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Argentina’s Capital Flight Slowed After Tighter Controls

Argentine capital flight slowed from a record pace in the fourth quarter after President Cristina Fernandez de Kirchner tightened controls in the foreign exchange market and forced companies to repatriate export revenue.

Investors withdrew $3.3 billion from South America’s second-biggest economy in the October-through-December period, down from $8.4 billion in the previous quarter, the central bank said in a report yesterday. Argentines took $21.5 billion out of the country in 2011, up from $11.4 billion in 2010. The annual figure was below the record $23.1 billion withdrawn in 2008.

With Argentina blocked from international credit markets since a 2001 default, Fernandez depends on a trade surplus to bring dollars into the economy. After winning re-election in October, Fernandez ordered energy and mining companies to repatriate export revenue, tightened oversight of foreign exchange purchases and told insurance companies to bring investments back into the country.

“The controls were very effective and there has been a strong slowdown in outflows,” said Jorge Todesca, a former deputy economy minister who now runs Finsoport Economia y Finanzas research company in Buenos Aires.

Unable to buy greenbacks, Argentines tapped their dollar deposits, which fell to $13.3 billion on Feb. 3 from $15.9 billion in October, according to central bank data. YPF SA, the country’s biggest energy company, said in a Feb. 14 letter to the government that it was struggling to import fuels as a result of the foreign exchange measures.

Restrictions, Measures

The extra yield investors demand to own Argentine bonds over U.S. Treasuries fell 24 basis points, or 0.24 percentage point, to 805 at 11:33 a.m. in Buenos Aires, the biggest drop among emerging market economies in JPMorgan Chase & Co.’s EMBI+ index.

Fernandez introduced additional restrictions this year to further stem capital flight and a narrowing trade surplus. The government ordered all importers to get permission from the federal tax agency before bringing goods into the country. Fiat Spa’s local unit halted production for two days last month because of a supply shortage.

Shrinking Reserves

Annual inflation that economists estimate at about 23 percent, the highest among major global economies after Venezuela, and uncertainty over Fernandez’s economic policies fueled the surge in capital flight last year. Central bank reserves shrank last year to $46.4 billion from a record $52.6 billion. The government says prices rose 9.7 percent in January from a year earlier.

“There was a slowdown in outflows not because people had more confidence in the local currency but because the authorities tightened the sale of dollars,” said Boris Segura, a Latin America strategist at Nomura Securities International Inc. in New York. “The demand for dollars remains.”

The government’s measures have allowed the central bank to buy dollars in the foreign exchange market and rebuild reserves to $46.8 billion.

Fernandez, 58, needs to keep accumulating reserves to be able to tap about $5.7 billion for debt payments this year, as forecast in the government’s 2012 budget. The government used $6.6 billion of reserves in 2010 and $7.5 billion in 2011 to make debt payments.

‘Pressures for Devaluation’

The peso fell 7.6 percent against the dollar last year, compared with a 11.1 percent drop by Brazil’s real and a 11 percent drop by the Mexican peso. The currency is down 0.1 percent to 4.3560 per dollar in trading today.

Capital flight will tumble this year to about $16 billion as a result of slower economic growth, said Fausto Spotorno, an economist at Orlando Ferreres & Asociados research in Buenos Aires. The government forecasts a 5.1 percent expansion this year, down from 9.2 percent in 2011.

“With inflation running faster than 20 percent, Argentines bet on a currency devaluation,” Spotorno said. “This year, there will be a lower capital outflow but pressures for devaluation will continue. Sooner or later, there has to be some kind of devaluation.”

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