The governor of the central bank of Argentina, Alejandro Vanoli, is flying to Lima this week to strike a new deal with the Central Bank of the People’s Republic of China on the fringe of the World Bank/IMF meetings to boost its dwindling international reserves.
Negotiations have been underway in recent weeks to increase a foreign swap agreement and are due to be concluded in the Peruvian capital, according to a central bank source.
China’s renewed effort to bolster Argentina on the eve of the presidential election comes after Beijing has agreed to sign new loans and financing deals with other troubled South American countries in spite of its own domestic issues, including the recent devaluation of the yuan and uncertainties regarding its amount of debt.
Argentina will elect Cristina Fernandez de Kirchner’s successor later this month. “The government’s strategy to stabilise the economy ahead of the elections is under strain,” said Martin Castellano, a senior economist at the Latin America department of the International Institute of Finance (IIF). “The central bank is relying heavily on a currency swap from China.”
Last month, China extended a fresh $5bn loan to Venezuela to increase its oil production. In return, Chinese companies have been hired to help reach output targets.
In August, the Chinese Eximbank said it would open new credit lines worth some $10bn in Latin America in spite of the financial market turmoil. The latest three year $11bn swap agreement between China and Argentina was only signed last year, but it has already been used almost entirely.
In nominal terms, Argentina’s official reserves amount to $32.5bn. “But that seemingly comfortable figure is misleading, masking deep cracks in the model. Once you adjust for unpaid imports, debt payments, the Chinese swaps and other items, Argentina’s reserve position could be as low as $10bn-$12bn — and possibly closer to zero,” said Fernando Sedano, a Morgan Stanley economist, in a recent report.
RESERVES DEVALUED
Itaú Unibanco, Brazil’s largest domestic bank, assessed that “the net figure will likely fall to $6bn by the end of the year, due mostly to the sizeable repayments of sovereign and provincial foreign currency debt”.
Earlier this week, Argentina had to repay a $5.9bn bond which matured on Monday. The government plans to issue a new domestic bond today to stem the impact on its depleted reserves.
Furthermore, some 40% of Argentina’s reserves are denominated in yuan, which has suffered a large depreciation on the foreign exchange markets in recent months.
The new deal with China, to be confirmed this week, may amount to $2bn, according to the media in Argentina. It will go some way to alleviate the stress on Argentina’s reserves in the short-run, but the next administration will have to address structural issues to put the economy and its finances back in order — with or without China.
“Given its narrow scope and correlated liability build up, the currency swap with China does not substantially improve Argentina’s foreign exchange volatility. The swap cannot substitute for policies aimed at restoring confidence in the peso,” said Castellano.