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Friday, October 28, 2011 - 09:12

Argentina Steps Up Capital Controls to Buffer Reserves

BUENOS AIRES (MNI) - Argentina awoke to more capital controls Friday as the government unveiled another round of measures to brake the decline in reserves caused by accelerating capital flight that threatens to weaken the peso too quickly and accelerate inflation.

The central bank late Thursday approved stiffer requirements on dollar buying and the purchase of assets by non-residents, effective Friday.

This follows orders earlier this week for mining and oil companies to repatriate all of their export earnings and for insurance companies to return all funds and investments held abroad.

President Cristina Fernandez de Kirchner, fresh from her landslide reelection last Sunday, is seeking to sustain a gradual depreciation of the peso.

But Argentines are shifting to dollars on concerns about the global economic slowdown and faster peso depreciation.

This is bleeding the country's stash of hard-currency reserves, which dropped 9.5% to $47.6 billion this week from a record $52.6 billion in January as the central bank sells dollars to keep the exchange rate steady.

The central bank, an habitual buyer of dollars to build reserves and maintain a stable exchange rate, shifted gears in August to start selling more dollars to buoy the peso amid accelerating in capital flight.

The bank spent another $180 million Thursday, taking the total drain on reserves this month to about $1.7 billion.

Capital flight has accelerated to $3 billion a month since August from an average of $1.5 billion a month in the first half.

And the peso this year has depreciated by about 8% to 4.265 to the U.S. dollar. This in turn will pressure inflation, now running at 20% to 25%. The government expects the peso to weaken to an average of 4.4 in 2012, but private economists expect a decline to 4.8 to 5.1.

In measures announced Friday, the central bank beefed up requirements on purchases of more than $250,000 a year in dollars for undetermined purposes.

The buyer must provide information about how the pesos were obtained, which will "restrict operations with funds that come from the informal market to try to elude exchange rules," the central bank said in a statement.

Previously, the buyer only had to show a declaration of the funds in tax filings. Now they must show where the funds were held before, such as in a bank account or a safety-deposit box.

The central bank said this would provide more transparency in the foreign exchange market and prevent the purchase of bonds and stocks for the purpose of taking dollars out of the country, a practice it said has become common.

The second measure requires non-residents to register the transfer of dollars into the country before buying assets like a company or real estate or for direct investment in a company.

If a non-resident wants to sell a local company to a resident, they must demonstrate that the funds for the original purchase were registered with monetary authorities. Without proof, the central bank will not authorize the removal of the dollars from Argentina.

The bank said the rule applies to future investments.

Analysts said the battery of controls along with an increase in tax inspections on exchange houses over the past weeks could slow the purchase of dollars by making people more nervous.

Still, the central bank's strategy for maintaining a steady exchange rate means it is easier to bet on a future depreciation of the peso, prompting more dollar purchases.

** Market News International - Buenos Aires **

[TOPICS: MGT$$$,MFT$$$,M$T$$$,MN$FX$]

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