Why Argentina Faces a ‘Critical’ Situation as Foreign Reserves Continue to Decline

Amid the possibility of an earlier-than-planned payment from the International Monetary Fund, analysts express concern at the state of the country’s finances

By Belén Escobar (EN)
May 18, 2023 | 12:35 PM

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Buenos Aires — In spite of the measures implemented by the Argentine government’s economic team, exchange rate pressures are not easing and the international reserves of the Central Bank of Argentina (BCRA) remain in free fall, in the run-up to the October presidential elections as tensions and uncertainty are growing.

While waiting for more signals from the International Monetary Fund (IMF) and a possible early disbursement, the market is closely following the movements of the monetary authority due to doubts regarding its ability to act in the face of eventual financial turbulences.

The importance of the BCRA’s reserves

“International reserves are the main asset that the BCRA has to exercise its exchange rate policy. However, since a large part of these foreign currencies come from the monetary authority’s liabilities and, in turn, these are not 100% liquid in its coffers, and different metrics (net or liquid reserves) are generally calculated to monitor the BCRA’s real firepower to intervene in the exchange market, and therefore, its capacity to sustain the exchange rate”, according to an Ecolatina analysis.

“For a bi-monetary economy such as Argentina’s, with a long history of abrupt devaluations, foreign currency debt defaults, deposit freezes and exchange-rate mechanisms, among other disruptive factors, having a robust stock of international reserves in the BCRA’s coffers is even more fundamental than in other countries in order to guarantee sustained macroeconomic and financial stability,” it added.


“A high level of reserves implies greater degrees of freedom to intervene in the foreign exchange markets, avoiding abrupt movements and excessive volatility of the exchange rate, thus limiting devaluation expectations,” the Ecolatina analysis states.

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Negative reserves?

There is a consensus among the private sector that the country’s net international reserves are negative.

Ecolatina states that, “in spite of the fact that the BCRA managed to stop the foreign currency drain during recent rounds, international reserves continue on a decreasing trend”.


“Although gross reserves exceed $33 billion, both net reserves estimated under our methodology (at current prices excluding SDRs), and those contemplating the methodology of the agreement with the IMF (valued at constant prices and including part of the SDRs) are in negative territory by more than $1.3 billion,” according to Ecolatina’s analysis, the lowest level for the methodology used since August 2022.

Argentine broker Aurum Valores also estimated a negative range for the country’s reserves, and warned that “net reserves continue to deteriorate, despite the agri-dollar operations”.

Analysts at Mega QM, on the other hand, remarked that for the central bank it is key “to balance a demanding exchange market, where the demand for foreign currency is not ceasing”.

“This underscores the importance of the agreement reached with China to finance foreign trade operations with yuan, something that was sought to be replicated and was not achieved with Brazil”, they stated.


“This has led the BCRA to a complex position of negative net reserves, where it is starting to use funds that have short-term obligations and, therefore, need to be replenished,” they added.

Eugenio Marí, chief economist of Fundación Libertad y Progreso, says that “with the available data, it is observed that the BCRA’s net reserves are in negative territory by about $1.2 billion”.

“However, it must be taken into account that the BCRA is also using the tranche it activated of the swap with China, so in that sense it has gained short-term liquidity,” he added.


A ‘critical’ situation

Speaking to Bloomberg Línea, Marí said that “what is clear is that the BCRA’s financial situation is critical”.

“To make matters worse, pressure on monetary financing continues, as the fiscal and quasi-fiscal deficits are widening. This hits the government’s credibility and, consequently, affects the expectations of all Argentines,” he said.

“Specifically, the demand for peso-denominated assets is falling, including the currency, which is worth less and less. To continue issuing in such a context increases the risks of a run against the peso, something for which the fovernment has few defense instruments,” Marí said.

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