International investors prefer easy access to local markets. However, capital controls, which restrict movement of money, are detrimental to a country’s prospects of attracting overseas money.
In the previous article, we saw how President Mauricio Macri allowed the Argentine peso to free float. Apart from that, he has done away with taxes on beef, corn and wheat exports and reduced a tax on soybean exports. Along with the free-floating currency, this move has incentivized farmers to sell crops that they had hoarded in order to obtain better prices for their produce.
Removal of capital controls
Capital controls had been in place in Argentina since 2005. These required direct investments to the country to remain for 365 days before being repatriated. This duration was reduced to 120 days by former Finance Minister Alfonso Prat-Gay.
However, in a major move on January 5, 2017, the government did away with this 120 day holding period requirement for foreign capital. With this decree, the country removed “the last barrier to entry of foreign capital,” according to the finance ministry.
The reason why the country waited for over a year to make this move after letting the peso float freely was that if the two measures were taken directly after one another, it could have resulted into investors flooding the market to benefit from double digit yields on bonds.
Though the removal of this control has made the country’s financial markets susceptible to ‘hot money,’ it has also opened the gates to international investors.
Some additional measures are still anticipated though, the primary one being removal of capital gains tax on equity trading.
Impact of end of capital control
The impact of the end of capital and currency controls can be seen in the graph above.
When President Macri had assumed office in 2015, foreign reserves were at their lowest in nine years. By the end of February 2017, they had nearly doubled from their December 2015 levels.
In the next article, let’s look at the factors which can attract investors going forward.