September 30, 2019. The Governor of the BCRA, Guido Sandleris, delivered an opening speech at the Clarín Finance Seminar called “Savers, Key Players in Argentina’s Near Future.” The event took place at the MALBA museum.
Find below his speech:
Good morning. First of all, Shanah Tovah to all the Jewish community, and thanks to the organizers for inviting me to open this event.
I would like to take this opportunity to express once again the need for a rough political consensus that must guide our economy.
Argentina is going through hard times. We are aware that uncertainty at present causes difficulty and distress in people.
At times of great uncertainty like these, the macroeconomic imbalances that have been accumulating for more than a decade exert a noticeable impact on people's everyday life.
Today, I will not go into the latest developments; instead, I will talk about what our economy needs to move forward. All of us here know what happened after the primary election: upsurge in country risk, currency depreciation, debt reprofiling and foreign exchange control. We are also aware that our economy was not strong enough to face electoral uncertainty.
The Argentine economy has been running into difficulties for long. In the past 8 years—a period that covers two presidential terms—Argentina was one of the countries with lower average growth in the region. This applies to both terms. If we take a look at inflation, we get the same result: Argentina ranks among the countries with the highest price increases.
Between 2008 and 2019, the annual growth rate will have amounted to just 0.7%. It is a very low rate: below half the average for the region. It is below our population’s growth rate. Year after year, Argentinians, on average, have seen their standard of living fall, especially with an average annual inflation rate above 30%, compared to a 5% rate in the region.
Why has Argentina’s economic performance been so bad for more than a decade?
The reason why Argentina neither grew nor managed to lower inflation and poverty in the past decade is that no economic scheme can succeed without a minimal degree of political consensus.
When I say “consensus”, I do not mean broad agreements between political forces or public commitment announced grandiloquently. It only means being consistent with certain fundamental economic principles over time.
Many examples can be drawn from the region. The government in Chile alternates between center-right and center-left coalitions, and yet some basic principles that guide its economic policy remain unchanged. In Brazil, Lula took office without changing the monetary policy that had enabled to substantially get inflation down in the previous years. And inflation remained under control. In Uruguay, the Frente Amplio party came to power in 2005 and strengthened the macroeconomic balances that the Colorado party had already achieved. Argentina should follow the same path.
Today, I am proposing three fundamental economic principles that should be part of the political consensus I have just mentioned. All the countries that have managed to achieve sustainable growth and low inflation have adhered to them.
The first principle is that systematically incurring expenditure above revenue should be avoided. This is the most important principle considering our country’s history and is a necessary condition for the other two principles.
The second principle is that a consistent monetary policy is a must to regain trust in our currency. This will demand positive real interest rates for a long time.
The third principle is that we should boost productivity. This involves many actions, from reducing distortionary taxes to making trade agreements to integrate Argentina into world markets.
Despite making some mistakes, this government has made progress in the three principles. Reaching a consensus will prevent these principles from being jeopardized in each election.
It is very hard for companies to invest, for people to plan their future, and for authorities to lay the foundations for growth and development, if the economic policy of a country swings like a pendulum.
Let me give you my cautiously optimistic viewpoint about the consensus over the first principle: fiscal balance. I have noticed in the electoral campaign that there are some signs of agreement about this: some talk about avoiding excessive indebtedness, while others propose reducing fiscal deficit. Basically, they are similar things.
This consensus is valuable, especially taking into account that electoral campaigns tend to emphasize differences rather than agreements.
However, as a central banker, I must point out that achieving fiscal balance is not strictly the same as not letting net debt increase. There could be a difference if the Central Bank financed deficit, as has been many times the case in Argentina. This would mean a threat to the second principle.
Clearly, we must also reach a consensus about the financial system we want. I am sure that this event will be fruitful to move forward in this sense.
The financial system is like the brain of an economy, bringing together those who save with those who invest or bring forward consumption. It definitely plays a key role. Innovative ideas need funds to be implemented. The financial system allocates savings for these projects. This way, the economy's productivity increases.
Unfortunately, our financial system is not appropriately performing this function nowadays. It is shallow, and it lends little, in general, at very short terms.
The main reason for this has to do with the instability that our country has suffered for so long. Such instability is the consequence of a lack of consensus.
A balanced macroeconomy will encourage people to put a larger portion of their savings into the financial system for a longer period. Interest rates would be lower, though attractive, for depositors. This, in turn, would mean more accessible financing for those who wish to invest or bring forward consumption.
As I have said, Argentina could hardly reach a basic consensus about the development of its economy. There is a remarkable exception, though, which has to do with the prudential regulation of its financial system. More than 15 years ago, the BCRA laid down regulations to significantly limit banks’ exposure to the public sector and divided the banking system into two segments, dollars and pesos, which proved to be virtually isolated in practice. As a precautionary measure, banks were also required to maintain high liquidity levels, much higher than international standards. All the administrations have upheld these principles ever since.
This is an example of a basic consensus that we have managed to build in the interest of savers. Thanks to that, and despite the volatility of the past few weeks, Argentina's financial system is sound.
I would like to close with an optimistic message amidst so much uncertainty. I know Argentina has the potential to innovate. Ideas and creativity are out there, awaiting development. However, it is expressed sparingly. We should do our best to push it forward. If we build the consensus required for our economy to be back on track, we will manage to grow steadily, to lower inflation and to improve Argentinians’ standard of living.