March 9, 2014
Central Bank reserves end 2013 at US$30.586B
Country pays US$901 million to settle maturing bond, bill for gas imports from Bolivia
The Central Bank’s foreign reserves ended the year at a seven-year low of US$30.856 billion as the government used the funds to pay US$901 million in debt that included hundreds of millions of dollars for gas imports from Bolivia.
The country’s reserves have thus plunged approximately 29 percent this year — the biggest annual drop since 2002, when they sank 47 percent in the aftermath of the default.
In his daily morning news conference, Cabinet Chief Jorge Capitanich confirmed the country would pay US$527 million of Discount bond obligations, and that Bolivia would be paid US$300 million for piped natural gas. A further US$74 million were allocated to repay credits from international organizations.
After going over the scheduled repayments, Capitanich boasted that “if we consider the present value of the debt, this restructuring has been the most successful in human history, with savings equivalent to US$81 million.”
“This has been the most consistent period of growth in the last 203 years,” Capitanich concluded, estimating reserves would end the year at US$30.3 billion.
A crucial number
Reserves in the country are seen as crucial for debt repayments and investor confidence.
While the government’s bonds have surged this year, the nation’s borrowing costs are still the second-highest in emerging markets. With foreign-exchange controls failing to prevent reserves from heading to a record 14th straight monthly decline, investors are concerned Argentina is running out of the hard currency it needs to keep servicing its debt, according to JPMorgan Chase & Co.
“Currency controls are collapsing reserves, when the very reason you put those controls in place was so reserves wouldn’t collapse,” Jose Luis Espert, who runs research firm Espert & Asociados, said in a telephone interview with Bloomberg. “And why? Because once again, you’ve destroyed the people’s confidence.”
The gains accelerated after President Cristina Fernández de Kirchner’s Victory Front (FpV) lost in the country’s five largest districts in the October 27 midterm elections.
Restrictions including the bans on the purchase of dollars for savings as well as higher taxes on vacations and spending abroad, online shopping and luxury cars have failed to keep reserves from falling as inflation accelerates to 27 percent, according to private consultancies.
Unless the government addresses inflation, the drain in dollars — which have been used for public spending and payments to bondholders since 2010 — will deepen by at least US$7 billion next year, according to Vladimir Werning, an economist at JPMorgan.
Anxiety will be intensified further next year by the ever-present spectre of litigation in New York with holdout hedgefunds seeking full repayment on debt from the 2001 crash, which could trigger subsequent pari passu suits from restructured bondholders.
The US Supreme Court will decide if it will take on the case at some point this new year.
Argentina is “becoming increasingly illiquid. The pace of reserve loss is going to continue to be a fundamental focus for the market,” Werning, who in April predicted an accelerated drop in reserves, said in a telephone interview . “To stop the decline in reserves, authorities need to tackle the root cause of inflation, not just the symptoms.”
In an interview on Argentina’s Radio del Plata on December 24, Central Bank President Juan Carlos Fábrega said the bank will try to slow money supply growth next year from about 25 percent.
In 2011, when capital flight almost doubled to US$21.5 billion, Fernández de Kirchner began a series of measures to keep money from leaving the country.
While controls boosted capital inflows of $95 million in the third quarter on a net basis, money has escaped through the nation’s widening energy and tourism deficits — the latter and greater of which weighed in at US$632 in November — despite the expropriation of oil producer YPF and taxes on overseas travel.
Fernández, whose term will end in 2015, has also tried to lure capital from foreign oil companies. YPF formed a US$1.24 billion accord with Chevron to develop the Vaca Muerta shale oil and gas formation in July.
After limiting exporters’ local borrowing to make them bring in funds from abroad, the government on December 13 began selling them dollar-linked peso notes to compensate for a weakening exchange rate.
The measure is also aimed at giving farmers incentives to sell their produce instead of holding back on expectations they will receive more pesos in the future.
What to do
The government’s plan for gradually rebuilding reserves includes financing from multilateral institutions, boosting exports and promoting foreign direct investment, Cabinet Chief Jorge Capitanich told reporters December 5.
The government has almost US$14 billion in debt payments in the next two years, according to the Economy Ministry, and it budgeted US$9.9 billion of reserves for payments in 2014.
Herald with DyN, Bloomberg