Fall in reserves and deposits bring new financial clouds to Argentina

The loss of foreign exchange accelerated in recent months in Argentina, triggering new doubts about a fragile economy amid complex negotiations with the International Monetary Fund (IMF) to restructure a debt that the country cannot afford.

The shortage of foreign exchange is a structural problem in Argentina, which in recent years caused a deep depreciation of the peso that fueled inflation of more than 50% per year and pushed more than 40% of the population into poverty.

In the last four months, the central bank’s (BCRA) reserves lost close to US $ 7,000 million -including a payment of US $ 1,900 million to the IMF Wednesday – to be around $ 39.2 billion.

Since October, private bank deposits have fallen by about US $ 1 billion to almost US $ 15.05 billion, according to official and market data.

For some experts, the liquid reserves of the central bank are almost nil, although the estimates differ.

“The discredit on the economy does not stop and the complications are so typical of the country, that the search for dollars does not stop. The trickle of reserves and deposits will continue, not only because the peso is of no interest to almost anyone, but the politics do not generate safety signals“, he claimed Armando Rojas, analyst at the private consulting firm Rojas.

The previous government established in 2019 strong restrictions on the purchase of dollars in the country to sustain the value of the Argentine peso, but the complications that the local economy maintains – deepened by the coronavirus pandemic – prevented the weakened current administration from lifting those limits. .

Before the implementation of exchange controls, bank deposits were around US $ 32.5 billion.

To get around the restrictions, many Argentines turn to the informal currency markets, where the dollar is trading almost twice that of the formal market.

If the loss of central bank reserves continues, the authorities could be forced to apply even more limits to the purchase of foreign exchange.

“There are increases of up to 50% in safe deposit boxes due to the outflow of deposits in dollars, despite the fact that we have a very healthy financial system ”, Held Javier Timerman, executive director of the consulting firm AdCap, who attributed the outflow of foreign currency to “We don’t get trust in people. The government has to give clear signals”.

Private analysts estimate, based on official data, that there are some US $ 250,000 million in savings of Argentines outside the formal market or deposited abroad, in a reflection of the lack of credibility in the domestic financial system.

Doubts and negotiations

The center-left president Alberto Fernández has just extended the 2021 budget to next year, after his project for 2022 was rejected by the opposition in Congress, a blow that could delay an agreement with the IMF to restructure debt maturities for US $ 45,000 million.

The IMF and Argentina were committed to achieving a new credit program, although further talks are still pending after recent technical meetings between the parties in Washington. Market doubts are reflected in a country risk at levels close to the maximums.

This Wednesday about US $ 1.88 billion were disbursed as part of the capital owed to the agency, which temporarily reduced the central bank’s reserves.

The government, which suffered a heavy defeat in the October midterm elections, hopes to close a deal before March, when nearly $ 4 billion of the roughly $ 19 billion due in 2022 will expire.

The central bank is studying eventual interest rate hikes to deal with high inflation, amid a revival of the economy after a three-year recession.

“A rate hike by the central bank is necessary. It is currently very negative (compared to inflation) and this was strengthening the dollar“Versus weight, he said Emiliano Anselmi, Analist of Personal Investments Portfolio.

Without an agreement with him IMF, many doubt that palliative measures such as a rate hike are sufficient.