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 2011.

Main aspects

The sustained trade surplus continues to be the main generator of foreign exchange for the domestic economy, in line with what has been observed since the 2001 crisis, driven this year by the expected record value of exports of goods. The estimated values of exports of goods for this year will more than triple the records observed in the last years of the “Convertibility” Regime.

In the first quarter of 2011, operations with customers in the local foreign exchange market showed a surplus of US$ 2,583 million, completing four consecutive quarters of strong surpluses. The positive balance of purchases and sales to customers in the Single and Free Exchange Market totaled around US$ 12,780 million in the last twelve months.

The positive balance of the first quarter implied a significant reversal with respect to the deficit of US$ 85 million observed in the first quarter of 2010. This year-on-year variation largely reflected higher income from financial loans, highlighting the placements in international markets of medium- and long-term debt securities of local governments and private sector companies.

In the context of strong international liquidity, and the reduction in country risk premiums, which was aided by the exchange of public debt offered to holders of debt pending regularization in mid-2010, the income of financial funds to the country was channeled through medium and long-term loans. in line with the objectives of discouraging short-term financial capital inflows through the implementation of preventive regulations on capital flows that are being successfully applied in the local market.

In addition to the sustained surplus from transfers for goods and income from financial debts, the sales of foreign currency assets of public sector organizations also stood out in the quarter as the main sources of funds in the foreign exchange market.

Within the framework of the policy of prudential accumulation of international reserves and managed floating of the exchange rate, the Central Bank made net purchases of approximately US$ 3,150 million in the quarter, absorbing both the surplus of the MULC and the net sales of its own holdings of free availability of the entities authorized to operate in foreign exchange. In this sense, financial institutions continued with the behavior observed in the previous two quarters, in which they also offered part of their own holdings in the market.

On the side of the applications of reserves, the net payments of capital services and interest on debt in foreign currency of the public sector and BCRA for about US$ 1,750 million and the withdrawal of foreign currency holdings of entities in the BCRA (passes and deposits) for about US$ 2,000 million stood out. This withdrawal of funds from the entities was mainly due to the change in the portfolios of public agencies that implied a decrease in local deposits in foreign currency, the increase in local loans in foreign currency and the aforementioned monetization of freely available holdings of the entities.

As a result, the BCRA’s international reserves showed a stock of US$ 51,298 million at the end of March 2011, decreasing US$ 891 million in the quarter. This level of reserves was 8% higher than at the end of March last year and continues to be historically high both in relation to external debt and domestic monetary aggregates.

The operations of the current account of the foreign exchange balance resulted in a surplus of US$ 1,541 million. The fall in the surplus of about US$ 650 million compared to the result of the same quarter of the previous year, was basically due to the lower net income from commercial operations of goods and services, partially offset by the lower transfers in terms of profits and dividends.

Collections of exports of goods totaled US$ 18,942 million, which implied a year-on-year increase of 22%, highlighting the collections of the export sector of oilseeds, oils and cereals for US$ 8,896 million (showing a year-on-year increase of 36%). Likewise, payments for imports of goods reached a level of US$ 13,342 million, registering a year-on-year increase of 37%.

For its part, the foreign exchange capital and financial account was in deficit by US$ 2,700 million, increasing about US$ 200 million compared to the negative result of the same quarter of 2010 (US$ 2,493 million).

The net demand for freely available foreign assets by residents of about US$ 3,700 million was somewhat below the level observed in the same period of 2010. In this regard, it should be remembered that part of the sector’s demand for foreign currency banknotes is used for the constitution of private local deposits in foreign currency, which increased by US$ 550 million in the period, and to cover tourism expenses and trips by residents abroad.