Argentine currency crackdown smothers dollar demand

A semblance of normality has returned to Argentina's foreign exchange market as investors grudgingly adapt to government controls and arm-twisting that have stifled demand for dollars.
Three weeks after President Cristina Fernandez ordered the tax agency to control dollar buying on a case-by-case basis, an initial increase in withdrawals from dollar accounts has slowed, according to central bank officials, and the peso is steady.
The central bank has bought greenbacks in the last five trading sessions, reversing months of heavy selling of dollars to prop up the peso.
Deputy Central Bank chief Miguel Pesce said last week that slower dollar withdrawals showed "the scenario is improving."
Even if the government has won a first battle against capital flight, economists say it could face a much longer war to avert future foreign currency outflows being fuelled by double-digit inflation and political uncertainty.
That could threaten the longer-term prospects of one of Latin America's fastest-growing economies.
"We're seeing a precarious equilibrium," said Carola Sandy, a Credit Suisse strategist. "If they think they've won the battle and relax, conditions could get bad again."
Besides tightening the regulations around retail dollar purchases, Fernandez told insurers to repatriate investments and ordered energy and mining firms to cash in export proceeds locally to bolster dollar supplies.
Wheat harvesting should further strengthen inflows next month, easing pressure on dwindling foreign currency reserves that Fernandez has earmarked for debt repayments next year.
"Demand has dried up and the supply has started to exceed it with ease," said local market analyst Gustavo Ber. "It also helps that (interest) rates have gone up lots and are clearly higher than any expectation for exchange-rate easing."
Behind-the-scenes pressure by government officials, already used to agree price caps and export increases with private companies, are being employed to persuade importers to delay payments in dollars.
"This is the reality," said a source at a leading import industry group, asking not to be named, adding that importers have become accustomed to unpredictable state intervention.
"Many people say, 'OK, they're making things difficult, but look at my balance sheet' we've never imported so much," the source said.
Argentine companies have come to expect unorthodox and heavy-handed economic policies from Fernandez, who imposed the new currency controls days after winning a landslide re-election last month.
The exchange rate is a touchy subject in Argentina, where many savers are reluctant to stash pesos away after being burned by a sharp devaluation and withdrawal limits during the country's 2001-02 economic crisis.
Still, it is far from business as usual in the exchange houses of downtown Buenos Aires.
Overall trade volume remains low, partly because of the deadlock in the so-called "blue" informal market, which is measured by Reuters.
Before the controls took effect, daily foreign exchange trade on the spot market averaged about $500 million. Last week, just $315 million per day changed hands on average, though volumes are gradually recovering.
Informal trade, dominated by "off-the-books" deals by foreign exchange houses, has been frozen for more than a week as traders resist government pressure to sell dollars at cheaper rates and narrow the spread with the formal market.
In the days after the government crackdown began, the spread between the two markets widened steeply as investors sought to dodge the tight new regulations.
Most currency dealers do not dare flout the government's chief policy enforcer, Guillermo Moreno, who they say has led pressure for an informal peso of 4.40/4.50 per dollar compared with the last traded ask price of 4.79 per dollar.