Argentina: External Accounts

Background:

In 2010, the Argentina’s central bank continued to pursue currency stability by intervening in foreign exchange markets and vowed to protect the economy in 2011 by continuing its intervention, the accumulation of foreign reserves and the control of capital flows. Capital requirements for foreign investors are high as portfolio inflows have to deposit 30% of their value during one year at the Argentine central bank at 0% interest rates. These measures have contained the pressures on the peso at high quasi-fiscal costs. In addition, the booming export sector’s earnings are favoring the increase of reserves to record levels. Most forecasts put Argentine peso (ARS) at around ARS4.1-4.2 to the U.S. dollar by the end of 2010, showing a outstanding stability among South America’s commodity exporters. Slower global and regional growth as well as relatively lower grain prices (compared to their peak in 2008) and output (severe drought) has been weighting on exports, while a rapid slowdown in domestic demand and the imposition of import tariffs have severely impacted imports. Since imports are falling faster than exports it is having a positive impact on the external balances.