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April 21, 2014
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Reserves end year with US$750 million drop

Economy Minister Axel Kicillof implemented together with Cabinet Chief Jorge Capitanich a set of measures to stop the drop in reserves.
By Fermín Koop
Herald Staff
The Kirchnerite administration is expected to pay interest on the Discount bond Tuesday

After a few weeks with a steady growth, the international reserves of the Central Bank will suffer in the next days one of its biggest drops of the year since up to US$750 million will have to be used to pay interests of the Discount bond. This leaves the reserves on the verge of breaking the psychological barrier of US$30 billion after closing on Friday at US$30.820.
The Discount is one of the most bulky bonds issued by the federal government. It was issued in 2005 and 2010 debt swaps in three currencies: pesos tied to the dollar currency rate, euros and dollars, being the last two that impact on the Central Bank reserves. Interests of four percent will be paid now but next year the Discount will have a much higher rate (8.28 percent), only exceeded by the Global 2017 bond (8.75 percent).
“It’s a very profitable bond. It will now pay interests near four percent but next year it will pay much more. It expires much later on 2024 so there will be 10 more years of interest’s payments,” Mauro Morelli, broker at Rava, told the Herald. “A lot of people showed interest in the bond on the past week and because of that it was highly traded.”
The country’s international reserves have plunged 29 percent this year, heading to the biggest annual drop since 2002, when they sank 47 percent after the default. Nevertheless, the US$12.6 billion decline this year has been compensated in the past weeks with a slow growing trend due to the US$940 million brought into the country by US oil company Chevron to invest in Vaca Muerta shale project.
After the Cabinet’s reshuffle, the government implemented a set of strategies to stop the drain on the reserves, which based on last week’s numbers have been successful. Being foreign tourism one of the reasons of the drop, the government increased the 20 percent tax to 35 percent, including the purchase of foreign currency on that tax. High-end goods such as imported vehicles and boats also now have an additional tax that in some cases reaches 50 percent.
A bond of the Central Bank in pesos tied with the official dollar exchange rate was issued for grain exporting companies in order to encourage them to sell their crops. The government had accused them of speculating with the current devaluation since by postponing the sale a higher income could be obtained later.
Making amends with international agencies was also on the list in the past few months. The government paid about 500 million dollars to five companies in compensation to resolve disputes filed at the World Bank’s International Centre for Settlement of Investment Disputes (ICSID), followed by an agreement with Repsol over YPF’s expropriation and new statistics mechanisms created with the International Monetary Fund together with INDEC statistics bureau.
Nevertheless, pending issues remain to be solved. While power shortages continue due to the heat wave, energy imports still is of the main areas in which reserves are used. In the third quarter, energy imports rose 25 percent and accumulate a 19 percent growth so far this year. An increment on prices would help reduce the expenses, something rumoured to happen this month, but the current blackouts make that something unlikely to happen soon.

Next year, the drop continues
While economists support the set of strategies implemented by the government, they ask for more measures to be taken next year and warn the drop will continue but at a slower pace, estimating international reserves will end 2014 at US$25 billion. That creates a complex scenario for the next government to come after 2015 presidential elections.
“The government took several important measures in the past months and gave positive signs to investors. But the change reached a limit,” Juan Pablo Ronderos, head of Business Development at Abeceb agency, told the Herald. “The urgent problems that generate a macroeconomic inconsistency were not solved.”
Ronderos believes next year new measures will come to continue working on the drop and described the need to reduce subsidies as something necessary so that the reserves do not fall below the US$25 billion barrier.
“I imagine the drop on the reserves will continue next year, ending with US$25 billion if the government carries on pending measures such as stabilizing the growth on subsidies and rising domestic energy fares,” Ronderos said. “If that doesn’t happen, the scenario will be much more negative.”
Interest of bonds such as Bonar, Par and Discount will have to be paid next year but no significant bonds will expire, being the next one the Boden in 2015. Nevertheless, the government will have to pay up to US$3.5 billion of the GDP bond since the current economic growth exceeds the bond expectations. A 3.2 percent economic growth in October was reported last Friday by the INDEC statistics bureau.
“Bonds should not affect the international reserves of the Central Bank next year since there are no major payments,” Morelli said. “The only one to be paid is the GDP bond since the economic growth has exceeded the bond expectations, together with interest payments of bonds such as Discount, Par, Boden and Bonar.”
Farmers and grain exporters could also challenge again the reserves next year since the harvest season is expected to start between March and April. If the devaluation continues at a high-speed pace, the agricultural sector could choose again to delay selling their crops in order to gain more money by waiting a few months.
“The government solved the problem this month with the Central Bank’s bond but it could emerge again next year if farmers choose not to sell their crops,” Lorenzo Sigaut Gravina, chief economist of Ecolatina agency, told the Herald. “The government needs to reduce the devaluation growing trend in order to lower farmers expectations, together with implementing a new bond next year.”
@ferminkoop
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