MercoPress. South Atlantic News Agency

Capital flight in Argentina averages record 2 billion USD per month

Confidence building and inflation the main challenges of the Argentine economy.

Capital flight from Argentina has reached proportions similar to those of 2001, according to economist Rodrigo Alvarez from consultants Ecolatina. He warned it was imperative for the government to restore confidence given the overall perception that “there is a limited capacity to solve problems”.

According to a report from Ecolatina in the last two years 44 billion US dollars have abandoned the Argentine financial system, at a rate of 2 billion USD per month, be it to safe deposit boxes or simply overseas, mainly through neighbouring Uruguay.

Interviewed by Buenos Aires media Alvarez described the situation as “very serious because it restricts liquidity from the economic system to finance consumption and investments”.

The flight of capital in practical terms means “resources which have ceased to exist to finance other activities”

Alvarez added this is closely linked to the general perception that those responsible for economic policies have insufficient capacity to solve current problems “which accumulate and remain unsolved”.

The Ecolatina economist points out three milestones in the flight: at the end of 2007 when the global financial crisis exploded; at the beginning of 2008 with the farmers’ long standing conflict and the unexpected nationalization of the private pensions scheme fund (15 billion US dollars) which have “caused a haemorrhage of 2 billion US dollars monthly”, partly compensated by the trade surplus, “but still extremely serious”.

“The great challenge for the Executive is to rebuild confidence because we are facing a serious political crisis which has an impact on economic fundamentals and decision makers. Politics is impacting on the economy and is signalling an agenda of increasing restrictions”.

Alvarez said that the “confidence crisis, the fall in economic activity and inflation” are the main issues to be addressed in the short term adding that the Argentine government has “virtually no margin to lower export taxes because it faces a serious budget revenue problem”.

“The government must look after every ‘peso’ it has. This fiscal year is virtually over and there are no more surprises than those which we are experiencing but in 2010, resources and outlays will present an even tighter scenario”, said Alvarez.

Regarding the sovereign bond holdouts (approximately 20 billion US dollars pending from the restructuring process of 2004) and which are limiting Argentina’s access to international credit markets, Alvarez stated that “they are a problem, but not one of the government priorities or an issue to be addressed on the short term”.