ARGENTINA: Government launches a series of measures aimed at easing capital flight and protecting central bank reserves

Record ID: 446709

  • Title: ARGENTINA: Government launches a series of measures aimed at easing capital flight and protecting central bank reserves
  • Date: 30th October 2011
  • Summary: BUENOS AIRES, ARGENTINA (RECENT) (REUTERS) VARIOUS OF CURRENCY EXCHANGE OFFICE WITH EXCHANGE RATE SIGN
  • Embargoed: 14th November 2011 12:00
  • Keywords:
  • Location: Argentina, Argentina
  • Country: Argentina
  • Topics: Economy,Politics
  • Reuters ID: LVABIR2MXGOFS23L6ZIMJW3L247F
  • Story Text: In the days after President Cristina Fernandez's October 23 landslide re-election, Argentina has launched a series of measures aimed at easing capital flight and protecting central bank reserves.
    Just after Fernandez's triumph at the polls, she ordered oil, gas and mining companies to cash in all their export revenue on the local foreign-exchange market.
    The surprise rule change put the industries on an equal footing with grains exporters and could cool investment at a time when Argentina's trade surplus is shrinking and its energy supplies are overstretched.
    Until Fernandez's re-election, energy companies were obligated to repatriate 30 percent of their export revenue in dollars, while miners faced no such requirement.
    To fight the trend the government also said that insurance companies with investments totaling $1.6 billion held outside the country, had 50 days to bring them back.
    The central bank meanwhile announced that Argentines who make investments of over $250,000 per year in other countries must explain where the money came from.
    The new policies affirmed investors' fears that Fernandez will make good on her promise to "deepen the model" of her government, which is known for intervening in the markets as it searches for revenues to fund popular social welfare programs.
    The dollar is considered to be a cheap currency in Argentina.
    Capital flight has forced the central bank to sell billions of dollars on the currency market since August to stem the peso's losses. Analysts estimate that about $10 billion in private investments have been transferred out of Argentina in the same three months.
    The banks reserves fell to $47.6 billion dollars on Thursday from $51.9 billion in early August.
    The level of reserves is especially critical in Argentina because the country has been cut off from the international capital markets since its 2002 sovereign debt default.
    The government asked Congress for authorization to use up to $5.68 billion in central bank reserves in 2012, to honor financial commitments.
    Capital flight is normal in emerging markets such as Argentina in the months leading up to a presidential election, as fund managers seek shelter from political uncertainty. But this time, the exit of cash appears to have continued after Sunday's vote count was announced.
    Argentine inflation of over 20 percent, according to private economists, has helped make the dollar more popular in the South American country, where the economy has grown heartily since its 2001/02 financial crisis. Gross domestic product is currently expanding at about 8 percent per year.
    The interbank peso has remained virtually unchanged since September at about 4.2 per dollar, thanks to Central Bank interventions. But the implicit exchange rate used to buy and sell Argentine assets abroad is near record highs at 4.87 pesos per dollar.
    Informally the peso closed Friday at 4.4875 per dollar, close to its all-time weakest. A sharp depreciation of the peso would improve the competitiveness of Argentina's economy compared with its main trading partner, Brazil. But it would also generate greater inflationary pressures.
    Devaluations are unpopular in Argentina, where savers consider the dollar to be a safe haven.
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