Report on the Evolution of the Foreign Exchange Market and the Foreign Exchange Balance

This report analyzes the evolution of purchases and sales of foreign currency in the foreign exchange market, corresponding to the first quarter of 2006.

At the beginning of the year, the entire debt with the International Monetary Fund (IMF) was cancelled early for the equivalent of US$ 9,530 million, an amount that represented 34% of the international reserves registered at the end of 2005. The operations of authorized entities with their customers in the Single and Free Exchange Market (MULC) registered a surplus of US$ 2,217 million in the quarter, which, as usual, is mainly explained by the surplus of exchange transfers for goods.

Although the exchange surplus with customers reflected a significant year-on-year increase (surplus of US$ 2,217 million compared to US$ 921 million in the same period of the previous year), it is necessary to consider the different relative weight recorded by the National Treasury as a demander of foreign currency in each of the periods. While in the first quarter of 2005 it had demanded some US$ 1,660 million through the MULC, in the first three months of 2006 it acquired US$ 400 million, explaining practically the entire year-on-year difference in the external surplus.

With this result, fifteen consecutive quarters of surplus were accumulated in operations with customers in the MULC. If private sector operations are considered exclusively, the accumulated surplus totals around US$ 37,000 million.

The purchases of foreign currency made in the foreign exchange market allowed a rapid recovery of international reserves after the cancellation of the debt with the IMF. After this payment, the increase in international reserves was about US$ 3,000 million, that is, practically a third of the amount used in the cancellation of the debt.

As of March 31, 2006, the BCRA’s stock of international reserves totaled US$21,549 million, a level that is about US$1,200 million higher than the stock recorded at the same date last year and more than double the minimum levels of mid-2002.

The current account of the foreign exchange balance for the first quarter of 2006 registered a surplus of US$ 2,184 million, some US$ 170 million (8%) lower than the surplus observed in the same quarter of 2005 (US$ 2,267 million). This decrease reflected, in large part, the lower surplus of transfers for goods and the higher interest payments of the National Government, effects that were partially offset by the higher net income from services.

Collections for exports of goods totaled US$ 8,904 million, growing 10% year-on-year, while payments for imports of goods totaled US$ 6,159 million, registering an increase of 22% compared to the same quarter of the previous year.

The foreign exchange capital and financial account registered a net outflow of US$ 8,820 million, mostly explained by the aforementioned cancellation of the debt with the IMF. Private sector operations resulted in net income of nearly US$130 million, implying a reversal of about US$300 million from the net outflow in the first quarter of 2005.

Since the implementation of the measures on controls on short-term capital inflows, a structure in favor of medium- and long-term external financing has been consolidated. In this context, there was a significant year-on-year decrease in non-resident portfolio investments and an increase of almost 40% in income from direct investments by non-residents.

The National Treasury made new placements of public securities in foreign currency for about US$ 1,500 million (effective value) during the quarter. These debt placements and the Treasury’s purchases of foreign currency made it possible to cover the net cancellations of principal and interest to other international organizations and the maturities of interest on public securities in foreign currency, and to accumulate at the end of March, a balance of holdings in foreign currency of about US$ 1,100 million, an amount that allows it to practically cover its debt maturities in foreign currency in the second quarter of 2006.