Argentine Capital Flight Rose After Dollar Purchases Limited
Argentine capital flight accelerated in the second quarter after President Cristina Fernandez de Kirchner tightened foreign exchange controls and forced companies to repatriate export revenue.
Investors withdrew $1.96 billion from South America’s second-biggest economy from April through June, up from $1.6 billion in the previous three-month period, the central bank said in an e-mail statement last night. In 2011, Argentines sent $21.5 billion out of the country, almost double the previous year’s $11.4 billion, as inflation surpassed 20 percent. Outflows slowed from $6.1 billion in the second quarter of 2011.
Blocked from international credit markets since its $95 billion default in late 2001, Argentina is seeking to staunch outflows and shore up central bank reserves, which President Cristina Fernandez de Kirchner uses to fund spending and pay foreign debt. Currency controls, inflation and a slowing economy have pushed up the country’s borrowing costs to 1010 basis points over U.S. Treasuries, the most among all major emerging markets, according to JPMorgan Chase & Co.s EMBIG index.
“The more measures you take to control the outflows, the more incentive people have to try to get dollars out,” said Alberto Bernal, the head of fixed-income research at Bulltick Capital Markets in Miami. “In the short term, these measures help contain outflows, but it costs them in the long-term in stronger expectations for a currency depreciation.”
‘Seek to Protect’
Since her re-election in October, Fernandez, 59, has ordered energy and mining companies to repatriate export revenue, told insurance companies to bring investments back into the country and prohibited most purchases of foreign currencies.
After making a $2.2 billion debt payment this month, central bank reserves fell to $45.1 billion yesterday from as high as $47.6 billion on May 17.
The government needs to accumulate reserves to be able to tap about $5.7 billion for debt payments this year. Fernandez used $6.6 billion of reserves in 2010 and $7.5 billion in 2011 to make debt payments.
Annual inflation that economists estimate at 24 percent, the highest in the region, and uncertainty over Fernandez’s economic policies fueled the surge in capital flight last year, Bernal said.
Banned from buying greenbacks and fearing a repetition of the forced conversion of dollar savings into pesos in 2002, Argentines withdrew money from dollar-denominated bank deposits, which fell to $9.5 billion on Aug. 3 from $9.95 billion a month earlier, according to central bank data.
“People see the dollar is lagging and foresee a depreciation of the peso, so they seek to protect the value of their savings,” said Mario Sotuyo, an economist at Buenos Aires-based research company Economia & Regiones. “Now they are forbidden from doing that.”
The official rate for the peso had weakened 6.7 percent this year to 4.6095 per dollar. In an unregulated market, in which investors buy internationally traded securities locally for pesos and sell them abroad for dollars, the peso has weakened 36.4 percent to 6.4928 per dollar yesterday.
Fernandez also tightened controls on imports, ordering companies to seek authorization from the tax agency before bringing goods into the country.
Since the import restrictions took effect in February, purchases of foreign goods have fallen each month, dropping 12 percent in June from a year earlier to $6.1 billion.
Imported goods are more competitive in the domestic market because the weakening of the peso hasn’t made up for the effect of inflation on companies’ costs, Sotuyo said.
“The government protects its dollars because one of its priorities is to accumulate reserves to be able to make debt payments,” Sotuyo said. “At the same time, tightening imports the government protects some industries, which are facing higher local costs, from competing with cheaper goods that come from abroad.”
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