MercoPress. South Atlantic News Agency

Argentine reserves yield a record of nearly 1.4 billion dollars in 2006

Argentina's Central Bank in 2006 obtained nearly 1.4 billion dollars out of investing its foreign currency reserves at a yearly yield of 5.7 percent – the highest since a crippling five-year recession ended in 2002 — and close to the 1.47 billion dollars the country reportedly spent last year in subsidies to keep inflation under two digits.

The profit was obtained from term deposits as well as investments in different kinds of bonds, and gains â€" in dollar terms â€" on the Bank's holdings in euros, sterling pounds, yens and gold, Central Bank sources said. A comparative figure for 2005 was not immediately available. Foreign reserves on Monday stood at 32.4 billion dollars after Argentina restored reserves to the level it had before it in December 2005 paid back in advance the more than nine billion dollars it owed to the International Monetary Fund, in a move that the administration of President Néstor publicized as gaining independence for the country, but that many economists said was rather a media effect. The higher yield has been the result of "more analytical" policies aimed at improving the risk-profitability ratio through investment in financial assets with a high degree of liquidity and a minimum exposure to credit risk, the Central Bank sources said. Over the last two years, besides its traditional permanent monitoring of international economies and markets, the Bank has developed quantitative analysis models that improved strategic and tactic decision-making process. Some of these models focus on fundamentals, others on technical indicators of markets' performances, and others on both, although always using modern financial tools that complement the traditional qualitative analysis on investment opportunities. The prevailing floating exchange rate implies that there are no technical reasons to concentrate reserves on a single currency, and that a diversification of portfolio is more advisable, the Central Bank source s said. After an "opportunistic" approach of that diversification (an approach fully based on expectations over the evolution of foreign exchange rates), there has been a gradual shift to a diversification model based on the structure of the economy (particularly, on the currency composition of the current account of the balance of payment and of the public debt) which allows "tactical detours" to increase yields. Despite the sources referred to a floating exchange rate, to maintain the dollar at its current value of about three pesos, the Central Bank over the last few years has been issuing pesos to buy dollars and subsequently issuing LEBAC and NOBAC draft notes to absorb or "sterilize" the pesos issued. The sources said that since early 2005 the Central Bank has been applying a sterilization policy "of unprecedented depth and quality," through the cancellation in advance of rediscounts (that is, the loans it granted to financial organizations to bail them out during the crisis), the tender of LEBAC and NOBAC, and reverse repurchase agreements (or repos) with the banks. The combined effect of all these sterilization factors, together with the policy of minimum banking reserves, led to a monetary absorption of almost 27 billion pesos in 2006, the sources said. Regarding the Central Bank's gold holdings, derivative tools have been incorporated to reduce the impact of foreign exchange rates volatility. Since early 2006 the Central Bank adopted a policy of gradual extension of the portfolio duration, as a result not only of expectations regarding US interest rates, but also to gradually reincorporate reference indexes for the administration of reserves in foreign currency. The discipline resulting from the use of reference indexes, with specific limits for detours, offers tangible results in the mid- to long-term and is the policy regularly adopted by most central banks. The policy adopted has led the Central Bank to invest in sovereign bonds in which it previously did not invest, the sources said, adding that as a means to compensate the "still limited" portfolio diversification it continues to explore other alternatives. (MercoPress - Guillermo Háskel)