September 26, 2019. The Governor of the BCRA, Guido Sandleris, delivered a speech to close the Annual Conference held by Fundación de Investigaciones Económicas Latinoamericanas (FIEL). The event took place in the premises of the Buenos Aires Stock Exchange.
Find below his speech:
Good afternoon. Thank you, Daniel, and thanks to all of the FIEL team for inviting me to take part in this event.
These are not easy times for Argentina. It is at times like these that the macroeconomic imbalances that have accumulated for years have a noticeable impact on people's everyday life. We do not have a strong nominal anchor to prevent currency depreciation from immediately being passed through to prices and reducing real wages. We have not built the trust required for a stable, local public and private debt market. We have not built a public savings buffer to help cushion the new sudden stop we are experiencing.
After a tough year, the past few weeks have been especially complex.
All of us here know what has happened in the past month and a half. In short: primary elections, upsurge in country risk, depreciation, reprofiling and currency controls.
The market reaction to the election held on August 11 was categorical. That night, the price of bonds fell and the exchange rate increased on online sites, and continued to do so the following day.
There are fairly diverse interpretations about this. One of them emphasizes that the trigger that sparked off these developments was the result of the primary election.
Another interpretation underscores the fact that our economy was too weak to face the electoral uncertainty.
These two viewpoints are not mutually exclusive. The behavior of many key variables (from country risk to high-frequency inflation data, from the exchange rate to dollar-denominated deposits) changed dramatically after the election. A sounder economy would have been affected by electoral uncertainty to a much lesser extent.
I would like to focus on the last point I have just mentioned. Why has Argentina been unable to build a sound, competitive economy, with steady growth and low inflation? What have we learned from this period we are going through? The economic difficulties of Argentina are not new. They did not originate in the past year or in the past four years.
Let me clearly illustrate this with some data. 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 the first 4 years and the past 4 years. If we look at inflation, we get the same result: Argentina ranks among the countries with the highest price increases.
Let us take a look at the figures. Between 2008 and 2019, the annual growth rate will have amounted to just 0.7%. It is a very bad figure: less than half the average for the region. It is below our population’s growth rate. Year after year, on average, Argentinians see their standard of living fall, especially with an average inflation rate above 30%. The region’s average annual inflation rate is 5%.
Why has Argentina’s economic performance been bad for a little more than a decade? I have discussed many times the factors that have led to worse-than-expected economic results in these 4 years: a combination of an initial difficult situation, our own mistakes and an international context that turned more adverse in 2018. I could also find similar explanations for the previous 4 years.
However, I believe there is something more fundamental that is failing. One of the painful lessons drawn from the past decade—when Argentina neither grew nor managed to lower inflation and poverty—is that no economic scheme can succeed without a minimal degree of political consensus.
In this sense, principles concerning, for instance, inter-temporal fiscal balance, a healthy currency and a more competitive economy to integrate Argentina into the world should not be 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.
What’s more, the lack of a basic consensus entails risks that force those who do believe in such principles into more fiscal discipline and monetary prudence. The design of economic policy must factor this in. Having failed to understand this was a mistake.
Let me give you a cautiously optimistic viewpoint about the consensus I have just mentioned. I have seen some consensus about fiscal balance in the electoral campaign. It is referred to by different names: some call it avoiding excessive indebtedness, while others call it reducing fiscal deficit. Basically, we are talking about similar things.
This consensus is valuable.
However, as a central banker, I must point out that achieving fiscal balance is not the same as not letting net debt increase. Fiscal deficit has been financed by the Central Bank many times in our country. And even reaching a consensus about the importance of fiscal balance and avoiding both excessive debt and issue, the way in which such balance is achieved is not neutral for growth and development. Both the level and composition of taxes and expenditures matter.
There may be differences as to which taxes are more efficient and fairer, or as to which government expenditure items are more necessary. But at least discussing this within a framework where we all agree about the need of balanced public accounts would be a big step forward.
We must also agree that we need to be competitive and integrate into the world. Exports are not a surplus, but the result of investments that need predictability. I think we have made some progress in this sense in the past few years. Between 2016 and 2019, exports will have grown by 2.5% annually, after having fallen by 4.4% in the previous 4 years. Argentina’s prospects will greatly improve if we stay on and reinforce this path.
Finally, I would like to focus on the monetary issue, where there is also the need to build a consensus. To put it simply, it is essential to protect the resources of those who save in pesos. Therefore, real interest rates have to be positive. We all know that the Argentine currency is very unstable and that our financial system is small and unable to adequately meet the financing needs of companies and individuals that wish to invest or bring forward consumption. Both problems show how those who deposited pesos have been adversely affected for years. Distrust will not be overcome from one day to the other, but we will only succeed if we stay on this path.
As I have said, Argentina could hardly reach a basic consensus about the development of its macroeconomy. There is a remarkable exception, though, which has to do with the 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 precaution, banks were also forced to maintain very 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 hope this lesson can be taken to other spheres. As I have said, an inter-temporal fiscal balance, a competitive economy that is integrated into the world, and the protection of those who save in local currency are principles that we should embrace as a society. That is what we need in order to start to grow steadily, to lower inflation and to improve our citizens’ standard of living.