Reintroduction of capital controls

ARGENTINA - In Brief 02 Sep 2019 by Esteban Fernández Medrano

The debt rescheduling announcements of last week, as might have been expected, did little to calm markets anxiety and, on the contrary, acted as a coordination signal to spur capital flight, forcing the BCRA to continue selling reserves to keep the dollar value in check.Also, bank withdrawals of USD deposits accelerated, in an environment where the memories of banking crisis related to debt restructuring are not so far away. Private sector USD deposits, which were growing during last months, in contrast to peso deposits in real terms, dropped close to USD 4bn or 12% form since the primaries and USD 790mn alone the first three days of last week. While banks remain quite solid, with less treasury debt holdings than in the past, the concerns that the BCRA LELIQ debt might eventually be swapped into something less liquid is always at hand. For the time being, the BCRA response to such fears has been to hike the LELIQ rate to 83.2%, a new record high and signal it will resist further dollar depreciation.In this environment, the government decided to move one step further and reintroduce capital controls, allegedly until December 31st. The objective is to limit the loss of FX reserves while limiting FX volatility until the next administration takes over (most likely Alberto Fernández’s). The capital controls were announced in coordination between the government and Central Bank. In particular, the government issued the Decree of Necessity and Urgency (DNU_2019_609.pdf ) and BCRA regulation (BCRA_Com_A_6770.pdf).The measures consist, in short, a) to limit the local acquisition of USD in the official FX market, b) oblige exporters to transfer their receipts to the domestic mar...

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