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Monday, October 31, 2011 - 12:14

Argentina Ups FX Controls to Slow Capital Flight; Risks Seen

BUENOS AIRES (MNI) - Argentina tightened controls on buying foreign currencies Monday to contain rising capital flight, a move that analysts say could backfire and intensify the demand for dollars.

Those who want to purchase dollars must present their personal and tax identification numbers at a bank or exchange house to do so, the national tax agency said in a resolution in the Official Bulletin.

The teller will check with the agency to verify if the buyer has a declared income to substantiate the amount of the exchange before the deal can go ahead.

Previously the purchase of dollars could be done with just a tax id, and transactions could also be done at automated teller machines and via online and telephone banking services.

The new requirements seek to verify "the source of the funds," with the aim of ferreting out money launderers and tax evaders, Economy Minister and Vice President-elect Amado Boudou said Monday on Radio 10.

"We are going to continue with these types of controls and today we have an additional tool that doesn't change anything for those people who buy dollars legally," he said.

This is the latest measure aimed at slowing capital flight in Argentina, the pace of which doubled to $3 billion a month in the second half of this year compared with the first. This has led to a decline in international reserves as the central bank tries to sustain a gradual depreciation of the peso and keep inflation in check.

President Cristina Fernandez de Kirchner, who won a second four-year term by landslide Oct. 23, last week toughened capital controls and ordered insurance, mining and oil companies to bring funds into the country from export sales and investments.

Her administration also ordered the deployment of hundreds of gendarmerie and tax inspectors to oversee trading at money houses with the objective of uncovering illegal operations.

The government wants to slow or even turn around the slide in the country's hard-currency reserves, which fell 9.5% to $47.6 billion Friday from a record $52.6 billion in January as the central bank sells dollars to maintain an about 8% annual depreciation of the peso.

The peso was trading at 4.236 per U.S. dollar Monday, in line with Friday.

Private economists warn that a quicker depreciation could fuel faster inflation, already running at an annual 20-25%, according to private estimates.

Analysts expressed concerns about the impact of the controls.

"There is nothing less attractive than prohibition," said Jaime Abut, a business consultant in Rosario, Argentina.

He said the controls will incite more flight to dollars as concerns swell about a repeat of the seizures of bank deposits and withdrawal restrictions in the month ahead of the 2001 economic collapse, one of the worst in the nation's history.

"We have seen this movie before and we know that it ends bad," he said.

The central bank's attempts to sustain what is considered an overvalued peso against the dollar will continue to shrink its available reserves, Abut said.

He said he expects the available reserves to continue falling to about $15 billion by the end of the year as imports rise and exports fall, he said.

The trade balance shrank to $8.2 billion in the first nine months of this year compared with $10.3 billion in the year-earlier period, as imports rose 36% and exports 25%.

Abut said the government is ignoring the reasons for the capital flight: excessive public spending, peso printing and subsidies as well as artificially low public service rates and limited incentives for industry to expand output.

The principal aim of the restrictions is to slow the depreciation of the peso but it could do just the contrary, said Lucas Llach, an economist at the Torcuato Di Tella University in Buenos Aires.

"People will have less desire to buy pesos and those that were buying dollars will continue to do so," he said. "People will say, 'It is wiser to buy dollars now because these measures are an indication that there is a problem and that the government will devalue the peso more and put more restrictions on buying dollars.'"

It is this sensation that "will accentuate the flight to dollars," making it harder for the central bank to sustain the rate of decline in reserves, he added.

The capital restrictions also are expected to hit the economy by increasing interest rates and souring consumption.

"If there is a perception that there will be further devaluation, people will postpone purchasing decisions because they will get more for their money later," Llach said.

Banks raised fixed-term deposit rates on large sums to an annual 20% in October from 11% in September to tempt savers to keep pesos in the system, helping to stem the flight to dollars and rebuild deposit levels.

In consequence, they have pushed up lending rates to more than 30% for companies, reducing demand for credit and threatening to slow the economy, which before these measures was expected to grow 8% this year and 5% in 2012.

A major problem is that buying dollars in Argentina is almost a sure profit, Llach said.

The government is sustaining a gradual depreciation, meaning there is little risk of an appreciation of the peso, he said.

If the government were to allow the peso to depreciate to a level more in line with its value such as 5 pesos per dollar and were to loosen the rigidity in the exchange rate then there would be less demand for dollars, he said.

"If the exchange rate went from 5 pesos to 4.60 pesos per dollar in a short period, people would be less willing to buy dollars. You could win or lose, like in Brazil," he said. "In Brazil you are never sure if you are going to win. In Argentina it is very hard to lose."

** Market News International Buenos Aires **

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

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