Argentina's tough controls on foreign currency purchases could prove counter-productive, sustaining capital flight by rattling savers' nerves and stoking inflation risks by boosting the informal market.
The controls, widely seen as an effort to staunch capital outflows estimated at $10 billion since August, were introduced days after President Cristina Fernandez won a landslide re-election on October 23 and regained control of Congress.
Local and foreign economic analysts say her centre-left government should let the country's peso currency depreciate to restore competitiveness being eroded by inflation running at an annual rate estimated privately at about 25 percent.
Betting that the central bank would ease hefty dollar sales and allow a steady depreciation after last month's election, many savers and investors accelerated dollar purchases.
Fernandez's administration, which is often criticised by Wall Street for its interventions in the market, blames speculators for pressuring the peso. And she seems determined to show the state has the tools to beat back the attack.
Risky as the new controls are, the government is concerned about allowing a sharp depreciation in a country where memories of the traumatic 2001/2002 financial crisis - marked by a collapse of the peso - are still fresh.
A weaker peso could also add further heat to prices by raising the cost of imports, but many economists say a sensible approach would be to let the currency ease while implementing inflation-targeting policies such as limiting wage rises.
And by propping up the formal interbank rate with strong-arm tactics, critics say the inflationary impact could eventually be channeled into the economy if the informal market becomes the reference for setting prices.
"That's precisely what happened (in Venezuela). Inflation began to pick up because people used the parallel as the benchmark," said Boris Segura, a strategist at Nomura, although he added that such a process would take time.
"I don't see an imminent risk," he said. The spread between ask prices on the formal and informal markets widened to 57 cents on Wednesday as more investors sought to find ways around the new controls.
Under the regulations that took effect on October 31, people or companies wanting to buy foreign currency must get approval first from the AFIP tax agency, which verifies they have enough reported income to justify the purchase.
The controls, which the government says target evasion and money-laundering, have made it more difficult for people to get the official exchange rate of 4.26 pesos per dollar and trade volume has fallen since they took effect.
In the informal or parallel market, which is measured by Reuters and reflects "under-the-counter" deals in foreign exchange houses, the peso was trading at 4.84 pesos per dollar on Wednesday. The crackdown came days after the government ordered energy and mining companies to cash in their export revenues on the local foreign-exchange market and told insurance companies to repatriate investments totalling $1.6 billion.
Despite the currency controls, the appetite for greenbacks has remained strong and withdrawals from dollar accounts have picked up, suggesting the rules are unlikely to stem the capital flight estimated by private economists at about $10 billion since August.
They also delay a depreciation that economists say is long overdue to sustain growth as global economic conditions sour. "These measures will not be enough to satisfy the demand for dollars, nor will they resolve the root problem," said Buenos Aires-based consulting firm Economia & Regiones.
Argentina's currency has appreciated strongly in inflation-adjusted, or real, terms over the last two years because its depreciation has failed to keep pace with inflation, making Argentine-made goods more expensive.
"The current strategy is likely to be self-defeating given that a weaker currency is part of the required macro adjustment needed to alleviate some of the macro imbalances created before the elections," Goldman Sachs economist Alberto Ramos wrote in a recent briefing note. "Rather than hurting "speculators" the measures are hurting the economy," he added.
Argentina's central bank has sold $4.7 billion in foreign currency reserves to prop up the peso since August, eroding a key source of funds earmarked for debt repayments.