Argentina’s Monetary Reserves: To Net or Not to Net

Many commentators and numerous press notes announce that Argentina’s net monetary reserves are on the brink of turning positive. Is there any truth to this?

In this short commentary, I will argue that, while Argentina’s monetary reserves have notably grown under the Milei administration, net monetary reserves are still far from becoming positive.

The Art of Calculating Net Reserves

The brilliant monetary economist Ralph Hawtrey published a book in the 1930s called “The Art of Central Banking” where he argued that managing a central bank was more of an art than a science. In this case, history repeats itself, because calculating the net reserves of a central bank, especially one like Argentina’s, is also more an art than a science.

From a theoretical perspective, there is no “magic formula” to calculate net reserves. Multinational companies calculate exchange rate risk by creating balance sheets or profit and loss statements divided by currency. Once this is done, companies perform a sensitivity analysis to understand the potential impact of an exchange rate movement on their equity position and income statement.

Public finance analysis often does similar things for the public debt levels of countries. The temporal profile and the currency in which the public debt is denominated are analyzed to determine if a negative impact on the exchange rate could harm the country.

Therefore, it makes some sense to apply this principle of currency exposure of the central bank of Argentina (BCRA).

The process will, therefore, involve subtracting all foreign-denominated central bank liabilities from its monetary reserves.

What Are Central Bank Liabilities?

The Central Bank of the Argentine Republic (or BCRA) has liabilities of all kinds. The sheer variety of acronyms for such liabilities is almost endless. However, although their names vary, the instruments used by the BCRA are not unlike central banks from other latitudes.

For central banks, the main source of funding consists of monetary liabilities. Some central banks also issue non-monetary liabilities, which are nothing more than the bonds issued by their very own central bank. Usually, central banks use these bonds to “sterilize” their own issuances. Central banks tend to do this when they have “behaved poorly” in the past[1] and, as a desperate measure, attempt to withdraw from circulation some of the money they previously created.

As far as poor monetary policy is concerned, Argentina is, unfortunately, one of the world champions. In the graph, we can see how almost 80% of the BCRA’s funding consists of non-monetary liabilities (this also includes other instruments such as reverse repos).

The bonds issued by central banks can be in foreign currency but also in domestic currency. In the case of the Argentine central bank, total dollar debt issued (which the BCRA calls notes) in recent months has been quite large, and they are already almost 20% of the total notes issued, exceeding $9 billion by the end of March 2024.

Monetary Liabilities in Domestic and Foreign Currency

Central banks in countries where citizens primarily operate in one currency usually have straightforward monetary liabilities in their own currency. However, many countries have dual monetary systems, with Argentina being one of them. This means that private banks offer financial services in the country's currency but also in some foreign currency, with the dollar being predominant as a secondary currency in most parts of the world. Central banks often require, as precaution, private banks to deposit a percentage of such deposits with them (this is what is called a reserve requirement). In this situation, banks hold a liability in foreign currency against their own central bank. In the case of Argentina, this liability currently stands at around $9 billion.

Central banks often require, as precaution, private banks to deposit a percentage of foreign-denominated deposits in the central bank (this is what is called a reserve requirement). In this case, banks hold a liability in foreign currency against their own central bank.

Liabilities with International Organizations

Some international organizations extend funding to central banks and governments in states of emergency. Typically, central banks access emergency credit lines extended by the International Monetary Fund (IMF) with the goal of "stabilizing" a country macroeconomically and monetarily.

In the case of the Argentine central bank, this debt to international organizations has plummeted since Milei came to power and currently stands at around $500 million.

International (Monetary) Reserves: From Gross to Net

To arrive at net reserves, it is necessary, therefore, to subtract from the gross reserves, which consist of dollars, gold, and other foreign currency holdings, all the foreign currency liabilities discussed earlier. When we subtract everything, we say that we have deducted the foreign currency liabilities from the foreign currency assets, thereby arriving at the net foreign currency position. Thus, the net reserves are the remainder after subtracting all the foreign currency liabilities from the monetary reserves.

We have introduced two methods for calculating net reserves. We believe the most correct is method one, which subtracts all foreign currency liabilities. Method two is identical, only it does not subtract the notes issued by the BCRA in foreign currency, because they are usually issued with maturities of more than a year. We have included the second method, because the IMF states in its “best practices”-manual that net reserves should be calculated by subtracting short-term liabilities only.

In this graph, we can observe that the net reserves do not differ between both methods until April 2023. From then on, the difference between the two methods of calculating net reserves begins to appear and increase. The reason is that BCRA notes were almost exclusively issued in Argentine pesos and only recently has the central bank started to issue such notes in dollars, as we have seen above.

Conclusion

Therefore, it is obvious that analysts arguing that monetary reserves will become positive in the short run are using method 2, and are not taking into account the dollar-denominated notes issued by the BCRA.

However, we do believe that net reserves are indeed improving, and this is good news for Argentine monetary stability. Nonetheless, we believe that these reserves remain so negative that it is practically impossible for them to become positive in the very short term if we consider all the dollar-denominated liabilities of the central bank.

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[1] Poor monetary behavior almost always implies a monetization of public debt that typically expands the amount of currency issued by the central bank exponentially.