December 11, 2013
Reserves fallingMonday, August 19, 2013
Argentine spending overseas increases deficit
Locals travelling overseas spent US$303 million in the first six months of the year
By Camila Russo
Argentines are undermining President Cristina Fernández de Kirchner’s attempt to halt the biggest drop in currency reserves in a decade as spending abroad widens the deficit from tourism to a record.
Locals travelling overseas spent an unprecedented US$303 million more than what foreigners bought in the country during the first half of the year, four times the gap in the same period last year, according to the INDEC statistics bureau. That has exacerbated the decline in foreign reserves, which plunged US$6.3 billion this year to a six-year low of US$37 billion.
Considering the bans on dollar purchases, which were implemented last year in an effort to slow down capital flight to save foreign currency for debt payments.
That restriction has not stopped spending abroad though, as credit card use overseas has soared as a way to not only buy everything from clothes to electronics at cheaper prices but also obtain cash at better rates than the Buenos Aires foreign exchange black market.
“It's one of the few ways Argentines have to legally access dollars,” Juan Pablo Fuentes, an economist at Moody's Analytics said in a telephone interview from West Chester, Pennsylvania. “It adds to a bigger problem of capital flight and a deteriorating current account.”
Tourists in Argentina spent US$1.3 billion in the first half, the least since 2006, as inflation and an overvalued currency make the country's iconic attractions and products from visiting glaciers to drinking Malbec wine and purchasing leather goods more expensive, said Fuentes at Moody's.
The tourism gap in the first six months of the year exceeds last year's record US$89 million annual deficit, the first time Argentines spent more abroad than foreigners did in Argentina since 2001.
Spending abroad by Argentines in the first half of the year fell to US$1.6 billion from US$1.7 billion in the same period last year after Fernández de Kirchner increased the tax on purchases with bank cards abroad to 20 percent from 15 percent in March. That now implies a dollar rate for bank card purchases of about 6.68 pesos per dollar compared with the official rate of 5.57 pesos.
Last month, Fernández de Kirchner said the number of Argentines travelling abroad in the past 10 years has jumped 135 percent.
“This means that they have dollars,” she said in a speech in the province of Chaco, adding that it showed the “hypocrisy” of those who say there are currency controls.
However, Fernández de Kirchner restricted foreign currency purchases in the week after her re-election in October 2011, requiring authorization from the AFIP tax agency to buy dollars, and in July 2012 she banned most purchases.
The measures have proved insufficient to stop the decline in Central Bank funds, which has prompted Citigroup to say there's a 37.5 percent chance dollar bonds due 2015 will be restructured on a weakening capacity of payment.
“Every measure reinforces the idea that the official dollar is cheap so people will keep doing whatever they can to get it,” José Luis Espert, who runs Buenos Aires-based research firm Espert & Asociados, said. “It doesn't stop capital flight. It has the opposite effect and makes it worse.”
The drop in reserves will be mitigated by the country's soybean harvest, said Neil Shearing, chief emerging-markets economist at Capital Economics in London.
“At the moment it's being crossed over by the fact that soy prices are high and the soy harvest has been strong,” Shearing said. ·That's helping to taper over the crisis of the balance of payment this year.
While more savvy tourists are starting to bring cash to exchange for pesos in the black market, most are probably using credit cards and exchanging at the official rate, he said.
The inflation-adjusted exchange rate, or the real effective exchange rate, of the peso has appreciated 16.5 percent in five years, making it the most overvalued of 15 emerging-market currencies tracked by Crédit Suisse Group AG, according to an August 8 report.
The tourism gap will continue widening because completely shutting dollar access for travel would be unpopular and further deteriorate government support, Fuentes said.
“The middle class is very sensitive to this issue so any additional controls are inviable,” he said. “While the gap with the parallel peso keeps widening, the incentive to travel is even greater.”