In a strategic shift to ease its financial squeeze, Argentina is actively looking to extend its de-dollarization agreement with China. An increased swap line, with funding denominated in Chinese yuan, could offset the South American nation’s dwindling dollar reserves.
Stretching Argentina’s financial safety net
Sergio Massa, Argentina’s Economy Minister, is spearheading discussions to elevate the current swap line’s capacity. The aim is to double the available amount, taking it from the existing $5 billion to $10 billion, expressed in Chinese yuan.
Central Bank of Argentina’s President Miguel Pesce is set to join Massa in a diplomatic visit to China on May 29, with the objective to reinforce the financial safety net.
Reports indicate that Argentina has already utilized nearly $2 billion of the original $5 billion freely accessible from the swap line over April and May.
The total value of the credit line stands at almost $19 billion, translating to 130 billion yuan. The strategic move was initially signaled by Massa, contingent upon political conditions and the agreement of the Chinese Central Bank.
Argentina is grappling with a debilitating decrease in its foreign currency reserves, reaching a seven-year low. As per Bloomberg’s data, dollar-denominated international reserves fell to a mere $36 billion in May.
This economic strain is compounded by the persistent devaluation of the Argentine Peso and the astronomical inflation rate, which surged to over 108% year-on-year in April.
Hedging against a shrinking economy
President Alberto Fernandez’s economic team has been compelled to enact measures to slow the dollar outflow from Argentina’s local economy. These include limiting oil companies’ access to official dollars and a mandate to finance import payments for a duration of 90 days.
However, the challenge is two-fold. On one hand, Argentina is trying to reset the terms of its debt agreement with the International Monetary Fund (IMF).
The objective is to speed up the financial institution’s disbursements, which are supposed to amount to $10.6 billion between June and December.
On the other hand, Vice President Cristina Kirchner presents a contrasting perspective, arguing against the repayment agreement with the IMF.
At a recent rally, she was quoted saying, “If we don’t manage to get this program that the Fund imposes on its debtors thrown aside allowing us to create our own growth and industrialization and technological development, it will be impossible to pay the debt.”
The proposed expansion of the swap line with China is a significant part of Argentina’s broader strategy to stabilize its economy and secure its fiscal position.
The next step for Argentina lies in successful negotiations with China and a final agreement that could bolster the country’s financial outlook and afford it the flexibility to navigate its present economic challenges.
