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 2012.

Main aspects

Operations in the Single and Free Exchange Market (MULC) of the entities authorized to operate in foreign exchange with their customers showed a surplus of US$ 4,481 million in the second quarter of the year, accumulating a favorable balance of about US$ 7,500 million in the first half of 2012. The quarterly result is almost three times the surplus recorded in the same period of 2011 and represents the second all-time high since the MULC came into force, only below the record reached in the second quarter of 2007.

The behavior of the foreign exchange market, in addition to reflecting seasonal issues due to the external sale of most of the coarse harvest, showed the effects of the exchange rate measures that have been applied since the end of October 2011. In the second quarter, these measures were complemented by another series of regulatory modifications: a) the reduction of the maximum period for the entry of foreign currency from exports of goods, which was made more flexible according to the specific realities of each exporter; b) the establishment of a maximum period of up to 15 working days for the arrangement of exchange from the date of collection of exports of goods, also applicable to collections that were pending settlement that implied an additional offer in the exchange market in the order of US$ 1,000 million; (c) the application of greater restrictions on the demand for foreign currency without a specific destination; and d) the intensification of different types of controls, such as in the cases of transactions between related parties and payments to the so-called “tax havens” for certain concepts.

The sources of funds in the foreign exchange market during the second quarter of the year were basically given by the surplus of transfers for goods and income from direct investments by non-residents. On the outflow side, the demand for foreign assets by residents stood out, which shows a significant slowdown due to the measures established for the purchase of foreign currency, net payments for services mainly due to tourism and travel expenses abroad, and the net cancellation of loans granted by local financial institutions as a result of the decrease in local deposits in foreign currency which were partially replaced by new lines of financing in local currency.

Within the framework of the policy of managed floating of the exchange rate and prudential accumulation of international reserves, the Central Bank made net purchases in the foreign exchange market for approximately US$ 3,800 million in the quarter.

On the side of reserve applications, the net payments of capital services and interest on debt in foreign currency of the public sector and BCRA for approximately US$ 2,000 million (which adds up to a total of net payments in the first half of the year of about US$ 3,400 million), and the withdrawal of foreign currency holdings of entities in the BCRA and other net movements for about US$ 2,500 million. This withdrawal of funds from the entities was due to the coverage of the decrease in local deposits in foreign currency by approximately US$ 3,200 million. As a result, the BCRA’s international reserves decreased by US$ 943 million in the quarter.

The operations of the current account of the foreign exchange balance resulted in a surplus of US$ 5,333 million. The increase of about US$ 1,400 million compared to the second quarter of 2011 was basically due to regulatory modifications in the minimum capital requirements for the distribution of profits of financial institutions, changes in the dividend distribution policy of the country’s main company when it became controlled by the National State and lower remittances of profits and dividends. as a result of greater payment management.

Collections of exports of goods totaled US$ 22,569 million, showing a fall of 1% compared to the value of the second quarter of the previous year. The oilseeds and cereals sector had revenues of US$ 9,693 million (year-on-year fall of 10%, due to the decrease in exportable balances due to the fall in domestic production as a result of the drought), while the rest of the sectors registered liquidations of US$ 12,876 million, with a year-on-year increase of 7%. This increase is basically explained by the impact of the regulatory modification by establishing a maximum period from the date of effective collection of exports of goods for the conclusion of the exchange operation.

For its part, payments for imports of goods through the MULC reached US$ 15,573 million, showing a year-on-year drop of 3%. The different companies linked to the energy sector registered import payments for US$ 2,552 million, which implies an increase of 39% compared to the payments of the same quarter of 2011. As in the same period of the previous year, payments for imports linked to the energy complex were below imports of fuels and lubricants, mainly liquefied natural gas, fuel oil and gas, which were around US$ 3,500 million, up 25% year-on-year.

The foreign exchange capital and financial account was in deficit by US$ 6,032 million, which implied an increase in the deficit of approximately US$ 2,300 million compared to the same quarter of 2011. The deficit in this account basically reflected, and in equivalent parts, the result of foreign exchange operations for capital of the Non-Financial Private Sector (NFPS) and the effect on international reserve assets of withdrawals from financial institutions of deposits with the Central Bank.

The deficit observed in the NFPS capital and financial account of US$ 2,449 million was mainly due to net purchases of freely available foreign assets for about US$ 2,000 million and net payments of financial loans for about US$ 1,400 million, as a result of the demand for foreign currency for the net cancellation of local credits in foreign currency. These expenditures were partly offset by net income from foreign direct investments of about US$ 1,100 million.

Income from direct investments by non-residents, which includes both capital contributions and the purchase of local companies, returned to a level among historical highs, continuing the upward trend that began at the end of 2009 and reflecting a year-on-year increase of 33%.