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Press Conference by Guido Sandleris

December 4, 2019. Guido Sandleris, BCRA Governor, held a press conference.

Find below his speech:

Good afternoon.

I have invited you today for this press conference for two reasons.

First, to announce that the officers who are here with me today and I have submitted our resignation from our positions effective as of December 10.

In most countries, the term of central bank authorities does not coincide with the presidential term. This allows for a continued monetary policy irrespective of the results of elections.

Such institutional arrangement is a key component that has allowed most countries in the world to have low inflation rates since a long time ago.

In Argentina, this does not happen, even though our law so establishes. The tradition in our country is that the newly elected government appoints new authorities for the BCRA.

Behind this tradition is—I believe—something I have mentioned several times: the lack of a rough consensus about the importance of building a healthy currency, and, especially, about how to do so.

Maybe one frustration from my experience as governor of the BCRA is having failed to make significant progress towards that consensus. I wish the future authorities manage to build it, thus breaking that tradition.

In this context, I think our resignation smooths the path so that the President-elect has absolute freedom to appoint the persons he deems fit to implement his economic plan, including monetary and foreign exchange policy.

As I said the day after the election, we will fully cooperate in the transition with those who may be appointed.

I would like to thank President Mauricio Macri for the trust placed on us to fill these positions. I would also like to give recognition to the members of the Board, who have worked with me along this year, and the staff of the BCRA for their commitment and work in such a complex period.

The second purpose of this press conference is to briefly analyze the current economic scenario in Argentina, and the administration of the BCRA in the past year and two months.

I know Argentinians have gone through hard times. Our economy is still in recession, inflation has risen, and there have been months of strong financial volatility.

As a consequence of adverse circumstances and mistakes, the economic results, without a doubt, are not as expected.

Unfortunately, this has been the rule and not an exception in Argentina. Many years have passed without Argentinians being able to solve the problems of our economy.

Some data clearly illustrate this. Comparing Argentina’s average growth in the past 8 years—a period that covers two presidential terms—with that of the other countries in the region, Argentina ranks among the countries with the lowest growth rate. This applies to both terms.

If we look at inflation, we get the same result: Argentina ranks among the countries with the highest price increases.

It has been years and years of economic disenchantment. Can we, Argentinians, change this situation? Even in a complex context like this one, some aspects let us think this situation may start to change.

First, some important, long-standing imbalances have been corrected. We are close to achieving fiscal and external balances. This year, primary fiscal deficit will be about 0.5% of GDP and external deficit will be less than 1% of GDP. Having restored these balances may be the most notable achievement of this government in the economic field.

Saying we have managed to correct these imbalances does not mean we ignore we have been going through recession with high inflation for over a year and a half. However, the importance of reaching fiscal and external balances is to be underscored because the lack of such balances, a combination of preexisting conditions and a delay in correcting them were the main cause of the crisis of the past year and a half.

Consolidating twin balances is fundamental to avoid periods like this one, and to finally manage to grow steadily.

I would like to briefly discuss the quality of fiscal balance. The way in which fiscal balance is achieved has an effect on productivity and competitiveness. For example, hypothetically speaking, a country that finances unproductive expenditures out of taxes on innovation will be less competitive than a country that reaches fiscal balance without these distortions.

During the last four years, public expenditure started to decrease after more than a decade of an almost uninterrupted increase. Between 2015 and 2019, the consolidated primary expenditure went down from 40.2% to 33.7% of GDP.

We must go on working for a more efficient public expenditure in order to have a more productive economy with fiscal balance.

A second aspect that may help overcome years of economic disenchantment is that the Central Bank has more international reserves and fewer monetary and remunerated liabilities.

At present, the Central Bank has nearly twice the gross international reserves it had in December 2015 and an even higher multiple in the case of net reserves.

The remunerated liabilities of the Central Bank (now made up of LELIQs and repos) have decreased substantially in terms of GDP. They account for less than half of the maximum reached by mid-2018 and stand below the level reported at the end of 2015.

It is clear that inflation figures have not been the expected ones, but prudent monetary policy is now a starting point from which the coming government can launch an anti-inflationary plan. The policy of zero growth in the monetary base implemented for nearly one year has removed most liquidity excess in our economy.

Prudent monetary policy was also reflected in the positive real interest rate that depositors almost steadily received in the past year. Keeping a positive real interest rate is key to promote saving in our currency and preserve depositors.

A positive real interest rate and the correction of existing liquidity excess have allowed the gap between the official and the parallel exchange rates to remain fairly narrow.

As I have said many times, foreign exchange control allows for more monetary policy flexibility. However, this is limited. No foreign exchange control can replace a consistent monetary policy.

The fact that the real exchange rate is at competitive levels also helps to keep a narrow gap.

At present, capital control is not a tool to keep an artificial exchange rate. On the contrary, the current real exchange rate is consistent with trade surplus.

Considering the narrow exchange rate gap and the competitive exchange rate, you may wonder why it was necessary to introduce capital control.

We had to do so in order to protect a weak real economy against financial volatility. During the electoral process, the lack of political consensus on basic economic principles gave rise to significant outflows of Argentine assets.

To understand the effect that such lack of consensus can have on the economy, we may just analyze market reactions after the primary election. On August 12, in just a couple of hours, the country risk tripled, listed Argentine companies lost half their value, and the foreign exchange rate depreciated more than 20%. This uncertainty continued for all the electoral period.

Some of the achievements I have highlighted are the correction of fiscal and external imbalances; the increase of reserves and the decrease of remunerated liabilities of the BCRA; the virtual removal of the excess of pesos from our economy and the preservation of depositors; and also the eradication of distortions in relative prices which allows us to be more competitive. However, this does not mean we ignore the present context is complex and that there are important challenges ahead.

The present context is complex because, as I have just said, there has been recession for more than a year and a half, inflation has increased and financial volatility has been very high.

The coming government will face significant challenges. Some of the short-term challenges are to consolidate the path towards inter-temporal fiscal balance, reschedule public debt and renegotiate the debt with the IMF. It is clear this is not an easy task.

Finally, I hope Argentinians keep moving forward to reach basic economic consensus. Consolidating inter-temporal fiscal balance, having a sound currency, and making the economy more competitive to fit in the world are good economic practices to which all governments—regardless of the political color—should aim at.

It would be a step forward for our country to keep these basic economic principles regardless of political alternation. Taking this step will serve as a starting point for Argentina to resume the path towards steady growth, low inflation and poverty reduction.

Thank you.

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