One of the objectives that it was proposed to consolidate the Minister of Economy, Sergio Massa, on his trip to China is to expand the freely available use of the swap. In this way, it could alleviate the deficit with Argentina’s second largest trading partner, expand reserves and try to curb exchange rate tension.
“If the swap extension with China comes to fruition, as they say, It seems to me that this is good news. The Swap generates an exchange of currencies. It works like a line of credit,” he told him. Scope Federico Zirulnik, CESO economist. But let’s take a closer look implying.
Swap with China, what is it?
Is about an exchange of currencies between central banks. In this case, the BCRA gives pesos to the People’s Bank of China (BPC), and the BPC gives yuan to the BCRA.
It should be noted that “if the BCRA uses the yuan (or exchanges it for dollars), at the end of the contract it must return it, paying interest (we understand that something similar to the Shibor rate +6 pp, as was done in 2016). The BCRA registers the yuan in its assets (increases reserves) and its liabilities (they are not owned). This is why they are usually subtracted to calculate net reserves“, he explained to Scope, Santiago Manoukian from Ecolatina.
The swap with the People’s Republic of China originated in 2009 with 70,000 thousand yuan (about US$9,900 million). However, its use was not freely available.
“Until before the current agreement, the amount that the Government could use from the funds was very limited. almost $19 billion (130 billion yuan) available: the direct use of yuan was in 2020 and 2021 of only 0.2% of the agreement, for example. This according to BCRA balances, even without data for 2022,” he added.
According to sources in the financial sector, the president of the Central Bank, Miguel Ángel Pesce, who also traveled with Massa, will seek increase the available amount of the swap from the current limit of $5 billion to $10 billion.
“If it is expanded by US$5,000 million, Gross reserves will increase by US$5,000 million. They can be used to import from China, or activated and exchanged for dollars (paying a small cost)”Federico Zirulnik opined.
What impact does the swap have on reserves and the dollar?
According to Manoukian, the BCRA can grant yuan to importers from China, “which implies that it frees up foreign currency for other purposeswhile it is a debt that the BCRA is incurring”.
In short, “this activation allows the Government to have one more channel to show that it has alternative resources in the midst of the severe impact of the drought, while if it works it could give somewhat more fluidity to import payments“, broad.
“With this, the BCRA gains firepower to intervene in the exchange markets. The net reserves, before the embargo, remain unchanged (the BCRA’s assets and liabilities grow by US$5,000 million). However, they can be used the same,” Zirulnik closed.
Source: Ambito
