Economy & Trade, Financial Crisis, Headlines, Latin America & the Caribbean

ECONOMY-ARGENTINA: Capital Flight – Again

Marcela Valente

BUENOS AIRES, Aug 7 2009 (IPS) - In spite of the resilience shown by the Argentine economy during the current global recession, deep-rooted distrust has led to the flight of 44 billion dollars over the last two years, which have been deposited abroad, locked up in vaults or tucked under the mattress.

The amount of capital leaving the country this time far surpasses the capital flight in 2001, when then President Fernando de la Rúa (1999-2001) imposed a freeze on bank accounts known as the “corralito” that heightened the economic, social and political crisis that toppled his government and prompted the devaluation of the peso.

In that crisis, 18 billion dollars in capital fled the country between mid-2001 and March 2002.

But the economic situation in Argentina was very different then. Foreign reserves stood at under eight billion dollars in 2001, compared to 45 billion dollars today, the fiscal deficit de la Rúa laboured under has become a fiscal surplus, and the trade balance, then negative, is now positive.

Nevertheless, the fears and distrust of Argentine savers prevail, and a high proportion of the financial surplus is converted to dollars and withdrawn from potential investment, credit and consumption. These losses over the past two years have been weathered until now, but may create big trouble in the medium term for the administration of President Cristina Fernández.

Economy Minister Armando Boudou, named to that post just a month ago, played down the situation, saying that “rather than capital flight, there have been portfolio changes.” But several observers maintain that capital flight is the main economic problem at present and that reversing the outflow is urgently needed.

At a time when public accounts are threatening to veer into the red again, and the foreign trade balance is positive thanks only to import restrictions, many people fear that by the end of the year capital flight may outstrip the trade balance and monetary reserves may have to be used to compensate for it.

A high-ranking official in the economic sphere confirmed the size of the capital flight to IPS and attributed it to external and internal factors. Among the external ones, he mentioned the global financial crisis, although he acknowledged that in Argentina “investors, but above all small savers, are scared and are seeking dollars as a refuge.”

This explains why capital flight in Argentina is lasting longer than in neighbouring South American countries, although they are all suffering from the same global economic storm.

The source told IPS that in 2001, dollar savings outside the financial system led to a serious loss of reserves in Argentina. Today, however, with adequate reserves, the flight is being financed by the positive trade balance.

“It is unquestionably a trend we have to curb, because these resources leave the system and no longer generate credit or investment,” he said.

In an interview published recently in the local newspaper Clarín, the executive secretary of the Economic Commission for Latin America and the Caribbean (ECLAC), Alicia Bárcena, said that Argentina is making economic progress, but “the trickiest problem for the country is capital flight.”

“With dialogue and consensus, confidence can be restored,” she added.

Most analysts say the root cause of the financial bleed-out is, precisely, the loss of confidence among investors and savers due to political tensions and the uncertainty surrounding the direction of the government’s economic policies. Bitten once by the late-2001 banking collapse, they are twice shy of leaving their money in current or savings accounts and prefer to withdraw it and buy dollars.

Safe deposit boxes in banks have a 100 percent occupation rate. Many financial institutions have waiting lists for would-be renters, and in Uruguay, a regular haven for Argentine savers removing their money from the local system, dollar deposits by non-residents have grown.

Uruguayan officials acknowledge that most of the deposits have been made by Argentines.

The generalised climate of uncertainty is based on, among other things, the conflict that has dragged on since 2008 between the government and large-scale farmers, the transfer of pension funds from private administrators to the state pension system, and the lack of credibility of official statistics, especially the inflation index.

“Suspicion and distrust are nowadays an embedded characteristic among savers,” economist Mario Sotuyo of the consultancy firm Economía y Regiones told IPS, recalling the vicissitudes of the late-2001 crisis when thousands of depositors watched helplessly as their savings in Argentine pesos were trapped in the banks during a drastic devaluation.

In spite of the current context of high reserves, a fiscal surplus and a positive trade balance, Sotuyo said, capital is seeking shelter in the dollar. To curb this flow, long-term measures to rebuild confidence are needed, he said.

“The constant bleeding of dollars from the private sector is one of the issues of greatest concern in the present economic dynamics,” Ecolatina, a consultancy, said in its latest report. “And with good reason: in the last 24 months 44 billion dollars have taken flight by this mechanism, nearly equivalent to the entire stock of international reserves.”

The experts also stated that “it is loss of confidence that is driving capital flight.” Over the last year, 25 billion dollars exited the country’s financial system, and since April the rate of withdrawals has been almost two billion dollars per month, the report says.

According to Ecolatina, while exports have declined over the past year, so too have imports, because of government restrictions. This has allowed a strong positive trade balance to be maintained in the first half of 2009. The trade balance is now financing capital flight, without a correspondingly steep fall in reserves.

However, there may be problems looming in the medium term. “Continuing capital flight could lead to balance of payment difficulties and exchange rate volatility,” the report says.

In the 2001-2002 crisis, when the government was burdened with a heavy fiscal deficit and had lower dollar reserves, the leaders of the hard currency flight were large companies and investors. Now, capital flight is fuelled by huge numbers of smaller savers choosing to put their savings into dollars.

Even President Fernández and her husband, former president Néstor Kirchner (2003-2007) are following the same logic in their private investments. In their last sworn statement of assets they declared bank deposits equivalent to 8.4 million dollars, 62 percent of which was deposited in dollars.

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