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At Buenos Aires’ Buquebus ferry terminal on a recent Friday, Argentine tax agency officials strolled by idling cars waiting to board the boat to neighboring Uruguay. Golden and Labrador retrievers on leashes accompanied the tax men. As they passed the vehicles, the dogs sniffed their way through trunks and luggage. They were not looking for drugs.
Argentina’s tax agents are deploying dogs trained to detect the ink used to print U.S. bills. The goal is to catch Argentines trying to leave the country with more than the $10,000 legally allowed out of Argentina without declaring it to the government. In mid-December, in their highest-profile catch, the dogs discovered $30,000 packed inside the spare tire of a BMW leaving for Uruguay on the ferry. The dogs and their employer, the tax agency known as AFIP, had found a total of $2.7 million in U.S. bills as of mid-December 2011. The K9 corps includes 300 dogs at border crossings and the regional airport, as well as the ferry terminal.
The dogs are the latest effort by the government of President Cristina Fernández de Kirchner to stem capital flight from South America’s second-biggest economy. Investors, worried about a possible devaluation of the peso and inflation estimated by economists to be more than 20 percent annually (the government says it’s lower), pulled $18 billion from the economy in the first nine months of 2011, according to central bank data. That is the most in a decade and double the amount from the same period in 2010.
President Fernández has been cracking down on capital flight since winning a second term in October. “People were expecting her to be much more market-friendly after the election,” says Walter Molano, a Latin American specialist at BCP Securities. “And she did the opposite.” Within days of her victory, she ordered energy and mining companies to keep their export revenue in the country and directed insurance companies to repatriate investments. In December a new money laundering law targeted unregulated trading in the peso as financial “terrorism.” And the government has made it much harder for Argentines to get greenbacks.
The imposition of tighter capital controls was a shock to many Argentines, accustomed to seeking security in the dollar during the nation’s many financial crises. They store dollars in safety deposit boxes, in safes at home, and under the proverbial mattress. The pro-dollar mentality is so ingrained it recently led the daily La Nación to diagnose the country as having a severe case of “dolarmanía.”
Prior to the elections, when other currencies in the region weakened, Fernández didn’t let the peso depreciate. The peso weakened only 4.5 percent in the second half of 2011, compared with 16 percent declines in the Brazilian real and Mexican peso, and a 10 percent tumble in the Chilean peso.
Fernández continues to tightly manage the exchange rate, which means stopping Argentines from changing pesos into dollars and moving the greenbacks out of the country. Now, those looking to buy dollar bills must pre-register with AFIP, which grants or rejects requests based on factors such as tax and salary history, estimated monthly expenses, and the desired purchase amount. Previously, no such papers typically were requested, nor were questions asked. Dollars were often used in lieu of pesos: Even buyers and sellers on an Argentina-specific site similar to EBay (EBAY) would often operate in dollars.
In late October, when the new restrictions were announced, fear of the controls and of a peso devaluation, as well as a rumor the government would confiscate dollar accounts, prompted the withdrawal of $1.7 billion from local banks over the next two weeks.
By moving money to Uruguay, Argentines benefit from a more market-friendly regime and a Swiss-like tradition of banking secrecy. Fifteen percent of Uruguay’s bank deposits, about $3 billion, comes from abroad and most of that is from Argentina, according to Uruguay’s central bank.
José Ragozino, an Argentine engineer who runs two companies, was waiting to drive his blue BMW that Friday onto the ferry headed to Montevideo, Uruguay’s capital. He calls the dollar-purchasing changes “ridiculous” and says “it doesn’t solve any problems.” He says AFIP gave him permission to buy dollars, but he hasn’t yet tried to do so. From Montevideo, he was headed to Punta del Este, where many well-off Argentines summer. In Punta, the prices for everything from real estate to nightclub fees are often quoted in dollars. This year, in light of the tighter controls next door, Uruguayan tourism executives also asked their government for permission to accept payment in Argentine pesos.
The bottom line: Argentina is cracking down on its citizens, who moved $18 billion out of the country in the first nine months of last year.