capital controls

Now this was unexpected.

Brazil on Tuesday said it would scrap the 6 per cent IOF (financial operations tax) currently levied on foreign portfolio inflows into fixed income investments.

It’s a pretty drastic move. The country only raised the IOF on fixed income investments from 4 per cent to 6 per cent a little over two and a half years ago. Read more

Thailand became the latest of several Asian countries to actively encourage the depreciation of its currency on Wednesday, continuing a trend that is likely to leave other regional economies with little choice but to follow.

Its central bank cut interest rates by 25 basis points from 2.75 per cent to 2.5 per cent a year, in an attempt to stem a rise in the baht, which hit a 16-year high last month. The Thai finance ministry is considering adding capital controls to the mix. Read more

Watching Argentina’s unofficial exchange rate is suddenly like being at an auction: on Wednesday it has risen breathlessly, hitting 8.75 pesos per dollar. Yesterday it was 8.27 pesos, Monday it was 8.08. And breaching the 8-peso barrier was a milestone in itself. What’s going on? Read more

Somewhat distracted lately with the death of Hugo Chávez, Venezuela’s government is finally getting around to replacing a system it scrapped well over a month ago that allowed importers to access foreign currency.

With shortages of basic goods worsening by the day as a result and fresh elections just around the corner on April 14, it was clearly prudent to devote some attention to the issue. Read more

When it comes to saving options in Argentina, it’s not so much a case of “all that glisters is not gold” but, perhaps, “the only thing that glisters is gold”.

Let’s face it, saving is hard with galloping inflation and an outright government ban on buying dollars specifically to save. Buying dollars for any other purpose is hardly much easier, and who would want to save in pesos when their value is on the skids? Read more

By Tony Volpon of Nomura

Why has growth in Brazil been so disappointing these past two years, falling from 7.5 per cent in 2010 to below 1 per cent in 2012? There are two competing responses. The first, favored by the government, puts the blame mainly on external factors, such as the European crisis and the growth slowdown in China. The second emphasizes supply-side constraints, whether in poor infrastructure or tight labor markets.

Though these two explanations are not mutually exclusive, they are hard to fully square up with the data. Read more

Hot money is known in Latin America as “swallow” capital, like the migratory birds that arrive in the springtime, build a nest and raise their chicks, only to fly away elsewhere with all their brood.

But, rather than swallows, the dollars that have flooded into Costa Rica in recent months have been “real weapons of mass destruction” for the Central American nation’s economy, according to the president, Laura Chinchilla. Read more

Argentines continue sprinting away from their peso as if it were slathered with avian flu virus. After hitting a record high yesterday, the black market (or “blue”) dollar in Argentina hit another high on Thursday, of 7.54 pesos to the dollar, the local daily La Nación reported. Read more

The currency war rumbles on. As Bloomberg reports on Wednesday – under the headline “emerging markets backlash” – South Korea wants a meeting of G20 finance ministers and central bank governors in Moscow next month to focus on the adverse affects of easy money in the US, EU and Japan.

Korea has certainly been feeling the heat. The eurozone crisis dampened demand for its exports throughout 2012. Seoul says exports remain under threat from a stronger won and growing protectionism around the world. But will words translate into actions? Read more

Brazil’s central bank issued a rule change on Tuesday covering “advance receipts for exports”, a form of export finance. The contracts were previously limited to 360 days; now they may be extended to 1,800 days (five years to you and me). It is significant because such contracts are not subject to the 6 per cent IOF (financial operations tax) charged on other forms of overseas borrowing.

In other words, Brazil is relaxing its capital controls. Read more

By Jonathan Ostry of the IMF

It did not take long after the announcement by the Federal Reserve to engage in a third round of quantitative easing – action warranted by continued economic weakness – for emerging market countries to react. Brazil led the charge, denouncing the action as “protectionist” and predicting that it would reignite “currency wars.” Perhaps less expected than Brazil’s comments were those of Korea’s central bank, which expressed worry that the resulting inflows were “expected to lead to huge difficulty in managing capital inflows.” On the other hand, not all emerging market countries seem unhappy about inflows. India, for example, liberalized its capital inflows regime in the wake of the Fed’s action, in sharp contrast to Brazil’s threat to exercise its option to tighten capital controls if the challenges of managing inflows became too great. Read more

For Felipe, an Argentine freelancer who works in the media, opening a bank account recently meant catching the ferry across the River Plate to Uruguay.

“I’m losing 40 per cent of my salary just because of the exchange rate,” he says. “That could pay a month’s quota at my daughter’s school or a small mortgage.” Read more

There were ructions in the global financial markets when Brazil announced the start of the “currency wars” in 2010 and responded to monetary easing in the west by imposing capital controls in the form of extra taxes on foreign securities purchases.

South Korea, Peru and Thailand followed suit with actions of their own – all designed to cool inflows, calm markets and counter rapid currency appreciation.

But did it all have any effect? No, says a report this month from the Brookings Institution. The authors argue that the impact on capital flows, economies and exchange rates of such temporary controls is pretty much “zero”. With the Fed now launching a new round of monetary easing in the shape of QE3, the debate is anything but academic. Read more

It was nice while it lasted.

Like a harried engineer using his fingers to patch a leaky dyke, on Thursday the Argentine government announced yet another currency restriction aimed at stopping the bleed of foreign currency from its central bank.

This time the target was overseas credit card purchases, which up until now were not limited. Read more

Uruguay prides itself on being an open, investment-orientated economy. So what is it doing imposing capital controls? Trying to deter hot money – aka short-term capital inflows — is the answer.

The central bank says foreign participation in tenders of central bank debt has been “unusually high” in recent months. Though it recognised that that was proved the success of Uruguay’s investment-friendly policies that have led to investment-grade status and high interest rates, it called the phenomenon “a challenge for the management of domestic macroeconomic stability”. Read more

In an interview with Radio Continental on Friday, Argentine central bank president Mercedes Marcó del Pont confirmed news reports that the government was considering means to stop guarantees in the country’s futures markets from being written in dollars or other foreign currencies. Read more

Argentina’s clampdown on foreign currency purchases has claimed another victim: peso-denominated bonds. Argentina’s inflation-linked peso bonds have lost an average of 15 per cent so far this year, reports Bloomberg, quoting data compiled by Barclays.

On the surface, the bonds certainly look attractive. The inflation-linked Argentine bonds due in 2033 yield 14.3 per cent plus the official annual inflation rate, according to Bloomberg. But that plus is the problem. The annual inflation rate as reported by INDEC, the national statistics agency, sits at 9.9 per cent. But many private economists say that INDEC has woefully underreported inflation since the Argentine government intervened in INDEC in 2007, and that the current annual rate is closer to 25 per cent. Read more

The Argentine government formally announced on Thursday that its citizens will no longer be able to convert their savings from pesos to dollars, something many Argentines do to hedge against inflation and devaluation.

Driving the point home in an interview published Friday in the pro-government newspaper Pagina/12, Argentine central bank president Mercedes Marcó del Pont noted that the exchange restrictions also applied to real estate buyers purchasing dollar-denominated properties. “People doing these transactions will have to make the payments in pesos,” she said. Read more

Argentines have lately been dusting down a tried and tested shopping experience: “deme dos” – or “I’ll take two of those”.

Over the years, whenever things are perceived to be expensive, or hard to get at home, smart Argentines who can buy goods abroad have tried to do so – and while they’re at it, they like to stock up. I’ll take two, thank you.

They’re at it again. Only this time, Argentines are using their credit cards aboard to get around the government’s restrictions on dollar buying. Read more

Another day, another dollar restriction. As Argentines found the tax agency was now blocking them from buying dollars to save, banks are also reportedly facing a clampdown.

According to this report in El Cronista Comercial, a business daily critical of the government, the central bank has also clamped down on banks buying dollar-denominated bonds and paying for them abroad. Read more