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. 

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. 

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? 

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. 

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? 

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. 

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. 

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. 

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? 

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. 

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. 

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.” 

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. 

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. 

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”.