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 2011.

Main aspects

In the last quarter of 2011, the operations in the Single and Free Exchange Market (MULC) carried out by entities authorized to operate in foreign exchange with their customers showed a surplus of US$ 427 million. From the package of measures adopted by the National Government at the end of October, a strong reversal was observed in the result of the local exchange market, which went from a deficit of US$ 2,168 million in October, to positive balances of US$ 433 million in November and US$ 2,162 million in December. The latter was a record in the records of the last month of the year.

The package of measures at the end of October included the implementation of greater controls on the possibilities of residents to purchase freely available foreign assets, the elimination of exceptions to the obligation to earn foreign currency from exports of hydrocarbons and mining, the obligation to locate in the country the investments abroad of insurance companies operating in the country, greater monitoring of operations of significant amounts that are carried out through the foreign exchange market, and the establishment of the requirement of prior approval for the repatriation of foreign direct investments, when these repatriations correspond to new investments by contributions or purchases from residents with disbursements of funds abroad, and they have not entered through the local exchange market.

In line with the measures adopted, the reversal in the result was largely explained by the sharp slowdown in the result of net sales of freely available foreign assets to residents, the effect of repatriations in foreign currency by insurance companies and the higher income through the MULC from export collections from the oil and mining sector.

For its part, the BCRA’s international reserves registered a decrease of US$ 2,214 million in the quarter of 2011. The purchases of the surplus of the local exchange market and the operations of the Central Bank only partially compensated for the need for foreign currency to meet the obligations of the National Government for about US$ 3,200 million and the withdrawal of funds in foreign currency from financial institutions as basically a reflection of the withdrawal of local deposits in foreign currency from the private sector for about US$ 2,500 million in the month of November. This withdrawal was observed from the implementation of the greater controls on purchases of freely available foreign currency until it was reversed in the last half of December, when an increase in these deposits was recorded.

The operations of the current account of the foreign exchange balance resulted in a deficit of US$ 1,683 million in the quarter. The reversal in the result compared to the same quarter of the previous year was basically due to higher interest payments, especially due to the accruals in the income coupons of public bonds tied to the growth of the Gross Domestic Product (GDP).

Collections of exports of goods totaled US$ 19,268 million, showing a year-on-year increase of 10%, while payments of imports of goods totaled US$ 16,338 million, showing a similar year-on-year increase, 11%.

For its part, the foreign exchange capital and financial account was in deficit by US$ 337 million, showing a substantial improvement compared to previous quarters. This improvement was mainly due to the decrease in net purchases of foreign assets by the non-financial private sector and the repatriation of funds from insurance companies. Direct investment income from non-residents also contributed, reaching a quarterly record since the entry into force of the MULC in February 2002.