For weeks, buying US dollars in Argentina has been more difficult than usual, after the government tightened controls on currency exchange. Shortly after President Cristina Fernández de Kirchner’s landslide re-election, Finance Minister Amado Boudou announced that residents would require approval from the national tax office (AFIP) when changing pesos into dollars.
As the new measures went into effect on 31st October, local media reported on confusion in currency exchange houses and banks in downtown Buenos Aires and stoked fears that this was a sign that the economy could be in trouble.
In an effort to calm the public, Boudou tweeted a somewhat reassuring message: “Nothing has changed with respect to the possibility of buying dollars. Everyone who can demonstrate their income can acquire them.”
The vice president-elect explained that the measures were simply a means of clamping down on tax evasion and money laundering. Under the new system, AFIP, the Central Bank and money laundering operation experts all have access to the same data, making it easier to detect when someone is moving more cash than can be justified by their declared income.
The measures also target the unregulated or “informal” foreign exchange market, which investors and companies use to skirt currency limits and generate large profits by taking advantage of different exchange rates. The central bank will allow transactions over $250,000 only when the person can show that those funds were legally earned, declared when brought in the county, or come from previously-owned assets. Individuals will be able to purchase up to US$2million per month, provided they can prove the origin of the money.
An Ulterior Motive?
Some experts, however, say the measures are more about stemming the flow of money leaving the country, which has accelerated in recent months. This capital flight— estimated by Banco de la Ciudad de Buenos Aires at an average of US$3bn per month— prompted the central bank of Argentina to sell US$2.7bn of reserves in August and September to protect the peso from a sharp devaluation. Already, reserves, which are used to pay down national debt, have fallen to US$47.6bn this year from a record US$52.6bn in January, the largest depreciation in three years.
Although the direct currency controls are new, economist and professor of macroeconomics at the Universidad de Buenos Aires (UBA) Daniel Heymann said the problem of capital flight has existed for a while. “What happened was an increase in demand for dollars even when the trade surplus was still significant. The outflow of capital is a phenomenon that started several years ago and had its high points during the international crisis in 2009.”
Heymann asserts that capital outflow and ‘dollarisation’ are issues that Argentina has been facing for a while. Despite a long period of strong economic growth, a history of financial turmoil and currency devaluations mean many locals prefer to save in US dollars. “For Argentina, the issue of exchange rate changes and the foreign exchange market is quite important because the country has a tradition of thinking in dollars, therefore, expectations and perceptions are influenced by this,” adds Heymann.
The lingering fear that the future holds another monetary catastrophe is the big reason why large amounts of household wealth and business profits are often stowed outside the country. Days before the new currency controls came into effect, President Fernández issued a mandate requiring energy and mining companies to keep all of their export revenue in the country in an attempt to prevent the dollars from flowing out of Argentina.
For tourists and locals buying small amounts of dollars, little is likely to change under the new system. However, analysts warn that those looking to buy a house could face difficulties. In the local real estate market, which has been booming in recent years, transactions are generally conducted in US dollars, often in cash.
“It is a custom that has existed for more than 20 years. The people have no confidence in their local currency,” says Leo Tomeo of Jose Tomeo E Hijos Real Estate. “They prefer to save in dollars and the real estate market follows suit.”
Tomeo divulges since the regimentation of the dollar came into play 10 days ago his office has been very quiet: “We have had a drop in consultations. The market is standing still.” He adds, though, that it is still too early to tell what the overall outcome will be on his business.
Other concerns focus on the potential for the new measures to have the opposite effect of spurring activity in the informal market. Around a third of the Argentine economy is estimated to operate in undeclared cash, some of which will now be forced into the informal market by the new restrictions. Since the new measures were enforced, the black market, or ‘parallel’ exchange rate rose to above $5 (compared to the official rate of $4.28), reflecting strong demand for dollars via unregulated exchange.
In response, the government was forced to relax regulations in the banking system to increase the supply of dollars, while also launching operations against illegal change houses. Interior Commerce Minister Guillermo Moreno, renowned for using strong-arm tactics to keep supermarket and petrol prices down, is involved in the crackdown on the informal market.
Two weeks after the new controls were introduced, the market appears to have stabilised. However, in the long term, Professor Heymann states that there needs to be a more fundamental change made to Argentina’s macroeconomic policies to increase confidence in the local economy and ease the problem of capital flight.
Find out what locals think about the new currency restrictions here