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 2006.

Foreign exchange operations and the exchange balance sheet for the fourth quarter of 2006

The operations of authorized entities with their clients in the Single and Free Exchange Market (MULC) showed a surplus of US$ 3,816 million, an amount that practically doubled the surplus recorded in the same quarter of 2005 (US$ 1,985 million).

The year-on-year increase in the surplus was basically due to the increase in income from financial loans, highlighting the primary placements of public securities of local governments and negotiable obligations of the private sector, and the greater surplus from transfers by goods. In the latter case, the difference is largely explained by the adjustment in the income of the export sector in the fourth quarter of 2005, based on the regulations issued by the BCRA since September of that year, on advances and pre-financing of exports.

With the surplus for the quarter, four and a half years (eighteen consecutive quarters) have been accumulated with positive results in operations with customers of the entities authorised in the MULC.

The surplus of the MULC and other sources of foreign currency from the operations of financial institutions allowed the BCRA to accumulate international reserves for a total of US$ 3,989 million in the quarter.

The total volume traded in the MULC reached a new historical peak, US$ 62,906 million, an amount US$ 6,600 million (12%) higher than the previous record recorded in the second quarter of 2006 (US$ 56,314 million) and US$ 8,000 million (15%) higher in year-on-year terms.

The current account of the exchange balance registered a surplus of US$ 2,594 million, implying an increase of about US$ 1,200 million (almost 90%) compared to the result of the same quarter of the previous year.

Collections of exports of goods totaled US$ 11,084 million, growing 28% year-on-year, while a new record was registered in quarterly payments of imports of goods in the MULC (US$ 8,216 million), showing a year-on-year growth of 26%.

The surplus of the capital and financial account of the exchange balance showed a positive result of about US$ 1,200 million, of which almost US$ 900 million corresponded to the public sector and BCRA, about US$ 360 million to the non-financial private sector, and about US$ 405 million to other net income.

Foreign exchange operations and the exchange balance in 2006

The surplus of the MULC from operations with customers, excluding purchases by the National Treasury, totaled about US$ 13,350 million, a level slightly lower than that recorded in 2005 (US$ 13,750 million). As in 2005, the surplus of transfers by goods constituted the main source of the exchange surplus.

The BCRA’s policy of accumulating international reserves made it possible to cover the funds used to prepay the entire debt with the International Monetary Fund (IMF) for US$ 9,530 million and, additionally, to increase international reserves by about US$ 4,000 million in the year, closing 2006 with a stock of US$ 32,037 million, the highest historical level.

Unlike what was observed in the years of the previous decade, where the increases in international reserves were accompanied by net income from the capital and financial account of the public sector and the BCRA, the recovery of the BCRA’s international reserves in recent years was recorded in a framework of net deleveraging in foreign currency of the public sector and the BCRA. with the trade surplus being the main source of their increase.

The total volume traded in the MULC stood at US$ 225,040 million, an amount 12% higher than that recorded in the previous year (US$ 201,236 million).

The foreign exchange current account showed a net income of US$ 10,834 million, which implied an increase of more than US$ 1,500 million compared to the previous year. This increase was explained by increases in the net surplus of all the aggregates of the account (goods, services, rents and other current transactions). The current exchange account accounted for 5.1 per cent of the Gross Domestic Product (GDP) for the period, maintaining the level recorded in 2005.

Collections of exports of goods totaled US$ 42,332 million, with a year-on-year increase of 15%. On the other hand, payments for imports of goods totaled US$ 29,029 million, showing a year-on-year increase of 20%.

Net revenues from services totaled US$ 776 million, more than doubling the net flows observed in the previous year, highlighting tourism and travel operations.

The foreign exchange capital and financial account showed a net outflow of US$ 7,420 million in the year. This deficit was largely explained by higher net debt payments by the Public Sector and lower net income from the non-financial private sector (NFPS).

The public sector and the BCRA had a deficit of US$ 8,509 million in the foreign exchange capital and financial account, explained by debt cancellation with the IMF, a payment that was partly offset by the increase in the sector’s net indebtedness in foreign currency by just over US$ 1,000 million in the rest of the year.

The lower surplus of the NFPS capital and financial account of approximately US$ 2,400 million compared to the previous year was mainly explained by the reversal in net flows from freely available foreign assets (which went from net supply of almost US$ 1,000 million in 2005 to net demand of about US$ 1,600 million in 2006) and the lower income from portfolio investments of non-residents. These effects were partly offset by higher net outlays for financial loans (especially medium- and long-term).