October 28, 2019 / 5:24 PM / 15 days ago

Factbox: Soft or hard - emerging markets flirting with capital curbs

LONDON (Reuters) - Argentina ramped up capital controls over the weekend, showing that a clampdown on cross-border movement of hard currency remains a key crisis control tool in emerging markets.

But is the use of capital controls globally increasing alongside rising tariff barriers? And how damaging is this friction in international trade and finance to the economies of the developing world?

Capital controls in various forms have seen something of a renaissance over recent years.

In the past few months alone, policy makers across developing economies have used various restrictions on the purchase or sale of domestic currency to foreigners or hard currency to nationals to get to grips with persistent currency turbulence and dwindling hard cash reserves.

Even giant economies such as China carefully control cross border flows.

Among global investors, the jury is out as to their effectiveness. While they are sometimes applauded as a short-term stabilisation tool helping to adjust a country’s balance of payments imbalance, they risk deterring often much-needed foreign capital if left in place for a protracted time.

“The idea is if you have capital controls, you make a recession shallower,” said Gabriel Sterne, head of global macro research at Oxford Economics.

“But in the longer term it kind of works the other way: If you have capital controls it means you will also have no capital coming in, because even if you don’t restrict any capital coming in, who is going to put capital in if you cannot get it out again?”

Below are examples of countries that have used capital measures in the past 12 months.

ARGENTINA - The central bank announced early on Monday it would slash the amount of dollars individuals could buy, amid concerns over outflows of FX reserves accelerating after incumbent Mauricio Macri lost Sunday’s presidential election. Curbs on dollar purchasing for individuals now stand at $200 per month, down from $10,000 a month, and will be in place until December when the new government is in situ. The central bank has spent about $22 billion in its reserves to defend the peso since Aug. 11.

LEBANON - Although Lebanon has not imposed hard capital controls, a state prosecutor banned traders and money exchangers from taking significant amounts of physical dollar currency out of the country at air and land borders on Sunday, without specifying amounts. Separately, Central Bank chief Riad Salameh said currency exchangers must be licensed to move funds, do it through licensed companies or apply for a licence. Banks have been shut for nine days as protests over economic strife have paralysed the country.

TURKEY - Ankara never officially introduced capital controls. However, pressure on local banks in March to stop lending lira to overseas counterparts looked like a deliberate ploy and one that bore a striking resemblance to a capital control. The squeeze caused borrowing costs to soar to more than 1,000%, making it costly for foreign investors to short or hedge the currency.

CHINA - Draconian capital controls have helped China keep outflows under control over the past year despite an escalating trade war with the United States and weakening economic growth at home. In 2018, China moved to rein in currency outflows via the handful of overseas investment channels available to mainland investors.

GREECE - Athens fully lifted its remaining capital controls in August - more than four years after introducing the curbs when Greece was embroiled in a dispute with lenders over how to prop up an economy overwhelmed by a mountain of debt and its banks were bleeding cash. S&P Global last week upgraded Greece’s long-term sovereign credit rating by a notch to ‘BB-‘ from ‘B+’, saying the restrictions’ removal will improve confidence in the economy, while reducing related financial cost.

Reporting by Karin Strohecker, additional reporting by Tom Arnold, editing by Ed Osmond

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