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 fourth quarter of 2005

Foreign exchange operations in the fourth quarter of 2005

The operations of authorized entities with their clients in the Single and Free Exchange Market (MULC) registered a surplus of US$ 1,985 million. As in 2004, the fourth quarter was the only period of the year in which no purchases of foreign currency by the National Treasury were recorded in the MULC.

The BCRA’s net purchases in the foreign exchange market, which totaled US$ 1,877 million in the quarter, absorbed practically all of the surplus of foreign currency in the period and continued to be the main source of growth in the BCRA’s international reserves.

For the fourth consecutive quarter, a historic peak was recorded in the volumes traded in the MULC, totaling US$ 54,907 million.

The current account of the exchange balance for the quarter registered a surplus of US$ 1,397 million, almost US$ 900 million (39%) lower than the surplus observed in the same quarter of the previous year (US$ 2,281 million). This reduction was mainly due to the lower surplus of merchandise transfers, partly as a result of the rules issued to ensure the transparency of financing in the form of advances and pre-financing of exports.

Collections of exports of goods totaled US$ 8,646 million, growing 7% year-on-year, while payments for imports of goods showed a new maximum in the history of the MULC, US$ 6,543 million, an amount 26% higher than that recorded in the same period of 2004.

For the second consecutive quarter, a positive balance was recorded in the capital and financial account of the foreign exchange balance. Net income of US$ 1,117 million represents a difference of more than US$ 2,200 million compared to the deficit observed in the same period of 2004 (US$ 1,134 million).

The main sources of surpluses in the capital and financial account were the placements of public securities in foreign currency by the National Government, disbursements by international organizations (excluding the International Monetary Fund) and the income of non-residents for direct investments. These revenues were partially offset by loan cancellations to the International Monetary Fund and net non-financial private sector (NFPS) formation of foreign assets. This behavior partly reflects the channeling of external funds through the modalities not subject to the obligation to constitute the non-interest-bearing deposit with a term of one year.

Direct investment contributions reached a new high in the MULC at US$566 million, more than doubling the level recorded in the same quarter of 2004.

Foreign exchange operations in 2005

The year 2005 ended with a strong exchange surplus due to private operations. The total surplus for the year in the MULC, excluding purchases by the National Treasury, totaled a record US$ 13,768 million, 55% higher than that recorded in 2004 (US$ 8,798 million).

The level of the external surplus was reflected in a record annual increase of US$ 8,431 million in the Central Bank’s international reserves. This variation implied exceeding the previous record observed in 2004 by 53%.

Not only is the recovery in the level of international reserves important, but also the sources that allowed the Central Bank to accumulate this stock. As observed in the previous two years, the increase was mainly caused by the absorption by the BCRA of a large part of the surplus from the foreign exchange market, in a context of significant monetization of the domestic economy and net external deleveraging of the Public Sector and the BCRA. The source of these increases represented a substantial qualitative change with respect to the increases in the BCRA’s international reserves of the previous decade, where the increases basically originated in surpluses in the capital and financial account of the Balance of Payments of the Public Sector and the BCRA, as a result of greater public external indebtedness.

The total volume traded in the MULC reached US$ 201,236 million, an amount 37% higher than that recorded in the previous year (US$ 147,207 million).

The foreign exchange current account accumulated a surplus of US$ 9,326 million (5.1% of GDP), representing a fall of US$ 819 million compared to the previous year. This drop is explained by the higher interest payments of the National Government and profits and dividends. The effect of these payments was partly offset by higher revenues from services, with no significant variations in the balance of the foreign exchange trade balance.

Collections of exports of goods showed an increase of more than US$ 5,700 million (18%) compared to the previous year, totaling revenues of US$ 36,921 million in the period. This increase made it possible to offset the increase in payments for imports of goods that totaled US$ 24,232 million, with a growth of 31% compared to the previous year (US$ 5,804 million).

The capital and financial account of the exchange balance for 2005 had a deficit of US$ 465 million, which implied a difference of almost US$ 4,400 million with respect to the previous year. This lower net outflow of capital was mainly explained by the reversal in the total of the net flows from foreign assets of the NFPS and, to a lesser extent, by the higher inflows from investments by non-residents, disbursements by international organizations (excluding the International Monetary Fund) and the placements of debt in foreign currency by the National Government. The effect of these flows was attenuated by higher payments to the International Monetary Fund, private loans, and the formation of external assets from the financial sector.

The net flows from foreign assets of the NFPS went from net outflows of US$ 2,837 million in 2004 to net income totaling US$ 1,206 million in 2005.

Net contributions from direct investments totaled US$ 1,451 million, implying an increase of just under US$ 500 million (almost 50%) compared to the previous year.

Throughout 2005, the National Government placed public securities in the market for the equivalent of some US$ 3,250 million in effective value, both for issuances in dollars (about US$ 2,530 million) and in domestic currency (equivalent to approximately US$ 720 million), most of which were subscribed with funds entered by the local exchange market.