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 second quarter of 2005.

Since the closing of the external negotiation of public debt, in a context of international liquidity, there has been a growing interest of residents and non-residents in investing in local assets. This, together with seasonal factors of exports of goods and the private sector’s need for funds in pesos to meet income tax maturities, explain the strong net foreign exchange inflows in the Single and Free Exchange Market (MULC) in the second quarter of the year.

The operations of the authorized entities with their clients in the MULC registered a record surplus of US$ 3,457 million. Compared to the same period of the previous year, the exchange surplus was higher by about US$ 1,000 million (40%), basically as a result of the strong reversal of net flows for the formation of foreign assets of the non-financial private sector, the income of non-residents and the increase in export collections. These effects were only partially offset by the National Treasury’s higher net purchases of foreign currency in the foreign exchange market, which totaled US$ 1,545 million in the quarter, and higher import payments.

If we consider exclusively private sector operations, the quarterly surplus of the MULC exceeded US$ 5,000 million, a level that is at a maximum since the entry into force of this market, accumulating a surplus of approximately US$ 7,700 million in the first half of the year.

In line with the increase in the level of activity and trade flows, the volumes traded in the MULC registered a new record in the quarter, accumulating a total of US$ 50,976 million. The BCRA’s quarterly purchases of US$ 3,626 million also constituted an all-time high.

The current account of the exchange balance registered a surplus of US$ 3,591 million (7.4% of GDP), some US$ 390 million (10%) lower than the surplus observed in the second quarter of 2004 (US$ 3,982 million). This fall was basically due to the payment of interest and commissions on the restructured public debt for a total of US$ 695 million. The surplus of merchandise transfers continued to be the main component of the current account surplus.

Collections of exports of goods registered the highest level since the establishment of the MULC, with a total of US$ 10,963 million, growing 20% year-on-year. On the other hand, in line with the year-on-year growth in shipments to the market, in line with the evolution of the level of activity, payments for imports of goods also reached a new record, US$ 6,159 million, an amount 40% higher than that recorded in the same period of 2004.

For its part, the foreign exchange capital and financial account registered a deficit of US$ 658 million, the lowest level since the MULC came into force, together with that observed in the third quarter of 2003. This result reflected the low propensity to invest in foreign assets by residents, in net terms, and the income from short-term investments of non-residents channeled, in large part, through the repatriation of funds by stockbrokers. However, these income from the capital and financial account were more than offset by net payments of external debt.

Net payments of capital by the public sector and the Central Bank with international organizations totaled about US$ 1,390 million, basically explained by payments to the International Monetary Fund for US$ 1,123 million.

The total quarterly increase in the BCRA’s international reserves of US$ 2,713 million was the highest recorded since the fourth quarter of 1999, reaching US$ 23,052 million as of June 30, 2005.

The evolution of foreign exchange earnings and short-term expectations led to the issuance of new regulations tending, on the one hand, to encourage the demand for foreign currency from the private sector, and on the other, to establish exchange regulations to make capital inflows compatible with exchange rate and monetary objectives.