Argentina’s capital flight is forecasted to reach 17 billion US dollars in 2011, above the 11.4 billion of last year because of electoral year uncertainties, and in spite of a larger trade surplus.
During the first quarter 3.6 billion US dollars left Argentina plus preliminary figures of 1.8 billion in April plus another 2 billion in May, which could turn 2011 into the worst year for capital flight since the 2001/02 default because the combined trade surplus and foreign loans will not be enough to cover flight and debt payments.
Deposits in the Argentine system have been leaving at an annual rate of 3 billion USD but peaked to 23 billion in 2008, and have accumulated in the period until this year 56 billion USD, according to market estimates in Buenos Aires.
In 2010 capital flight reached 11.4bn and at the beginning of 2011, a total of 12bn was estimated for the whole twelve months, but numbers from the first five numbers have changed that forecast.
Strong financial controls by the Central bank, tax revenue office and exports controls plus concerns about the economic policy following the October presidential election have made investors uneasy which is also reflected in the exchange rate.
Even when the central bank argues that negative effects are relative since it is more a “dollarization of assets” rather than a capital flight, the fact is that buying US dollars traditionally in Argentina has been the step previous to leaving the country. Furthermore the lack of funds limits investment and prevents the central bank from accumulating international reserves.
A report from a Buenos Aires consultant Bein shows that since 2007 the flight of capital has been totally compensated by the influx of trade dollars and without the flight of capital, the Central bank could have accumulated double the reserves it currently holds.
The paradox is that the Central bank ceased to accumulate reserves when the Argentine economy is going through one of its best quarters as far as supply of dollars in the market is concerned, which means that in the first half of 2011, the capital flight could reach 10 billion, almost the same as the whole of 2010, with 11.4bn.
“The problem is not the electoral process but the day after the election” said Marina del Poggetto from Bain.
This feeling has been accentuated by recent statements from Deputy Economy Minister Roberto Feletti who talked of a “radicalization of populism” in a possible second mandate of President Cristina Fernandez de Kirchner who has yet to announce her bid for October’s election.
Whether populism further advances the markets’ feeling is that faced with a complicated domestic or international scenario, the government’s reaction will be to further advance on controls over the economy.
However according to government sources quoted by the Buenos Aires press so far “we are seeing a natural assets ‘dollarization’ process common to any pre-electoral period”, which has not seen a fall in reserves although yes in Argentine financial assets.
“In fact in May central bank reserves climbed 50 million USD”, said central bank sources.
This means the impact will be now centred on the depreciation process of the Argentine peso against the US dollar. This happened in the first quarter but then was cooled fearing the impact on domestic inflation. The official rate is 4.12 Pesos to the US dollar but in the black market the price is 4.41 Pesos.
Furthermore Argentine Economy minister Amado Boudou promised the business community no surprises with the dollar ahead of the October election. But this generates a further concern for the ‘day after’ the election with inflation already running at an annualized 25%.