Travel v. Crisis

Yesterday I got a note from the operator of a small tourist lodge in Tierra del Fuego asking me what I thought the impact of the current global economic crisis might be on this summer's season. On the surface, of course, it makes sense that people whose mutual funds have lost a third of their value might be reluctant to spend money traveling great distances but, at the same time, there's a certain logic in going against the grain. I'd never suggest that people should throw away their retirement funds on a two weeks' vacation but, just as investor Warren Buffett recently said he's moving his money into U.S. stocks because of the financial meltdown, international travelers may find they'll get more for their money in traveling to the Southern Cone countries.

That's partly because, against all odds, the U.S. dollar is actually strengthening against the currencies of Argentina, Chile, and Uruguay, and there are other favorable signals as well. When I was last in Chile in April, the peso was at roughly 430 per dollar, and the 2000-peso banknote illustrated here was worth about US$4.65; last Friday, with the peso at 617 per dollar, that same banknote was only worth US$3.24. As in the stock market, there have been some fluctuations, but the bottom line is that the dollar is worth 30 percent more than in April.

The case is slightly different in Argentina. When I last wrote about the topic about a month ago, the Argentine peso was only slightly above three per dollar, but now it's above 3.2 per dollar. That's a devaluation of roughly seven percent, but inflation - official figures are unreliable - is likely to eat up most of those gains. In neighboring Uruguay, meanwhile, the peso has lost about 15 percent against the dollar since early September.

Another favorable circumstance is that foreign travelers do not pay Chile's 19 percent IVA (Value Added Tax, or VAT) on accommodations - thus reducing the cost of a US$100 hotel room to US$81, for instance. Uruguay already offers a partial IVA refund to foreign visitors who pay their restaurant bills with credit cards, and is considering expanding the measure.

Argentina, however, does not do this - in fact, as I mentioned in a recent post, foreigners often end up paying more than Argentines in many cases. In this regard, Argentina's pending imposition of reciprocity fees is a further step in the wrong direction unless accompanied by an IVA policy similar to Chile's that could cancel out the negative aspects. Otherwise, as a US correspondent noted in yesterday's Buenos Aires Herald, "even if tourism levels were unaffected, I would expect that aggregate visitor spending on restaurants, entertainment, hotels, etc. would decline by an amount approximating any visa fee increase."

I would go even further in suggesting that, if Argentina persists in its "reciprocity" folly, it might undercut the future for far longer than the current economic crisis. Many of today's backpackers, though their low budgets may make only a minor contribution to the travel and tourism sector at the moment, will eventually be affluent job holders. If a visa fee discourages them from visiting the country now, it'll never occur to them to think about coming back when they're prosperous heads of families.