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 2007.

Foreign exchange transactions and the exchange balance for the fourth quarter of 2007

Operations carried out in the Single and Free Exchange Market (MULC) in the last quarter of 2007 showed a surplus of US$ 1,640 million.

The rapid reversal in the foreign exchange market’s result from the US$750 million deficit recorded in the third quarter mainly reflected record levels in quarterly revenues from export and direct investment collections, and the slowdown in demand for foreign assets from residents.

The absorption of the surplus in the foreign exchange market by the BCRA and the net placement of debt in foreign currency by the public sector were the main sources of the quarterly increase of US$ 3,285 million in the BCRA’s international reserves, which reached an all-time high at the end of 2007 when they totaled US$ 46,176 million. a level that is five times higher than the levels of mid-2002.

The current account of the exchange balance registered a surplus of US$ 3,144 million, implying an increase of about US$ 550 million (21%) compared to the result of the same quarter of the previous year. Collections of exports of goods totaled US$ 14,573 million, growing 31% year-on-year, while payments for imports of goods in the MULC reached US$ 10,636 million, showing a year-on-year growth of 29%.

The sharp deceleration of the negative balance of the capital and financial account in the fourth quarter of 2007 compared to the previous quarter (US$ 190 million versus US$ 3,442 million) is basically explained by the lower outflow of capital from the non-financial private sector (NFPS) and by the change in the results of the public sector and the BCRA, which went from a deficit to a surplus.

Foreign exchange operations and the exchange balance in 2007

The surplus of the operations carried out by the authorized entities with customers in the MULC totaled US$ 10,011 million in 2007 compared to the US$ 12,882 million recorded in 2006. As in recent years, the surplus of transfers by goods constituted the main source of the exchange surplus. If the purchases of foreign currency by the National Treasury in the foreign exchange market are excluded, the surplus of the MULC amounted to about US$ 11,200 million compared to US$ 13,200 million in 2006.

The total volume traded in the MULC stood at US$ 318,083 million, an amount 41% higher than that recorded in the previous year and tripling what was operated in 2003.

The foreign exchange current account reached a record surplus of US$ 12,867 million, implying an increase of more than US$ 2,000 million compared to the previous year. This increase was basically due to the greater surplus from transfers for goods. The current exchange account represented 5% of the Gross Domestic Product (GDP) for the period, maintaining the ratio recorded in 2006.

Collections of exports of goods also reached a record amount of US$ 53,457 million, with a year-on-year increase of 26%, significantly higher than the 15% observed in 2006. It should be noted that some 2,800 companies that did not register foreign exchange income from export receipts in the previous three years received foreign currency for this concept in 2007. These “new exporters” accumulated revenues of almost US$ 500 million in the year.

Payments for imports of goods also reached an all-time high of US$ 38,014 million, showing a year-on-year increase of 31%, and an acceleration compared to the 20% increase recorded in 2006.

Net payments of rents were recorded for about US$ 4,520 million. This is explained by the net drawings of profits and dividends of about US$ 1,760 million, especially from steel and automotive companies, and the net interest payments of US$ 2,760 million, which practically maintained the level observed during 2006, since the higher debt payments of both the private and public sectors and the BCRA were practically offset by the increase in income derived from the yield by the placements of the BCRA’s international reserves.

The capital and financial account ended with a positive balance of US$ 207 million.

The foreign exchange capital and financial account of the non-financial private sector (NFPS) closed with a net outflow of capital of around US$ 4,600 million. This was due to the higher net demand for foreign assets from residents. This effect was partly offset by higher net inflows from direct investment by non-residents and from medium- and long-term financial loans, with the availability of foreign funds to the domestic private sector remaining. Net income from direct investments by non-residents showed an upward march, reaching the annual record of US$ 2,309 million, with a year-on-year increase of 58%.

The NFPS recorded net income from financial loans of about US$ 1,700 million, exceeding the US$ 1,500 million received in 2006 and marking a significant change with respect to 2005, in which the sector made net amortizations of about US$ 800 million.

The financial sector recorded net inflows from financial loans after 5 consecutive years of net payments of external debt.