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October 20, 2014
Sunday, April 27, 2014

Foreign reserves boosted by record harvest

The Central Bank has been able to increase its reserves despite its debt payments, reversing a 10-month decline.
By Charlie Devereux
Bloomberg News (*)

Central Bank holdings jump 3.88 percent in April after reduced demand for greenbacks

Argentina’s record soybean harvest is creating a windfall for President Cristina Fernández de Kirchner.

The foreign reserves she uses to pay bondholders have jumped about 3.88 percent in April, the most in almost four years and stemming a 10-month decline, as farmers began selling part of an estimated 54.9 million-ton soy harvest.

The rebound in reserves is the latest boon for Argentine bond investors, who have reaped four times the average emerging market gain in the past three months as Fernández de Kirchner repairs ties with the International Monetary Fund and reaches a settlement with Spanish oil company Repsol SA over her expropriation of a controlling state in YPF SA. Argentina’s 19 percent peso devaluation in January, which was aimed at stanching a plunge in foreign-currency holdings to a seven-year low, has also created an incentive for farmers to sell their stocks more quickly, Barclays Plc said.

“While the central bank manages to keep reserves stable or even increases them, that’s going to reduce credit risk,” said Mauro Roca, a senior Latin America economist at Goldman Sachs Group.

Yields on Argentine bonds have tumbled 2.07 percentage points in the past three months to 10.69 percent, according to JPMorgan Chase & Co. The securities have returned 21 percent in that span.

Soybeans and interest rates

Argentina, locked out of international markets following a record US$95 billion default in 2001, began using reserves to pay off foreign debt in 2010. Foreign-currency holdings closed at US$28.09 billion on Friday.

Farmers who hoarded their soybeans last year in expectation of a better exchange rate have sold US$6.45 billion of soybeans, wheat and corn this year, an 11 percent jump from a year earlier. They pay a 35 percent levy on exports of soy.

“The measures taken by the government are proving to be effective,” Sebastián Vargas, an economist at Barclays, said in a telephone interview from New York. “They’ve succeeded in changing the equation for the export and agricultural sectors, increasing incentives to sell their foreign currency.”

The peso’s stabilization at about eight per dollar following the devaluation and the government’s decision to boost interest rates have helped to bolster the outlook for exports, according to Guillermo Rossi, a grains market analyst at the Rosario Grains Exchange.

“The devaluation and higher interest rates help a great deal to increase confidence among farmers,” Rossi said in a telephone interview from Rosario. “In the short and medium-term, the market will be much more fluid.”

Adrián Radric, who grows soy, wheat, corn and sunflowers on 3,000 hectares (7,410 acres) of farmland in Buenos Aires province, said that while he has already sold about half of his crop, he’ll retain the rest until later in the year as insurance because of his lack of confidence in the government.

In 2008, farmers clashed with the government over a proposed bill to increase export tariffs for soybeans to as much as 45 percent.

“For me, the base scenario is always one of distrust, so the safest thing for us is to hold on to our soy,” Radric said in a telephone interview from Daireaux, Buenos Aires province.

While the inflow of dollars from grains exports has increased this year, the proportion of the harvest sold slowed to 20 percent by April 2, compared with 24 percent in the same period a year ago, according to data compiled by the Agricultural Ministry.

Argentina’s grain exports brought in US$23.2 billion last year, according to the Grains Exporters Association. The country is the world’s biggest exporter of soybean oil and derivatives and the third-biggest exporter of soybeans.

The Central Bank is prioritizing the accumulation of reserves by buying more of the dollars brought in from exports instead of pumping pesos into the economy to stimulate economic growth, according to Goldman Sachs’s Roca.

Reduced demand for dollars

Reserves are also rising as demand for dollars from Argentines traveling abroad eases. The implied exchange rate for credit-card purchases abroad was greater than the parallel exchange rate for the first time since Fernández tightened currency controls in 2011 after the street price for the peso strengthened 2.9 percent to 10.5 pesos per dollar this month.

In December, the government raised the tax on credit-card purchases in foreign currency to 35 percent from 20 percent to discourage Argentines from spending dollars abroad. Credit-card purchases in dollars fell 25 percent to an average of US$330 million per day in February and March following January’s devaluation from US$438 million a day in the same period last year, according to the central bank.

“We’re seeing a fall in the use of credit cards and trips abroad,” Roca said. “We’re seeing an adjustment in the balance of payments due to weaker economic activity and that’s also helped to stabilize international reserves.”

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