A recent note from Itau said capital flight in Argentina amounted to USD 2.3 billion in 1Q12, which is USD 1.5 billion less than in the first quarter of last year and USD 6.3 billion less than the record amount posted in 3Q11, shortly before the introduction of strict controls on FX purchases.

Still according Itau’s Juan Carlos Barboza:

“The exchange deficit in the public sector and the financial sector, and the withdrawal of dollar notes from banks during the first quarter, resulted in a deficit of USD 1.6 billion in the total capital account. However, international reserves increased by USD 0.9 billion due a USD 0.2 billion gain in valuation and a USD 2.3 billion surplus in the current account. This surplus (similar in size to the surplus recorded in 1Q11) captures the effects of the controls on imports and dividend remittances that were introduced at the beginning of the year.

Demand for USD-denominated assets in Argentina remains an issue. Because of the FX controls and the FX purchases by the Central Bank, peso liquidity increased markedly, resulting in lower domestic interest rates but also, more recently, in the emergence of parallel FX markets and an incipient acceleration in the withdrawal of USD deposits from the banking system. A recent tightening of the FX controls gave new impetus to the value of the so-called “blue dollar”, and the gap with the price of the official exchange rate has widened by over 25%. Rumors about the introduction of a dual exchange-rate system forced a denial from the president this week.

The official exchange rate has been appreciating in the recent years in real terms, due to persistently high inflation (23.5% in April) and a low pace of depreciation (less than 10%). Expansionary policies (positive fiscal stimulus and negative real interest rates) and a run on the peso may boost the inflation rate, despite the economic deceleration aggravating problems in the FX market. The odds are low that the government will voluntarily implement an adjustment in policies and interest rates, but there are potential triggers for change, like a loss of popularity on the part of the government due to low growth and high inflation, or a flight to parallel FX markets. The alternative scenario is only more intervention and higher inflation.”

Many economists say that Argentina’s forex black market spawned by currency controls could choke back Argentina’s economic growth and create even more inflation: Controls make it harder for people to do business and undermine confidence in the peso, causing it to devalue even more quickly. That can create the threat of shortages when people are unwilling to sell goods for a currency they do not trust. The curbs could also encourage Argentines to withdraw dollars from banks.

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