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Confidence wanes further and government moves towards dollarization
On 1 December, the government decided to partially
freeze bank deposits and impose capital controls in an effort to avert
further reserve outflows. Since the beginning of the year,
international reserves have declined a staggering US$ 14.9 billion
(-44.2%) to reach US$ 18.8 billion on 30 November. The reserve outflow
has been accompanied by a corresponding drop in bank deposits. These
have declined by US$ 11.3 billion (-33.1%) in the same period. The
government’s decision to impose monetary control mechanisms came in
response to the rapid acceleration of capital outflows last month, which
culminated in a US$ 1.2 billion drop in deposits, as worried depositors
rushed to the banks to secure their savings.
The new measures are likely to further deepen the
recession but have prevented further deterioration and possible
devaluation for now. The government Decree 1570, which entered into
force on 3 December, provides for the following:
- Withdrawal restrictions.
Depositors are restricted to withdraw more than 250 US$ or Pesos from
their bank account per week. In addition to restricting physical
outflows, the government claims that the withdrawal limitation will
force depositors to make payments via the banking system and facilitate
tax collection.
- Prohibitions for banks to grant
Peso denominated loans.
Furthermore, banks are banned from making Peso loans and are required to
make only US$ denominated loans with corresponding lower interest
rates. Additionally, existing credits can be converted to US$ loans.
- Change in deposit terms.
While depositors will be permitted to maintain Peso denominated
deposits, banks are prohibited from offering interest rates on the
deposits that exceed returns offered on US$ denominated deposits and are
required to convert Peso deposits to US$ accounts without charging
additional fees.
- Restrictions on bank fund
movement.
If banks decide to offer clients higher interest rates than those
provided by the Central Bank, one hundred percent of the funds for said
deposits must be maintained in the financial institution.
- New capital controls.
The government has decided to severely limit capital outflows by
forbidding transfers abroad, including dividend and profit repatriation.
Trade and debt related transactions are exempt from the restrictions.
In addition, cash transfers are permitted only if not exceeding US$
1,000.
The immediate effect of the new measures has been to
bring interest rates on Peso denominated 30-59 day deposits on par with
US$ deposits for the same term, when on 31 October the spread was still
at 2,110 basis points. However, the authorities’ willingness to
infringe upon property rights has served to undermine confidence in the
government’s commitment to liberal economic policy. In the medium term,
the drop in confidence is likely to foster further deterioration in
deposit and reserve levels albeit at a more moderate pace.
Nevertheless, even under the new restrictions, the most conservative
estimates place the amount that may drain from the financial system on a
weekly basis at US$ 1.8 billion. According to our estimates, based on
the assumption that all account holders withdraw the maximum every week,
US$ 3.6 billion could be withdrawn per week. Therefore, even under the
new measures, the precipitous decline in deposits is unlikely to subside
completely and is likely to force the government either to devalue or
announce full dollarization.
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