Bajaj Auto Ltd.
- Trouble
with Argentine Peso
Tushar Patole 23-MF-27
Dipesh Pawar 23-MF-28
Piyush Pawar 23-MF-29
Shivraj Pawar 23-MF-30
Saurabh Pawaskar 23-MF-31
Case Summary
• On December 17, 2015, the Argentine peso fell by more than 30%, from 9.8 to 13.9 pesos per US dollar after the government lifted currency
controls. This was the largest percentage decline since the 2002 financial crisis.
• Bajaj Auto was the market leader in Argentina’s motorcycle segment with a 30% market share in 2015. The company entered the
Argentine market in 2012-13 and grew its market share from single digits in 2014 to 30% by 2015. Bajaj anticipated closing the year at a 45%
market share.
• Following the devaluation of the peso, Bajaj Auto’s share price dropped by 1.61% on December 18, 2015, as the market reacted to concerns over
its exposure to the Argentine market. The stock fluctuated between ₹2,502.85 and ₹2,470.25 that day. It had previously hit a 52-week high of
₹2,655 on July 23, 2015, and a low of ₹1,913.80 on April 30, 2015.
• In FY 2014-15, Bajaj Auto’s exports contributed 46.2% of its net sales, generating revenue of USD 1.524 billion. The Latin American market,
including Argentina, contributed approximately 20% to these exports.
• The sudden fall in the peso value raised concerns for Bajaj and other firms exporting to Argentina. The depreciation made imports more
expensive, reducing the purchasing power of local distributors and consumers.
• Bajaj’s local distributor in Argentina had anticipated the depreciation and had factored it into their pricing strategy. This helped Bajaj manage the
immediate impact of the currency fluctuation.
• Argentina had a history of economic instability, marked by high inflation, military coups, and frequent changes in government policies. For
example, inflation reached 5,000% in 1989, and the country defaulted on international loans worth USD 93 billion in 2001.
• The government introduced various reforms, including lifting capital controls, reducing export taxes, reforming the statistics agency, and
appointing a new central bank president. These measures aimed to attract foreign investment and stabilize the economy.
• Analysts expected the peso to fluctuate around 14-15 pesos per US dollar in the short term. The government aimed to stabilize the currency and
attract investment by securing loans and boosting foreign exchange reserves, which had fallen from USD 52.2 billion in 2010 to USD 25.6
billion in 2015.
• Despite the economic challenges, Bajaj Auto maintained a positive outlook. The company believed that the peso’s depreciation would not
significantly affect the landed cost of its products since its distributor had priced them based on the blue dollar rate. Bajaj planned to continue its
focus on the Argentine market while diversifying its export strategy to mitigate risks.
Why did the Argentine government implement a convertibility plan in 1991? Why did this plan fail in 2001?
Reasons for Implementing the Convertibility Plan Reasons for the Plan’s Failure in 2001
• Hyperinflation Crisis: Argentina faced severe hyperinflation, Loss of Export Competitiveness: As the US dollar appreciated against other global
with inflation rates reaching as high as 5,000% in 1989. This currencies in the late 1990s, the Argentine peso, which was pegged to the dollar, also became
eroded public confidence in the currency and the economy, making stronger. This made Argentine exports more expensive and less competitive in the global
everyday transactions and long-term economic planning difficult. market, leading to a growing trade deficit.
• Currency Stabilization: The primary goal of the convertibility Rigid Monetary Policy: The currency peg limited Argentina's ability to implement an
plan was to stabilize the Argentine peso by pegging it to the US independent monetary policy. The government couldn’t print more money or devalue the
dollar at a 1:1 ratio. This was designed to restore confidence in the peso to stimulate the economy during downturns, leading to economic stagnation and a rising
currency by ensuring that every peso in circulation was backed by unemployment rate.
a US dollar in reserves.
External Economic Shocks: The Asian financial crisis (1997-1998) and the Russian
• Attracting Foreign Investment: By pegging the peso to the dollar financial crisis (1998) reduced investor confidence in emerging markets. This led to capital
and committing to maintaining this parity, the government aimed flight from Argentina, putting additional pressure on the economy.
to create a more predictable economic environment. This was
intended to attract foreign investment and encourage economic Brazil’s Currency Devaluation: In 1999, Brazil, Argentina’s largest trading partner,
growth. devalued its currency, the real. This made Brazilian exports cheaper compared to Argentine
products, worsening Argentina’s trade balance and contributing to economic recession.
• Economic Reforms: The plan was part of a broader set of market-
oriented reforms, including deregulation, reduction of trade Rising Debt and Fiscal Deficit: Argentina’s government borrowed heavily to maintain the
barriers, and privatization of state-owned enterprises, aimed at currency peg and cover fiscal deficits, especially at the provincial level. This led to a rapid
transforming Argentina’s economy from a closed, state-controlled increase in public debt. By 2001, Argentina’s debt had ballooned to unsustainable levels, and
model to a more open, market-driven one. the government was unable to service it.
Loss of Confidence and Capital Flight: As the economy deteriorated, there was a loss of
confidence in the government’s ability to maintain the currency peg. This led to massive
capital flight, further depleting foreign exchange reserves and putting pressure on the peso.
Banking Crisis and Social Unrest: The government’s efforts to prevent capital flight
included freezing bank accounts (the “corralito”), which led to widespread social unrest,
protests, and a banking crisis. The situation escalated, leading to political instability and the
resignation of President Fernando de la Rúa in December 2001.
What was the state of the Argentine economy in 2014-2015? What led to the sharp movement in the value o
the Argentine peso ill-December 2015? What factors led to the lifting of capital controls and the flotation of
the peso?
State of the Argentine Economy in 2014-2015
• High Inflation: Argentina faced very high inflation rates, with inflation reaching around 37.5% in 2014. This high inflation eroded the purchasing
power of the peso and contributed to economic instability.
• Stagnant Economic Growth: The Argentine economy was stagnating, with low GDP growth rates. In 2014, GDP growth was only around 0.5%. This
slow growth, combined with high inflation, created a difficult economic environment.
• Widening Current Account Deficit: Argentina's current account deficit widened as the country's exports became less competitive due to the
overvalued peso. This led to increased reliance on foreign borrowing and depletion of foreign exchange reserves.
• Capital Flight and Declining Foreign Reserves: Due to a lack of confidence in the Argentine economy, there was significant capital flight. Foreign
exchange reserves dropped from $52.2 billion in 2010 to around $25.6 billion in 2015.
• Foreign Exchange Controls (El Cepo): To counter the dwindling reserves and curb capital flight, the government imposed stringent foreign exchange
controls in 2011, known as “el cepo.” These controls limited access to foreign currency, creating a black market for US dollars, called the "blue dollar
rate."
• High Exchange Rate Disparity: By late 2015, the official exchange rate was around 9.9 pesos per US dollar, while the blue dollar rate was much
higher, at around 14.5 pesos per dollar. This disparity reflected the lack of confidence in the official exchange rate and worsened economic distortions.
What was the state of the Argentine economy in 2014-2015? What led to the sharp movement in the value o
the Argentine peso ill-December 2015? What factors led to the lifting of capital controls and the flotation of
the peso?
Sharp Movement in the Value of the Argentine Peso in Mid-Dec’15
Lifting of Currency Controls (El Cepo): On December 16, 2015, the
newly appointed Finance Minister Alfonso Prat-Gay announced the removal
of the stringent foreign exchange controls, known as "el cepo," that had
been in place since 2011. This allowed the peso to float freely in the market,
leading to a significant devaluation as the artificial support for the peso was
removed.
Sharp Depreciation of the Peso: The immediate impact of lifting currency
controls was a sharp depreciation of the peso, which fell more than 30%
from 9.8 to 13.9 pesos per US dollar on December 17, 2015. This was the
largest single-day drop since the 2002 financial crisis, reflecting the
market’s adjustment to the new exchange rate regime.
Correction of an Overvalued Exchange Rate: Prior to the removal of
controls, the official exchange rate was significantly overvalued compared
to the black market or "blue dollar" rate, which was trading around 14.5
pesos per dollar. The sharp depreciation was a correction to align the official
exchange rate with the market reality.
Market Reaction and Uncertainty: Investors and businesses were
uncertain about the implications of the policy change. Concerns over
potential hyperinflation and further economic instability contributed to
market volatility, causing a sharp movement in the peso’s value as
participants reassessed the risk.
What was the state of the Argentine economy in 2014-2015? What led to the sharp movement in the value o
the Argentine peso ill-December 2015? What factors led to the lifting of capital controls and the flotation of
the peso?
Factors Leading to the Lifting of Capital Controls and the Flotation of the Peso
• Distorted Exchange Rate System:The gap between the official exchange rate and the blue dollar rate highlighted the inefficacy
of the currency controls. The overvalued official exchange rate made Argentine exports uncompetitive and discouraged foreign
investment.
• Dwindling Foreign Reserves:The government’s ability to defend the fixed exchange rate became increasingly difficult due to
declining foreign exchange reserves, which fell to critically low levels by 2015. This made it impossible to continue maintaining
the currency controls.
• Macri Government’s Economic Reforms: The newly elected President Mauricio Macri and his economic team were committed
to normalizing the economy by removing distortions and restoring market confidence. Lifting currency controls and allowing the
peso to float were part of broader economic reforms aimed at attracting investment and boosting growth.
• Encouraging Exports and Economic Growth: A more competitive peso was expected to encourage exports and bring in much-
needed dollars. This was crucial for Argentina, as the overvalued exchange rate had previously hurt export competitiveness and
led to a current account deficit.
• Restoring Credibility and Investor Confidence:The Macri administration sought to restore credibility in the Argentine economy
and attract foreign investments. Lifting controls was intended to show a commitment to transparent and market-friendly economic
policies.
• Addressing the "Blue Dollar" Issue:The existence of a black market for dollars undermined economic stability and credibility.
By lifting controls, the government aimed to eliminate the blue dollar rate and unify the official and market exchange rates,
reducing economic distortions.
How will Bajaj Auto be affected by Peso depreciation? What strategy should Bajaj auto and other firms operating in
Argentina adopt ?
Bajaj Auto, like other multinational firms operating in Argentina, faces several challenges due to the depreciation of the Argentine
peso. Peso depreciation can significantly increase the cost of imported goods, reduce profit margins, and cause volatility in pricing,
making long-term planning difficult. Furthermore, the decline in the currency value can erode the purchasing power of Argentine
consumers, leading to reduced demand for Bajaj's products.
Impacts on Bajaj Auto:
• Increased Costs: The depreciation of the peso increases the cost of importing parts or components for manufacturing or
assembling vehicles. Since many of these parts may be priced in foreign currencies, Bajaj Auto will face higher expenses, which
can squeeze profit margins.
• Price Sensitivity: With the peso losing value, consumers in Argentina will have less purchasing power, potentially leading to
lower demand for higher-priced goods, such as motorcycles. Bajaj may face difficulties passing on the increased costs to price-
sensitive consumers.
• Currency Conversion Losses: When converting Argentine profits back to Indian rupees (or other stronger currencies), Bajaj
Auto could face losses due to the unfavorable exchange rate.
How will Bajaj Auto be affected by Peso depreciation? What strategy should Bajaj auto and other firms operating in
Argentina adopt ?
Recommended Strategy:
• Localize Production: Bajaj and other firms could mitigate the impact of peso depreciation by increasing local production.
Sourcing more parts domestically or assembling vehicles in Argentina can reduce reliance on imports and lower costs associated
with currency fluctuations.
• Currency Hedging: Firms can adopt financial strategies such as hedging to protect against exchange rate risks. By entering into
forward contracts or other hedging mechanisms, they can lock in more favorable exchange rates for future transactions.
• Adjust Pricing Strategy: Bajaj could introduce a flexible pricing strategy, where prices are adjusted more frequently to reflect
currency changes. Offering smaller, more affordable models can also attract consumers affected by the economic downturn.
• Expand into Neighboring Markets: To diversify revenue sources and reduce dependence on the volatile Argentine market, Bajaj
could explore exporting from Argentina to other South American countries with more stable economies.
• By employing these strategies, Bajaj Auto and other multinational firms operating in Argentina can manage risks associated with
peso depreciation while maintaining their presence in the marke
What do you think will be the course of the Argentina peso after 2015? Will it appreciate or depreciate? Is there a
possibility of a crisis like that of 2002?
Course of the Argentine Peso After 2015:
• Depreciation Likely: The Argentine peso is likely to depreciate further after 2015. Given the country’s history of high inflation,
currency controls, and economic mismanagement, the currency has faced significant downward pressure. The government’s
practice of artificially fixing the exchange rate has often led to a divergence between the official and black market rates. Such
economic policies, combined with external debt and limited foreign exchange reserves, would likely cause the peso to continue
weakening unless significant reforms were undertaken.
• Possibility of Crisis: There is indeed a possibility of a crisis like that of 2002, though the situation would depend on external
factors (such as commodity prices and global interest rates) and internal policies (such as fiscal discipline and monetary policy). If
the government failed to reform its fiscal policies and continued to mismanage the currency, a crisis could arise. However, the
crisis might take a different form depending on the new government’s approach after the 2015 elections.
What should the Argentina government and central bank do to ensure that Argentina does not return to a crisis
like that of 2002?
Steps for the Argentine Government and Central Bank: To avoid a repeat of the 2002 crisis, the Argentine government and central bank
should adopt several reforms:
• Fiscal Discipline: The government needs to address its budget deficits and avoid excessive borrowing. Implementing austerity measures
and reducing unnecessary public spending can help stabilize the economy and reduce reliance on external debt.
•
• Monetary Policy Reforms: The central bank must adopt credible monetary policies to control inflation. This includes possibly allowing
the peso to float freely or at least widening the currency band to reflect market conditions. Central bank independence is key to ensuring
that monetary policies are not swayed by political pressures.
• Foreign Reserves: Increasing foreign exchange reserves is crucial for stabilizing the currency and building investor confidence. This can
be achieved by promoting exports, reducing capital flight, and fostering foreign direct investment (FDI)
• Restoring Confidence in Institutions: Transparency and accountability in government policies can help restore confidence in Argentine
institutions. This includes engaging with international lenders, like the IMF, to negotiate debt terms and improve credit ratings.
•
• Inflation Control: Tackling inflation through interest rate policies and other monetary measures is critical. If inflation remains unchecked,
it can lead to further depreciation of the peso and undermine economic stability.
• Diversification of the Economy: Argentina's economy has traditionally relied heavily on agriculture and commodities. The government
should encourage diversification into manufacturing and services to reduce the impact of external shocks like changes in commodity prices.
• Attracting Investment: Creating a more business-friendly environment through regulatory reforms, tax incentives, and stable policies can
attract both domestic and foreign investments, which can provide the necessary capital to stabilize the economy.
