Buenos Aires, August 16, 2017. It is a pleasure for me to share with you this forum at a time that, in my opinion, encourages us to be optimistic about the country. In fact, we are convinced that we are really at a turning point, which will mark the beginning of several decades of sustained growth.
It is especially important for me to speak here today because, under sustained growth processes, society manages to set in motion its productive resources with a view to increasing the supply being produced. Economies grow sustainably in the long term only by improving their productive capacity, rather than by relying univocally on temporary demand impulses. This is especially critical for the exporting complex since, in the end, it faces a defined and hardly changeable demand which is no other than the demand from all over the world. Then, conquering new markets is closely related to improving the productive capacity in a way that helps reduce costs and prices.
We have lived in a country that has banked for many years on the “magical” idea that a sustained growth process relied exclusively on increasing demand. This type of reasoning has blurred our sight, and has also baffled and exhausted us. Even worse, it has taken our energies away from where they should have always been: the improvement of the productive capacity of our Nation, because this is the only path for all of us to have a better life. Specifically, “developing our productive potential” means the accumulation of physical capital, which requires public and private saving as well as clear property rights; accumulation of human capital, which requires a quality education system; accumulation of technology, which requires policies that may encourage competition and innovation; and taking advantage of our natural resources, which requires the full operation of the rule of law and a wise regulation system. In turn, all of them rely on an essential condition: the guarantee of an orderly macroeconomic context, with tax sustainability and low inflation because, when the tax policy is not sustainable, in the end, it leads to crises, and crises inexorably impact adversely on property rights, regulatory frameworks and the operation of the economic system as a whole; and if inflation is not low, the investment horizons shorten, saving in domestic assets declines and market competition weakens (because consumers do not know the price of anything).
There are no other secrets. Anyone who speaks about growth without referring to supply and to productive capacity will only be looking at the next step, and will advance with spasmodic movements lacking the capacity to turn this movement into a true path to follow.
This is why we have reasons to be optimistic in our current position. For the first time in many years, we have a government which has decided to raise its eyes and think about the long term.
Just to give you a concrete example, let us say that Infrastructure is one of the areas where the highest productivity gains are being achieved. Not only because the same works were 50% more expensive during the previous Administration but also because now they are prioritized on the basis of their economic performance rather than their political affinities.
Let us see some figures to understand the magnitude of the benefits derived from this change. Over the last ten years, capital expenditure in Argentina has averaged 2.5% of GDP on a yearly basis. A transparent management of such expenditure allows for the construction, with that same amount of money, of works that would have cost 3.75% of GDP in the past. This higher impact would come from the elimination of corruption in public works. In turn, prioritizing such projects on the basis of their social return would increase their economic performance even more. For example, if a better allocation doubled the productivity of such investment, the initial 2.5% of GDP, turned into 3.75%, would be equivalent then to 7.5% of GDP. In short, reducing corruption and doubling the rate of return of the projects would three-fold (i.e. an increase of 200%) the impact of infrastructure investment on the economy. Let me illustrate this potential productivity improvement in spending with an example you all know: the Metrobus (network of dedicated separated lanes and stations for normal buses). The Metrobus operating in La Matanza (in Greater Buenos Aires), for example, will allow 220,000 people to save 40 minutes a day. If we take into account business days only (i.e. we leave aside the benefits for car drivers, the reduced environmental and noise pollution, the lesser incidence of accidents, the reduced wear and tear of the public transportation fleet, etc.), this means saving over 2,900,000 hours a month for all these people. At an average value of ARS 77/hour1 , the annual savings of that Metrobus would amount, at least, to ARS 2.7 billion. This means that the investment cost of a work amounting to ARS 1.7 billion would be recovered in only 230 days of use. Assuming a ten-year horizon, the Internal Rate of Return (IRR) of the project would be 159% on a yearly basis. This is why I am sure that the return of the initial 2.5% of capital expenditure under the previous example would increase significantly and, if we had projects with annual rates of return of 159%, I think that the point I want to emphasize is clear enough.
But these are areas managed by other departments of the government. Today, I want to focus on the topics related to my role: monetary balance, fight against inflation and the role of a floating exchange rate in this scheme.
Let us start with the macroeconomic context. Where is the economy standing today? Currently, the economy has been recovering for the last four quarters and all indicators show that the quarter we are in now will be the fifth consecutive period in this sequence. The economic activity is expanding at a pace of 4% annualized, and its momentum is showing sound foundations for sustainability in the next months.
Regarding the factors behind this growth pace, exports gave the initial boost in the second half of last year and in the first quarter of 2017, while investment started to rebound in the last quarter of 2016, gained momentum gradually to finally become the main engine of growth during the second quarter of this year. Consumption added up to this evolution in 2017, and we already have two consecutive quarters with seasonally-adjusted increases.
A set of indicators is revealing the soundness of the reactivation in progress. The level of investment in durable production equipment is standing at a historical peak, with year-on-year (y.o.y.) increases over 13% in real terms. Imports of capital goods went up 19% y.o.y. in dollars in the second quarter. And the “green sprouts” are now evident in most productive sectors. The construction business improved 17% against last year according to the latest available data. And in terms of the manufacturing activity, the Monthly Industrial Indicator (EMI) is showing a 6.6% y.o.y. increase, and 11 out of the 12 headings of the indicator are signaling positive changes.
Thanks to the introduction of UVAs (Unidades de Valor Adquisitivo – Acquisition Value Units), the real estate sector is also evidencing an extraordinary momentum. UVAs are the instruments that have given Argentina, once again, the possibility of entering into long-term contracts. In July, ARS 255 million a day worth of mortgage loans were granted, a figure we had not seen for a long time and which will pave the way for sustained growth in the construction business. In fact, it is access to financing in general that is growing at very high rates. Because not only mortgages, pledge-backed loans and personal loans are increasing (at rates of 41%, 64% and 55% year-on-year, respectively) but also lending for commercial purposes went up 45% in July against the figure recorded last year. All of the above is conveying a clear message: the Argentine economy is once again in motion. Now, the challenge is to promote such growth and sustain it firmly over time.
Regarding the current situation of the exporting sector specifically, I would like to give you today a vision from a different perspective. We cannot lose sight of the fact that in 2011 we managed to reach a level of exports close to US$ 83 billion but, since then onwards, they have gone down constantly to less than US$ 57 billion in 2015. There is no doubt that the price of our exportable goods was a relevant factor to explain such phenomenon, but the volume of exported products fell 18% over such period. In 2016, there was a reversal of such trend in volumes, which went up 6.6%, but the point I want to underline is that we have the installed capacity to return to that peak of US$ 83 billion.
It goes without saying that exporters were victims of a series of attacks that undermined your daily life during such period of clear deterioration of our external sales. The currency clamp, the fiscal burden through taxes on exports and other taxes, quantitative restrictions and corruption were the ingredients that fed such period of decay.
If, after that peak of US$ 83 billion in 2011 we would have grown, let’s say, 3% on a yearly basis, we would now be exporting products for an amount equivalent to around US$ 99 billion, up 73% against the current level.
In 2016, a clear rebound of sales abroad became evident. As a result of the measures implemented by the National Government, the total harvest reached 137 million tons, up 9.3% against the previous cycle. It is a volume that even the most optimistic forecasts predicted it would only occur after several years, but in fact it was reached in two years. This is a clear sign of our capabilities as a country to move forward and grow.
Our potential for service exports is also worth mentioning. In 2016, they went up 30% against 2015 and, so far this year, they have recorded a 50% increase against the time when the new Administration took office. In turn, industrial exports have started to reverse the uninterrupted decline they have been recording since 2011. It is worth noting that from 2011 to 2015, they had gone down an accumulated 38%. In the first half of 2017, they are growing 10% against the same period of 2016. This phenomenon is largely accounted for by the dynamic performance of the automotive and metal-mechanical sectors, but anyway it has also spread to several headings of the Manufactures of Industrial Origin (MOI).
The renewed momentum of industrial exports is also explained by the fact that we are witnessing a greater diversification of destinations for our products. Given the economic situation in Brazil, it is clearly seen that markets such as Chile, Central America, Peru, United States and China are just some of the destinations that have helped us support this growth. For example, the automotive segment is one of the sectors starting to explore new market alternatives more deeply.
The macroeconomic scheme
Which is the context allowing for this reactivation? Are there any guarantees that a recovery such as this one, which Argentina has experienced so many times in the past, will turn into a sustained growth process?
In 2015, a work team started to define the details of the macroeconomic program to be put into practice if the Argentinians voted in favor of a change of government. Almost every member of such team is now working for the National Government. This was the origin of the main guidelines of the path we are going along today. The plan started with a political definition: the correction of the fiscal figures, an unavoidable step if we wanted to build a stable macroeconomic context, would be gradual.
The only objective behind this plan was to tackle a reordering process in Argentina at large with a strong focus on social matters. Let us bear in mind that every single point of growth in GDP implies an increase of 0.3% of GDP in terms of resources obtained by the State. Therefore, an increase of 9.2%, which is the figure that the REM (Market Expectations Survey published by the BCRA) expects for 2017, 2018 and 2019, implies an improvement in fiscal resources of 2.8% of GDP. This means that, if we manage public resources properly and do not raise expenses automatically as a reaction to the improved resources, the path towards fiscal sustainability is being properly paved.
There are some people who criticize this government with the argument that this is an excessively passive approach towards the reordering of public accounts. And I say that this has never happened before. So far, no government has taken on the responsibility for restricting spending when there is an increase in resources. In addition, we must also add the improvements resulting from a higher efficiency in the use of resources. We were talking just a few minutes ago about what is happening in the area of Infrastructure, but this same reasoning may be extended, under an honest and professional management, to all areas of government. Another chapter would be related to the tax reform, which will undoubtedly improve the efficiency of our tax system. The team currently in charge of the initiatives undertaken by the Ministry of Economy and Finance is, in my opinion, one of the most qualified and competent that the country could have convened to perform this task. As you already know because the same applies to your companies, this type of change is not achieved with great ideas about things that nobody realized that needed to be done, but with hard and consistent work during a long period of time.
Given this definition of gradual fiscal convergence, a second definition followed: the need for temporary and declining financing by the Central Bank to the Treasury. In turn, this required a disinflation plan which needed to be gradual as well. The key decision made at that time was that the plan would never use the exchange rate as anchor; rather, inflation targeting would be the anchor, underpinned by the adoption of a flexible exchange rate. Likewise, like in all countries all over the world, liquidity conditions would be managed with the interest rate, readjusting monetary conditions as necessary to manage inflation on the basis of the targets already set. This scheme was not an improvised invention; it derived from two fundamental lessons. Firstly, it is a scheme that has worked successfully in economies such as our economy. And, secondly, Argentina had already tried to use the exchange rate as anchor on many occasions in the past, with awful results in the long run. Especially, for the people who are here in this audience today.
Therefore, the macroeconomic program may be summarized as follows: gradual fiscal convergence, gradual reduction of inflation through inflation targeting and a floating exchange rate. One year and a half after its launching, we can say that the letter of introduction for this macroeconomic scheme shows that Argentina has resumed its growth path, with expectations to keep on growing, and that the inflation rate is the lowest of the last seven years, with an outlook of a decreasing inflation towards the future. And this process has been achieved by not accumulating imbalances under the rug, and by constantly taking care of its sustainability. Regarding price evolution specifically, disinflation started to be tangible along the second half of last year, when inflation reached an accumulated 8.9%, i.e. an annualized pace of 18.5%.
Now, what can we expect from the monetary policy and the disinflation process from now onwards? Under an inflation targeting scheme, the nominal interest rate is chosen in such a way that the real interest rate ex-ante may generate the monetary conditions required to encourage the disinflation process. As a result, in the second half of last year, inflation reduction was accompanied by a declining reference interest rate. When the monetary authority decides to lower the rate, it needs to weigh the evolution of the disinflation process in order to assess the speed and magnitude of the measures to be adopted. In the light of this monitoring, our current diagnosis is that the reduction of the rates was sharper than required by the process and in a shorter period than required, thus easing monetary conditions more than required and unleashing a higher increase in inflation than expected by the BCRA from February to April this year.
For this reason, as from March 2, 2017, the BCRA has started a new cycle of monetary tightening, resulting in an increase of 150 basis points in the reference rate, accompanied by over-the-counter transactions with a view to restricting the liquidity conditions of the market, resulting in an increase of 430 bp in the shortest-term LEBACs, and of 480 bp in the longest-term LEBACs. The persistence of core inflation confirmed that we had to continue to be firm in such a position and, in fact, as of today, we still believe we have to keep this path so as to attain the appropriate disinflation figures.
The monthly inflation rate recorded in May and June (1.4% and 1.2%, respectively) has given once again promising signs, resulting in a year-on-year inflation of 21.7%, the lowest rate in seven years. In turn, July inflation went up to 1.7%. And, even though the year-on-year rate went down once again to 21.4%, this figure is not satisfactory for the BCRA despite the fact that we know that most increases of July resulted from decisions on regulated prices (gasoline, private health insurance, etc.). Besides, the fact that the inflation rate has returned in the last three months to a value close to 18% in annualized terms is not encouraging either for the monetary authority. Therefore, looking into the future, the BCRA will keep its tightening policy so as to reach by the end of the year a value close to a monthly inflation of 1%, which is the value required to channel the process towards a figure consistent with next year’s inflation target of 10%.
The path followed during the last 12 months resulted in a decline of 23 percentage points (p.p.) in the year-on-year inflation rate, which went from 44.2% in July 2016 down to 21.4% at present. In fact, reducing inflation to a value closer to the target set for next year may appear to be quite ambitious, but wouldn’t have many people said the same last year when we proposed to lower inflation dramatically in 2017?
One of the most important elements of this disinflation process is that the path was accompanied by a floating exchange rate. This means that the exchange rate cannot deviate significantly from its equilibrium values, as evidenced by the evolution seen in recent months.
In fact, in a conference held at the Argentine Industrial Union (Unión Industrial Argentina – UIA) in November last year we stated the following: “(…) Under this foreign exchange scheme, nominal appreciations or depreciations cannot be anticipated. And the reason is simple. If everybody knew that the currency will depreciate, then it would depreciate immediately afterwards, and then we would stop thinking that it is obvious that it will depreciate because this would have occurred already.”
Now, bearing all this in mind, let us analyze the evolution of the different measures adopted in terms of foreign exchange competitiveness in recent months. The Real Effective Exchange Rate is currently standing 23% above the rate in place before the removal of the currency clamp, and it is very important to underline, in the light of the Argentine historical experience, that today the real exchange rate is standing at virtually the same value it had in the same period of 2016 (down 1.7% to be more accurate), but with an inflation that went down to half its value in the meantime. This means that we are lowering inflation without resorting to the exchange rate anchor, as we did on many occasions in the past with awful results as already stated above.
If we analyze the situation in depth, we see that our real exchange rate against Brazil, one of our most relevant trading partners, has depreciated 46% more than before the removal of the currency clamp. We cannot forget either that the reduction of taxes on exports and the change in refunds have improved the conditions for our exports. By observing this effect, we can clearly see that the real effective exchange rate is standing 32% above the value in place before the exchange rate convergence. These are, of course, average values for the entire economy, since there are differences among sectors. If we focus on industrial manufactures only, then the improvement is close to 28%. In this segment, the automotive sector has experienced one of the highest increases in terms of exchange rate competitiveness, which went up around 33%.
But, I repeat, the most important factor is that this foreign exchange scheme is a guarantee for you that, regardless of the juncture, the exchange rate will stand at quite appropriate levels. I consider this should be a relief for you when looking into the future because it entails the certainty that the exchange rate will not be used as mechanism or anchor to meet other objectives.
A flexible exchange rate plays two key roles for the economy at large. On the one hand, it allows us to be better prepared for external shocks. For example, a crisis in Brazil that results in a depreciation of its exchange rate requires our peso to move in the same direction. This flexibility is important to protect our internal activities and our productive structure vis-à-vis such event. During the last year and a half, the exchange rate has been fulfilling this role in a remarkably effective and quick manner. As a result, the Brexit, the outcome of the US elections and the political crisis in Brazil did not affect our domestic economic recovery.
The second role of the exchange rate is to help ensure a sustained economic growth pace. For example, as we were saying before, a process of economic reactivation has consolidated in recent months, as evidenced by an economic activity that is growing at a pace of 4% annualized. Now, the challenge lies in sustaining this momentum over time and it is precisely here where the floating exchange rate plays a fundamental role that Argentina has always failed to implement in the past. It is well known that a growth cycle results in a relative boost to imports, especially when this growth is driven by investments which, on many occasions, increase the demand for imported capital goods. But it is precisely this movement in the exchange rate what allows the external sector to adjust to this situation, ensuring in this way the sustainability of our balance of payments over time.
In order to quantify what the change of the monetary-foreign exchange scheme has already meant, the correlation between the monthly devaluation rate and the monthly inflation collapsed as from December 2015. For example, in the 2011-2015 period, the correlation between inflation and devaluation was 73%. In contrast, from December 2015 to the present date, that correlation stood at around 18%. Yesterday, I saw a TV spot of a supermarket chain that decided to freeze the prices of its brand products from June to January next year. This is a proper example because, for these products, the correlation between prices and exchange rate goes down to zero by definition. And, over time, this decoupling will be even clearer.
This proves that the inflation targeting regime with a floating exchange rate is progressively fulfilling its mission of decoupling exchange rate movements from the rest of the domestic prices, which renders the exchange rate into a powerful buffer mechanism to face international ups and downs. This phenomenon is the result of allowing the exchange rate to go up and down alternatively over time. As from the removal of the currency clamp, the exchange rate went up on 53% of days and went down on 47% of days. The only way to turn exchange rate oscillations into a daily and less traumatic event for society at large is by ensuring that it is flexible enough to go up and down according to the flow of foreign currencies in the foreign exchange market, without these movements impacting adversely on our economic activity in general.
Naturally enough, there are times when there are liquidity conditions in the market that may generate a disruption in the exchange rate and, on these occasions, the Central Bank may decide to intervene if it deems it appropriate. Proof of this is that in the last year and a half we intervened five times (in February, March, April and June last year, and during the weeks prior to the Primary Elections [PASO] held last Sunday).
Now, in a context characterized by an exchange rate that goes up and down, the best strategy in terms of financial management to be adopted by companies the cash flow of which is exposed to exchange rate volatility (as it is evidently your case) consists in hedging risks by entering into futures contracts. This hedging strategy dramatically reduces the volatility of your income in pesos2 and allows you to make financial plans with a higher level of certainty. At the same time, since the expected devaluation in the futures markets is managed by the interest rate in pesos , and considering that the BCRA will seek to ensure a positive real interest rate, hedging transactions in the futures market might imply an additional positive real return for your business’ cash flow. Just to mention a specific term here as an example, forward dollar contracts at December 2017 are currently being transacted at around ARS 19.30. This is something for you to take into account. I hope that, little by little, you will dare to take increasingly more hedge positions in these markets. The experience of Chile in terms of floating exchange rate shows how companies opted for using these instruments more frequently in order to reduce their uncertainty in their business plans.
Access to financing
Now, I would like to complete the description of the macroeconomic scheme with a supplementary but also informative topic: the cost of financing for exporting companies. As it is well known, the Argentine financial system has deposits in both dollars and pesos, and the idea is that deposits in dollars may be used to finance exporting activities.
In the last year and a half, we have redefined the meaning of “exporting activities” in a way that is safer from a regulatory viewpoint and at the same time broader from a practical perspective. To this effect, the potential uses of the available lending capacity in foreign currency by financial institutions were expanded, and we allowed, for example, the suppliers of exporting companies to have access to such funds. We also established that a portion of such funds may be devoted to loans related to beef-cattle raising and energy projects. By the end of April, we offered the possibility of providing funds to Argentine importers of goods and services, under a mechanism by which local banks may become a source of funding for foreign clients of Argentine exporting companies, thus playing a role similar to that of development banks in other countries (such as BNDES in Brazil and the EXIM Bank in the United States, for example). For the first time in many years, Argentine companies may go out to the world to offer not only their products but also the financing for them.
All of this has given rise to a profound change. You will have seen already how the interest rates of domestic lending in dollars to exporting companies have collapsed to unprecedented low values from 5%-6% by the end of 2015 to 2%-3% annually today. And the stock of loans went up from US$ 2.9 billion to US$ 13.9 billion today, accounting for an accumulated increase of 379%.
Added to this, interest rates in pesos for commercial purposes have also significantly fallen (they have stood at around 20% to 23% along the year). As a result, lending for commercial purposes is growing at an annual pace of 45%. It is worth mentioning that the exporting sector has significantly benefitted from the improvement in access to lending.
As a conclusion of the message I wanted to convey to you today, I would like to emphasize that you have a key role to play for Argentina’s success. You need to know that this BCRA is well aware of that. I want to give you the certainty that Argentina will follow a disinflation process without exchange rate anchors and that we will redouble our efforts to ensure that the road towards a sustained growth pace of the country is properly paved.
Thank you very much.
1Calculated on the basis of the average income from the main activity provided by the Permanent Household Survey (EPH) corresponding to the first quarter of 2017, for all urban agglomerations.
2 A reference in this respect may be found in: “¿Existe bicicleta financiera en Argentina?” (Is there a financial bicycle in Argentina?), published on May 8, 2017 in the BCRA’s “Ideas de Peso”.
August 16, 2017