UPDATE 2-Argentina mulling steps to stop dollar reserves flight

Thu Nov 21, 2013 12:41pm EST

BUENOS AIRES Nov 21 (Reuters) - Argentina's government is mulling further steps to halt the flight of the central bank's foreign reserves, President Cristina Fernandez's new cabinet members said on Thursday.

Foreign reserves have shrunk by 26 percent since late 2012 to below $32 billion as the government uses them to pay bondholders, import energy and to intervene in the currency market to prop up the official value of the peso. Reserves are also depleted by Argentines buying goods overseas.

Cabinet Chief Jorge Capitanich said ministers were working on the reserves issue, though the new economy minister did not announce any new measures as some had expected.

Analysts suspect existing restrictions, including higher taxes on using credit cards outside Argentina, will be intensified. Currency controls introduced in 2011 have led Argentines to shop overseas with credit cards, which have to be paid in U.S. dollars and are further draining reserves.

"Taking care of our reserves does not mean destining them for luxury goods but rather promoting industrialization," Capitanich told journalists.

Economy Minister Axel Kicillof said the government would continue to encourage domestic industrial production and a more equal distribution of wealth in Latin America's third-largest economy, while seeking to solve the dollar shortage.

"We aren't going to do anything that generates brusque changes in the economy," he said in his first press conference as minister following a cabinet reshuffle this week. He said reserves were at "consistent levels."

The local press has speculated that Kicillof, a former academic who wrote about the theories of economists including John Maynard Keynes and Karl Marx, will try to implement a scheme of multiple exchange rates like fellow South American nation Venezuela.

Argentina's government has allowed the peso to depreciate slightly in recent months, but still keeps it overvalued to avoid pressuring prices in a country where private economists say inflation is around 25 percent.

The combination of high inflation and the overvalued exchange rate, which pushes the price of imported goods down but the price of exports up, are squeezing firms in the world's No. 3 corn and soybean exporter.

"The exchange rate is part of an integral program with lots of instruments and we have to find a way to generate more dollars," Kicillof said.

The official peso and black market rate as measured by Reuters both weakened ahead of Kicillof's press conference and curbed losses after no new measures were announced.

Fernandez, in a fiery speech late on Wednesday, promised cheering supporters in the presidential palace she would "deepen" the current economic model, which is based on state intervention in most aspects of the economy and promoting domestic industry.

She has made no mention of her supporter's heavy losses in congressional elections on Oct. 27 that ended her chances of securing a change to the constitution that would have enabled her to run for a third term in 2015.

A couple walks along the rough surf during sunset at Oahu's North Shore, December 26, 2013. REUTERS/Kevin Lamarque

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