without ups and downs. This means that many small and medium enterprises have to shut down,” says Grahmann.</p> <h2><strong>Bankruptcies</strong></h2> <p>The SME sector has suffered greatly under the Macri administration. Since 2015, 18,748 companies have closed in Argentina. This means, on average, 43 companies were lost per day countrywide. In the first four months of 2019, 5,170 companies closed, <a href="">according to the July report of the Assembly of Small and Medium Businesses (APYME)</a> based on information from Argentina’s Revenue System (AFIP).</p> <p>The Megamix manager says that carrying out a commercial activity in this context comes at a very high risk and involves permanent stress. “In the private sector we learned that in order to be viable we have to spend less than what we gain, or borrow for a limited time. This is something that different political sectors prefer to ignore. Without a structural change, things won’t change. If we who invest in productive activity are not supported, the economy will not be reactivated and will only respond to anabolics, such as various government subsidies.”</p> <h2><strong>Struggling to compete</strong></h2> <p>Jorge Longarini runs Aceros Elizalde, a steel production company with 15 employees in the greater Buenos Aires area. The company produces a majority of vehicle parts, but is also a provider to the agroindustrial and oil sector.</p> <p>Sales of vehicle parts sector fell 21.1 percent in the first six months of this year compared to the same period in 2018, reaching US$2.1 billion, according to <a href="">a recent report by IES Consultores.</a> While 901,000 new vehicles were sold in 2017, in 2018 sales fell to 803,048 vehicles. The decrease became stronger this year: <a href="">sales of new vehicles in Argentina collapsed</a> by almost 50 percent until July 2019 compared to the previous year, <a href="">reported the Association of Automobile Dealers of Argentina (ACARA)</a>.</p> <p>Moreover, Aceros Elizalde was also hit by the 2018 drought that led to a crisis in the agro sector. For Longarini, this meant having to automate certain parts of the production line, cutting off employees. “We did it by necessity,” said Longarini. “We had already started the process, but we had to accelerate it in order to survive.” To lower costs, they got one worker to operate three machines, trying to strike the right balance to make the business viable.</p> <p>“We can’t compare 2001 with 2019, but the tendency is there,” said Longarini. “Macri has been in power for less than four years, and this crisis has taken over quickly. Even if it is not so pronounced as in 2001, the deterioration is fast.”</p> <p>“For me the basic problem was to open up the economy in an international context with a lot of crisis,” said Longarini. “We don’t have enough technical and scientific knowledge to compete with other countries. Industry needs constant investments, otherwise survival becomes hard.”</p> <p>He says he has no big expectations of the recovery of the automobile industry. His biggest hope is to manage to provide more materials to the oil industry, especially with the prospects of development at the Vaca Muerta shale gas deposits.</p> <h2><strong>Squeezed cashflow</strong></h2> <p>Rafael Buelink is CFO of <a href="">Reycom</a>, a small enterprise dedicated to the pet food industry. Over the past 16 years, Buelink has been providing raw materials and additives for animal food to some of the largest companies in the sector, while also opening up a store for direct sales in the San Isidro area.</p> <p>He says that sales of higher quality pet food went down, because consumers cut down on expenses. He saw this directly in his shop, but he also got less request of additives from big brands, because they themselves were selling less.</p> <p>“Sales went down, costs went up and you can&#8217;t raise prices due to low demand. This makes you have a smaller profit margin. Therefore, your ability to cover fixed costs is reduced. That is why there are many layoffs and obviously there are no new jobs,” says Buelink.</p> <p>First quarter <a href="">unemployment</a> reached 10.1 percent, <a href="">according to official figures by Argentina’s National Statistics Institute (INDEC)</a>, while underemployment is at 11.8 percent.</p> <p>Buelink says that besides laying off employees, he had to watch finances much more closely. “Ten years ago a financial manager or the owner of a SME dedicated half an hour per day to the company&#8217;s finances,” he explained. “Today you spend at least three hours a day on financial analysis and cashflow. You have to project six months ahead, no longer two as before. That is time and money dedicated to analyzing the situation so as not to get hung up or not run the risk of bankruptcy if an important client goes bankrupt.”</p> <p>He says that even exports are not a convenient way out, because by the time you cash in what you have exported, the inflation has made internal costs higher, eating up your gains. “When you cash in the first export, it is very likely that the costs in pesos have risen because the increase in the dollar increased inflation. Wages and some costs, such as electricity, increased. So, exporting is not convenient either. It is a complex vicious circle,” he says.</p> <p>

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Irene Caselli

Irene Caselli is a multimedia freelance journalist with 14 years of experience in print and broadcasting. Having reported out of Latin America for the last decade, her work regularly appears in international media, including BBC News, The Washington Post, The New York Times, The Guardian, and Monocle. She is a contributing editor to Index on Censorship.