The Argentine government's decision to reintroduce capital controls to help stem the local currency's decline might fail to contain reserve losses as foreign currency deposits flee the banking system, Moody's said.
While the controls have had a measure of success in keeping the exchange rate stable, reserve losses have continued uninterrupted, the rating agency said.
Moody's noted that "the Argentine peso has appreciated by about 6% since the imposition of the foreign exchange controls, hovering around ARS/US$56 since late last week." Gross reserves kept declining in Argentina, however, since authorities rely on international reserves to cover foreign exchange bank deposits.
Deposits fell about 30% over August reaching $23.3 billion on Sept. 6 from $32.5 billion just before the primary elections in Argentina. The decline will continue, "increasing the likelihood that the authorities impose additional capital controls in the near future," according to Moody's.
Moody's also reflects that there is uncertainty regarding how the International Monetary Fund will proceed with the next disbursement of $5.4 billion to Argentina, as it is scheduled "on or after" Sept. 15. Cancellation of the payment would be unlikely, in the rating agency's opinion, since Argentina has continuously met its fiscal targets set in the standby agreement.
In a separate report from Sept. 9, Moody's said a deepening economic malaise will hit government and business sectors. The recent developments in the country, such as the severe market reaction, the freezing of certain prices, and the "re-profiling" of sovereign debt are credit negative for the sovereign, regional and local governments, and business sectors.
"Economic and financial conditions will remain depressed amid heightened policy risk" as tighter funding conditions will strain liquidity, and worsening operating conditions and increased uncertainty will impact on banks' creditworthiness, according to the rating agency.
