By James Bargent
A seasoned traveler in Argentina does not feel surprised at the sight of sniffer dogs at seaports, border crossings or at airports. But he will certainly be surprised if he learns that the dogs are sniffing not for cocaine or explosives but for dollar bills. The dollar-sniffing dogs, handled by agents from Argentine tax agency, AFIP, are tasked with finding Argentines trying to smuggle greenbacks out of the country to avoid the tight restrictions imposed on such acts. The restrictions are part of strict new currency controls imposed by the Argentine government last year, but they are sparking concern among investors in the outsourcing industry and fueling perceptiosn that Argentina is becoming an increasingly difficult place to do business.
President Cristina Fernandez-Kirchner announced the controls to prevent capital flight, tax evasion and money laundering. However, at the root of the issue is Argentina’s runaway inflation, which independent analysts estimate stands at more than twice the official rate of 10.6 percent. With concerns mounting over a serious devaluation of the peso, billions of dollars were flooding out of the country as wealthy Argentines looked to protect their savings.
In addition to the restrictions on dollar purchases, Fernandez-Kirchner’s government has also imposed new controls on the repatriation of foreign currency earnings, prompting fears among outsourcing investors about their ability to take profits out of the country
The measures have succeeded in slashing capital flight, which dropped to $1.6 billion in the first quarter of this year from $8.4 billion in the third quarter of last year. However, they have spawned a thriving black market, which has so far resisted government attempts to wipe it out.
For the average Argentine, this black market is the streets of Buenos Aires populated by illegal currency dealers. Businesses, on the other hand, have been exploiting the loop-hole known as blue-chip swaps, where companies buy dollar denominated sovereign bonds in pesos, transfer them to the U.S. and then sell them for dollars.
The gap between the official exchange rate and the black market rate has been widening, and the current spread is estimated to be as high as 45%, sparking fears that Argentina may be on its way to set up a Venezuela-style parallel currency market.
The artificial rate has the potential to negatively impact the revenues of companies in the outsourcing sector, which is already struggling to cope with rising labor costs. “At this point it seems it is pretty difficult for companies to use the official exchange rate to acquire those dollars and send it abroad – they will probably lose on the exchange rate,” said Juan Manuel Gonzalez, an outsourcing analyst at Frost and Sullivan.
In addition to the restrictions on dollar purchases, Fernandez-Kirchner’s government has also imposed new controls on the repatriation of foreign currency earnings, prompting fears among outsourcing investors about their ability to take profits out of the country. However, so far these controls have been limited to key sectors such as oil, gas and mining and are unlikely to be applied to the BPO or IT sectors.
For Gonzalez, it remains too early to tell if these new financial restrictions will have a serious impact on the Argentine outsourcing sector, although they will certainly not be welcomed by an industry that is already in decline. “If you look at the Argentine outsourcing sector it has been worsening for a couple of years,” he said, “but this is not tied to issues of taking out money or with the dollar (exchange rate) but with competitiveness and inflation.”