Overpriced Malbec Is a Turnoff as Locals Flee: Argentina Credit

Argentines are undermining President Cristina Fernandez de Kirchner’s attempt to halt the biggest drop in currency reserves in a decade as their spending abroad widens the deficit from tourism to a record.

Locals traveling overseas spent an unprecedented $303 million more than what foreigners bought in the country during the first half, four times the gap in the same period last year, according to the National Statistics Institute. That’s exacerbated the decline in foreign reserves, which plunged $6.3 billion this year to a six-year low of $37 billion.

Fernandez banned dollar purchases for savings last year in a bid to slow capital flight and to save foreign currency used to pay debt that yields more than twice the emerging-market average of 5.95 percent. Faced with costs in pesos that are rising at an estimated 25 percent a year, Argentines are using credit cards to buy everything from clothes to electronics abroad and to obtain cash at better rates than they would get in black markets on the streets of Buenos Aires.

“It’s one of the few ways Argentines have to legally access dollars,” Juan Pablo Fuentes, an economist at Moody’s Analytics Inc., said in a telephone interview from West Chester, Pennsylvania. “It adds to a bigger problem of capital flight and a deteriorating current account.”

Widening Deficit

Tourists in Argentina spent $1.3 billion in the first half, the least since 2006, as inflation and an overvalued currency make the country’s iconic attractions and products from visiting glaciers to drinking Malbec wine and purchasing leather goods more expensive, said Fuentes at Moody’s.

A bottle of Luigi Bosca 2007 malbec in Argentina costs 180 pesos ($32), double its price of $13 in the U.S., according to retailers wine.com and Winery.

The tourism gap in the first six months of the year exceeds last year’s record $89 million annual deficit, the first time Argentines spent more abroad than foreigners did in the South American nation since 2001.

Spending abroad by Argentines in the first half fell to $1.6 billion from $1.7 billion in the same period last year after Fernandez increased the tax on purchases with bank cards abroad to 20 percent from 15 percent in March. That now implies a dollar rate for bank card purchases of about 6.68 per dollar compared with the official rate of 5.57.

Last month, Fernandez said the number of Argentines traveling abroad in the past 10 years has jumped 135 percent.

“This means that they have dollars,” she said in a speech in Chaco province, adding that it showed the “hypocrisy” of those who say there are currency controls.

Dwindling Reserves

Fernandez restricted foreign currency purchases in the week after her re-election in October 2011, requiring authorization from the tax agency to buy dollars, and in July 2012 she banned most purchases.

The measures have proved insufficient to stop the decline in central bank funds, which has prompted Citigroup Inc. to say there’s a 37.5 percent chance dollar bonds due 2015 will be restructured on a weakening capacity of payment.

“Every measure reinforces the idea that the official dollar is cheap so people will keep doing whatever they can to get it,” Jose Luis Espert, who runs Buenos Aires-based research firm Espert & Asociados, said in a telephone interview. “It doesn’t stop capital flight. It has the opposite effect and makes it worse.”

The extra yield investors demand to hold Argentine debt instead of U.S. Treasuries widened one basis point to 1,019 basis points at 3:08 p.m. in New York, according to JPMorgan.

Soy Harvest

Argentina’s five-year credit-default swaps, contracts that protect holders of the nation’s debt against non-payment, rose 64 basis points to 2,290 basis points at 2 a.m. in New York, according to data compiled by CMA Ltd.

The drop in reserves will be mitigated by the country’s soybean harvest, said Neil Shearing, chief emerging-markets economist at Capital Economics Ltd. in London.

“At the moment it’s being crossed over by the fact that soy prices are high and the soy harvest has been strong,” Shearing said in a telephone interview from London. “That’s helping to taper over the crisis of the balance of payment this year.”

While more savvy tourists are starting to bring cash to exchange for pesos in the black market, most are probably using credit cards and exchanging at the official rate, he said.

‘Very Sensitive’

The inflation-adjusted exchange rate, or the real effective exchange rate, of the peso has appreciated 16.5 percent in five years, making it the most overvalued of 15 emerging-market currencies tracked by Credit Suisse Group AG, according to an Aug. 8 report.

The tourism gap will continue widening because completely shutting dollar access for travel would be unpopular and further deteriorate government support, Fuentes said.

“The middle class is very sensitive to this issue so any additional controls are inviable,” he said. “While the gap with the parallel peso keeps widening, the incentive to travel is even greater.”

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