Argentina’s Import Controls Reflect Increased External Account Concerns

Argentina’s Import Controls Reflect Increased External Account Concerns

On 11 January, Argentina announced a measure that reflects growing external pressures: beginning 1 February, most imports into Argentina (B3 stable) will require official preapproval. By limiting imports, the government seeks to limit further erosion of the trade surplus and indirectly stem the decline in official foreign reserves. We expect the new import controls to result in greater economic inefficiencies in the long term, and only moderately constrain the worsening trade balance in the short term.

Historically, Argentina’s external sector has been a key source of economic volatility and the reason for many of its crises. But in the last decade, higher prices and demand for Argentina’s main exports changed that and led to continued current account surpluses and reduced external vulnerabilities. The current account deficit averaged 3.5% of GDP in the five years to 2001, improving to surplus of 2.6% of GDP in the five years to 2010. But in the past year, continued appreciation of the currency and growing domestic demand have again raised concerns about the external sector and its impact on sovereign creditworthiness.

Twelve-Month Cumulative Argentine Trade Balance

An improved trade balance has been key to the improvement in the overall current account numbers. As recently as 2000, the overall trade balance showed a surplus of less than $3 billion. In 2009 it breached $18 billion. Since then, the trade surplus has been shrinking as imports have grown much faster than exports. Lower trade surpluses coupled with increased capital flight have placed pressure on the official reserves (as shown in Exhibit 2), which dropped $7 billion in 2011.

Total Reserves Minus Gold

We expect the new measure to be only moderately successful in stemming the trade surplus’s erosion and, indirectly, the decline in foreign reserves so long as the peso continues to appreciate in real terms, making imports cheaper and exports more expensive. Coupled with the prospect of further capital flight, these dynamics will likely translate into further deterioration in foreign exchange reserves and be credit negative for sovereign creditworthiness.
The introduction of import restrictions follows a number of other policy responses in 2011 to provide short-term support for FX reserves, but which had a number of unintended negative credit implications.8 These restrictions can introduce macroeconomic distortions that constrain potential future growth, another credit negative for the sovereign.