Argentina: Currency and Capital Controls Slow Activity

GDP forecasts have held firm this month despite ongoing disquiet about the stuttering economy. The Fernández government’s policies are triggering further capital flight, with many conglomerates rethinking their investment plans in the wake of strict capital controls which include prohibiting foreign companies from sending profits abroad. The widening gap between the official and black-market exchange rate (where there is a 60% premium on the purchase of scarce US dollars) is also factoring into firms’ decision-making. The immediate impact of capital flight has been limited somewhat by the controls in place, but they have also heightened marked distortions in the economy. A shortage of foreign currency is illustrated by the deterioration in forex reserves, from US$40.8bn in Q1 2012 to US$34.2bn in Q1 2013, and our panel’s forecasts have fallen back this month. Argentina’s lack of access to global capital market funding has meant that the state is heavily dependent on the tax take of export-related receipts, especially for its key agricultural commodities. And with the world price of soybeans easing, Argentina’s trade surplus has narrowed, pushing our panel’s forecasts for the current account into deficit. Q1 did see an acceleration in the official GDP growth rate, from 2.1% (y-o-y) in Q4 2012 to an estimated 2.7%, but this is a far cry form the 5.2% figure recorded in Q1 2012. Moreover, inflationary pressures are adding to the economy’s woes.

There is cause for cautious optimism in May’s 32.2% (y-o-y) surge in auto output. However, this was due to favourable base effects stemming from a poor May 2012 outturn. Industry picked up from 0.2% (y-o-y) in March to 1.7% in April but remained modest in the face of faltering exports and a lack of investment in the sector. The 2013 production forecast has risen, though.

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