Argentina seeking extension of currency swap with China

Amid negotiations with the International Monetary Fund (IMF) to secure a cash disbursement and faced with negative net reserves, Sergio Massa, Argentinian Minister of Economy, has traveled to China to explore the renewal and extension of the existing currency swap agreement. The objective is to continue financing imports with China, Argentina's second-largest trading partner, and alleviate pressure on the reserves of the Central Bank of the Republic of Argentina (BCRA).

Minister Massa is leading a delegation that arrived in Beijing on May 30, 2023. His primary goal is to renew the currency swap with China for USD 18 billion, which is set to expire in August, while also aiming to increase the available liquid reserves by an additional USD 3 billion. Currently, Argentina holds USD 5 billion, and this amount could rise to USD 8 billion through the proposed extension.

In early June, Massa was scheduled to hold meetings with Chinese officials, including Yi Gang, President of the People's Bank of China, during which they discussed the "renewal and expansion" of the swap line. Analysts suggest that this measure will aid Argentina in hedging against its diminishing dollar reserves and help the country mitigate external risks. By broadening the utilization of the yuan, Argentina can better manage its financial challenges, particularly in light of the significant cash reserve shortage.

The currency swap agreement entails the exchange of currency to bolster Argentina's international reserves with 130 billion yuan and an additional activation of 35 billion yuan specifically designated for compensating operations in the foreign exchange market.

While Argentina's concerning inflationary situation may raise eyebrows in China, the South American nation could still serve as a source of leverage for pressuring Brazil. Brazil has been reluctant to join the ambitious Silk Road program signed by Argentina's President, Alberto Fernandez, last year.

Additionally, Massa is hopeful that Argentina can secure financial assistance from the BRICS Bank, where China plays a pivotal role. Article 7 of the institution's Reserve agreement offers a contingency fund for countries facing exchange rate crises, but it is exclusively available to members. This suggests that Argentina might be contemplating joining the BRICS, although the country's position on the matter remains uncertain.

The Outcome....

The Central Bank of Argentina has successfully renewed the currency swap with China for another three years, raising freely available funds from USD 5 billion to USD 10 billion.

According to the Argentinian economic team, these funds can be utilized for various financial operations, providing the government with flexibility in managing its financial needs.

The extension of the swap was formally signed on Friday (June 2, 2023) and was announced by the Central Bank of Argentina. Miguel Pesce, President of the Argentinian monetary authority, signed the agreement for the early renewal of the swap, amounting to 130 billion yuan, equivalent to USD 19 billion.

The signing took place after a meeting between Miguel Pesce and Yi Gang, President of the People's Bank of China, at the bank's headquarters in Beijing.

The Takeaway

Argentinian Economy Minister Sergio Massa believes these agreements will strengthen the trade relationship between Argentina and China.

It is important to note that the availability of these funds for all types of financial operations allows the Argentinian government to intervene in the foreign exchange market if necessary.

The anticipated reduction in demand for dollars resulting from the activation of the swap with China is expected to have a positive impact on the reserves of the Central Bank of Argentina.

This development will facilitate increased direct trade in yuan, and as a result of the recent activation of the currency swap with China, other business opportunities will also be revitalized. This includes activities related to the trade of goods and services between the two countries. Import permits under this mechanism, known as SIRAs, have already been approved.

Furthermore, several import operations have been authorized to be conducted in yuan. Official sources state that "Argentina will work to continue advancing in that sense." Currently, the Industrial and Commercial Bank of China (ICBC) and Banco Francés (BBVA) are the entities operating under this mechanism, while the Bank of China deals with wholesalers.

Argentina remains committed to exploring alternatives that sustain and increase the supply of inputs from China, a strategically important destination.

?Written by:? Claudia Espinoza

*This article is informative and is not to be used as legal, economic, or