Argentina Capital Flight Hit Decade High in Third Quarter

Argentine capital flight accelerated to the fastest pace in at least 10 years last quarter as investors concerned about inflation and a weakening peso pulled cash out of South America’s second-biggest economy.

Capital flight totaled $8.4 billion in the July-through-September period from $6.1 billion in the previous quarter, the central bank said yesterday in a report originally scheduled for Nov. 10. Outflows doubled to $18 billion in the first nine months of 2011 from the same period of 2010.

Annual inflation that economists estimate is 24 percent, the highest among major global economies after Venezuela, and uncertainty over President Cristina Fernandez de Kirchner’s economic policies fueled a surge in capital flight that helped shrink central bank reserves to $48.6 billion last quarter from a record $52.6 billion in January. Reserves have since tumbled to $46.1 billion.

“Those problems are related to the speed of inflation and the exchange rate in an international context that is more complicated,” former Finance Secretary Daniel Marx said in a interview in Buenos Aires. “There are imbalances to correct going forward,” he added, citing the speed of growth in public spending.

Dollar Deposits

The total outflow was the most since the central bank began issuing the quarterly reports in 2002 and topped the $8.37 billion pulled from the economy in the second quarter of 2008, at the start of the last global financial crisis. Some foreign currency purchases in the quarter were used to help boost dollar deposits in banks and to pay for travel abroad by individuals, yesterday’s report said. Dollar deposits rose $1.3 billion in the three-month period.

The yield on Argentine dollar bonds climbed 274 basis points, or 2.74 percentage points, to 12 percent in the third quarter, according to JPMorgan Chase & Co. Brazilian dollar debt yields fell 9 basis points in the same period to 4.92 percent.

The peso has fallen 7.1 percent against the dollar this year, compared with a 9.0 percent decline in the Mexican peso and a 4 percent gain by the Peruvian sol. The peso was little changed at 4.2838 per dollar at 12:07 p.m. New York time.

In the week after Fernandez, 58, won re-election on Oct. 23, she ordered energy and mining companies to repatriate future export revenue and insurance companies to bring investments back into the country. An Oct. 28 decision to heighten oversight of foreign exchange purchases led to a surge in dollar deposit withdrawals. Dollar deposits fell to $13.6 billion on Nov. 18 from $15.9 billion a month earlier.

Benchmark Rate

As banks struggled to attract savers, the 30-day benchmark peso deposit rate, known as the badlar, climbed to a three-year high of 22.9 percent on Nov. 17. Economy Minister Amado Boudou and central bank President Mercedes Marco del Pont met with bankers that week to ask them to lower rates, and the badlar has since fallen to 18.9 percent on Nov. 30.

“The government has to regain confidence and for that, the first thing it should do is eliminate those new exchange rules,” said Ricardo Lopez Murphy, who served as Economy Minister for two weeks in 2001, under former President Fernando de la Rua.

Insurer ACE Seguros SA, which has 60 percent of its invested assets abroad, may be downgraded by Moody’s as a result of the investment decree, the ratings company said in a report today.

Slowing Outflows

Capital outflows may slow next year should Fernandez take steps to boost investor confidence, by allowing more utility price increases, improving the credibility in official inflation data and reaching an accord with the Paris Club over about $9 billion in defaulted debt, said Fausto Spotorno, an economist at Orlando Ferreres y Asociados in Buenos Aires.

Fernandez last month announced the elimination of some energy subsidies that will save the country 4.6 billion pesos a year. Government spending rose 41 percent in October to about 52 billion pesos while revenue rose 31 percent, the government reported Nov. 22.

Spotorno estimates capital outflows will slow in 2012 from about $25 billion this year, as a result of a smaller trade surplus. He forecasts central bank reserves may fall to as low as $45.5 billion by year-end.

Argentina’s economy, which has expanded an average 5.6 percent per year since Fernandez took office in late 2007, will see growth slow to 5.1 percent in 2012, according to the government’s draft budget.

The successor to Boudou, who will be sworn in as Fernandez’s vice president on Dec. 10, will have to resolve imbalances in the economy and slow growth of public spending to regain investors’ confidence, said Marx.

“I hope that they give signals addressing the main problems that originated the outflows,” he said.

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