BUENOS AIRES: Foreign exchange trade shrivelled in Argentina after the government ordered on Monday that tax authorities clear all dollar purchases, a move aimed at slowing dollar demand but which analysts say could backfire.
To counter surging capital flight, the central bank sold about $1.78 billion of its foreign reserves in October alone to keep the foreign-exchange market supplied with greenbacks and stem a sharp depreciation in the country's peso currency.
But in the days following an Oct. 23 election, in which President Cristina Fernandez handily won a second term, the government unveiled a series of measures aimed at boosting dollar supplies while also discouraging demand.
As of Monday, any person or company wanting to buy dollars must get approval from the AFIP tax agency first, according to a resolution in the official gazette.
Banks and foreign-exchange houses scrambled to put into place a new system whereby they will consult with AFIP electronically to verify the buyer has enough reported income to justify the purchase.
On Monday, trade volume was minimal on the formal, interbank market, where the peso was at 4.2325 per dollar, traders said.
Trade was nil on the parallel market, where the peso closed at 4.4875 on Friday.
Local media said the government planned to send out several thousand officials to help implement the new system which critics described as a scare tactic aimed at cooling demand among crisis-scarred Argentines, who snap up dollars at times of uncertainty.
High inflation has eroded the currency's competitive edge for exporters, and investors, small and large, expect the central bank to allow a faster pace of depreciation in the coming months to protect local industry.
"We have detected more than 100 people who have very limited resources but who nonetheless make big dollar purchases," Economy Minister Amado Boudou told local radio. "At the same time, we've seen that only a handful of companies have been dominating (dollar) purchases on the market."
"The people who have their accounts in order should be very calm and those who seek to operate illegally should be very nervous," Boudou told financial daily Ambito Financiero.
Although trade on the interbank market was anemic, the central bank nonetheless offered $500 million to ensure sufficient dollar supplies, as it has been doing in recent days, continuing intervention even as the new controls are imposed. Dollar demand was expected to surge on the parallel market dominated by foreign-exchange houses, further widening last week's gap of some 25 centavos per dollar between the two markets. Foreign exchange house traders said no deals were being made on Monday morning.
An employee at one of the largest private banks operating in Argentina told Reuters that no dollars would be sold on Monday as the new system gets up and running.
"We were advised not to carry out operations in dollars, telling our clients to wait a few more days until the system has normalized," the employee said on condition of anonymity.
The new foreign-exchange measures requires that banks and exchange houses identify buyers' names, the currency they seek to buy as well as the amount and purpose of their purchase.
"The new measures smack of desperation and, by drawing attention to the fact that the peso has become a one-way bet for further depreciation, could exacerbate the flight of capital from peso deposits to dollars," Neil Shearing, chief emerging markets economist at London-based Capital Economics, wrote in a research note. Alberto Ramos, a senior economist at Goldman Sachs, agreed the restrictions could backfire.
"All these measures are geared to restrict demand and increase the supply of dollars in the FX market. However, they are mostly palliatives as they do not address the root cause of the recent pressure on the peso: nominal peso rigidity while domestic inflation is growing at a much faster rate than that of its trading partners," Ramos said.
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