Good morning,
These are new times and I would like to begin this management by sharing with you the ideas and principles on which I hope to work with all of you. As Javier Cercas says in Anatomía de un instante (Anatomy of a Moment):
“Nothing is more disgraceful to us as a political society than the practice of a false ethics, which instead of being concerned with what really lies with the politician, the future and the responsibility he faces, gets lost in questions […] about the mistakes of the past and […] overlooks the inevitable falsehood of the whole problem, a falsehood which is the result of the rapacious interest of winners and losers in gaining moral and material advantages from the confession of the guilt of others.” [1] The spirit of our administration is that of the future, not the past. That is how we must face the present. As President Mauricio Macri said the night he won the election, the country cannot remain in revanchism and settling scores. Our energy must be focused on what is yet to come, on how to build the future we all want for our country and our children.
It is in this spirit that I would like to speak to you to outline the lines of work that we will begin today. In other words, in this first message I will define the strategic lines to be followed by the BCRA, of which I now have the honor to be the Governor.
I would like to comment on the basic guidelines of my administration of the BCRA. A few years ago, I led the restructuration of one of the institutions of this system, Banco Ciudad, where we successfully focused on restoring the pride of belonging to such an important public institution. That is why I would like to spend a few minutes talking about this challenge: to strengthen the pride we all feel in belonging to this institution. This is undoubtedly one of the most important institutions in Argentina.
To do this, we will start with the Charter of the BCRA, which in Section 3 defines the objectives of our institution:
“The purpose of the Bank is to promote — within the framework of its powers and the policies set by the National Government — monetary and financial stability, employment, and economic development with social equality.”
Note how interestingly it is written. It is listed in order of priority or importance, not in alphabetical order. The Charter thus tells us that monetary stability is the main objective of the BCRA. This means, first and foremost, having low inflation, in other words, having a reliable currency. It also means having predictable inflation and a freely convertible foreign currency. When the President called me to take on this task, he told me that “we [were] going to renew our vote of confidence” and that my principal mission would be “to return the currency to the Argentine people” and “to respect the independence of the BCRA.” The President is well oriented because he asks us exactly what our Charter requires of us.
Our Deputy Governor, Lucas Llach, expresses it in an interesting way. He says: “The government has several creditors: recipients of transfers, employees, suppliers, bondholders, etc. But we must understand that those who hold pesos are also creditors of the State. People use their effort and their work to acquire the means of payment with which they live. And our institution watches over these creditors, who this institution is bound to protect. For too long we have left peso holders unprotected. And it is from the point of view of these creditors that we must think of our role.” In short, this means that the main focus of the BCRA will be to strengthen our currency. This means to have inflation in line with international parameters.
To reinforce this concept, I want to tell you that the BCRA will pay more attention to the evolution of inflation than to the value of the dollar, which has been an obsession in recent times, precisely because the real problem has not been a priority. Watching over the value of the peso means ensuring that inflation remains low, not that the value of the dollar will remain unchanged. We shouldn´t be interested in whether a peso buys more or less dollars, but rather in ensuring the purchasing power of those pesos in terms of goods. Our “reaction function,” as it is usually called in papers, should respond to changes in the evolution of prices and not necessarily to the evolution of the dollar.
This change requires a shift to an inflation targeting regime with a managed floating exchange rate system. We will resume the task that our current Minister of Economy and Finance had to leave unfinished in 2004.
Once the first step has been taken—normalizing our foreign exchange market—we will quickly begin to define the framework, the objectives and the time during which we will work on the transition to an inflation rate in line with that of the majority of countries. That will be the unwavering objective of the BCRA.
It is time to talk about the exchange rate normalization plan, or what is known as “the end of the foreign exchange clamp.” We should not talk about it for too long. The foreign exchange clamp is an anecdote, as a country cannot function when economic activity is hindered, as was the case in the last 4 years. Since the foreign exchange clamp, the economy has not grown. Some people think that this situation controlled the demand for dollars. I think that, what it actually did, was to destroy the supply of foreign currency. That is why it is necessary to get out of this trap and to do something immediately. In addition, it is worth remembering that a floating regime, even managed, will allow us to restore the conditions for the growth of our economy. A few years ago, in a paper published in the American Economic Review with my colleague Eduardo Levy Yeyati, we showed that, since the end of the Bretton Woods system, countries with more flexible exchange rate regimes have achieved higher growth rates than those with more rigid exchange rate regimes[2]. An inflation targeting regime with a floating exchange rate will be the monetary policy objective in Argentina.
Let us leave the nominal exchange rate for a moment and look at what we call the “real” exchange rate. As we know, it reflects the productivity levels of the economy. The Swiss franc has great purchasing power because the Swiss economy is very strong and has a very high level of productivity. On the contrary, a weak, inefficient and unproductive economy needs a more depreciated exchange rate to compensate for its internal inefficiency, a certainty demonstrated by the Balassa-Samuelson theory. There are no shortcuts: to strengthen the peso, we must strengthen our economy. It is important to keep this relationship in mind. The long periods with an appreciated exchange rate have not been positive, not only in Argentina but also in other countries[2][3]. Therefore, the BCRA will seek to maintain the competitiveness of the exchange rate to the extent that the objective of price stability allows it. In particular, we won´t hesitate to prevent short-term capital flows from appreciating the exchange rate beyond what is reasonable.
Just a footnote on the measurement of inflation. I would like to tell you that, fortunately, an Argentina where reality was hidden behind fabricated statistics belongs to the past. A stage where people preferred to deny reality rather than face it. A crazy stage where it was said that white was black and black was white. Thus, we spent energy discussing whether it was black or white, instead of trying to solve the problems that needed to be addressed. It is a definition of government that institutions and officials will never again engage in such practices and will always speak the truth. This is a central point for an institution such as the BCRA, whose signals and the trust it builds are so vital.
Let us then move on to the second point mentioned in Section 3 of the Charter: financial stability. The emphasis on this point as the second most relevant, after price stability, is correct. Because the BCRA, by this means, will be able to contribute to the last objective: economic development with social equality. We must say it clearly: a neglected peso has made it impossible for us to generate savings instruments in pesos, and without savings there is no credit and without credit there is no progress. When I presided over Banco Ciudad, all of us shared the great happiness of working in a financial institution, because financial institutions create “terms” in financial assets. In other words, they turn short-term liabilities into long-term assets. Banks create time, they give us time. And these long-term financial assets enable a family to buy a home, an SME entrepreneur to make their business grow or a big company to invest in projects to transform the country’s economic matrix. But without currency there are no savings, without savings there is no credit, and without credit there is no development. In the absence of a strong financial system, there cannot be distributive equity given investment is only reserved to those who already have money, which keeps the past economic structures and makes the processes of social mobility thus lose momentum. Here we are. With a transactional financial system, that is to say, a depositary of the money we need for our operations and a borrower of what is left over: a poor financial system, whose private deposits and loans represent 16.8% and 14.0% of GDP, respectively, very poor compared to the 66.8% and 74.4% that they represent in Chile.
All in all, I think this is a key issue. And of course, it starts with the first point, that of recovering the strength of Argentina’s currency. We can help to move along this path in a faster way. For example, we should evaluate a system similar to the unidad de fomento used in Chile. It is a mechanism that they launched when they had inflation levels similar to ours, and that allowed them to build the financial system they have today, which is six times bigger than ours. Consider this: Chile has, in terms of GDP, only in mortgage loans one and a half times the Argentine financial system.
A mechanism of these characteristics will allow banks to raise money, whose real value will be preserved for the depositor. An instrument that will tend to make us forget about the dollar as a savings instrument, which has a much more uncertain value and a limited potential contribution to the economy. We want the savings of the Argentine people to be converted into productive and mortgage loans, fostering the growth of the economy, and not dollars in a can or in a safe deposit box. We must recover the savings culture and teach it to our children. We will be responsible for regulating how those savings should be lent by banks. Just to give you an example of what this means, it will allow that long-standing desire of mortgage payments lower than rent. This is an example I will always mention: a mortgage loan with an interest rate of 1%, in unit of account, could allow a 30-year loan with payments similar to or below rent. Specifically, for a loan of ARS750,000, the initial monthly payment would be ARS2,211 and the required family income would be ARS7,371. The dream of owning a home will be available to all very soon.
Moving on to the financial sector’s agenda, we should not only increase its raw material—savings—and aim to make it twice as big size in the next five years, but also improve its levels of competition. I have personally seen that the sector is highly competitive, but we must push it even further. Because the only guarantee of work being done for the benefit of the people to the fullest is competition. Some of the steps to be taken are: to set up bank correspondents, to streamline the process to be followed for opening branches, to improve the levels of competition in the processing of transactions, to ensure access to credit instruments such as the discount code to all those who can intermediate them, and to improve competition in the areas of insurance and cash-in-transit.
Improving the quality of our financial sector is the way this institution will contribute to development. It has often been thought that this institution would contribute to development by creating money, either to provide credit or simply to expand aggregate demand. But the idea that money creation per se enables development has misdirected us. We don´t need to mention a lot of examples, whether our own or those of others. Just remember the last four years of high inflation and zero growth, and, perhaps more dramatically, the very long period between 1975 and 1990 when Argentina had the highest inflation records and the longest economic contraction. At the beginning of that period, I am referring to 1975, our income was similar to that of Spain, and by 1990 we had fallen to 46.8% of that. I remember a taxi driver at that time saying to me: “When will the government learn that you cannot make money with money?”
It is a paradox because it is the opposite of what we think is right. It is not high inflation that creates growth, but low inflation. Because excessive issuance generates inflation, and the resources released into the system are transformed into a tax that finances the State, without any final impact on aggregate demand. And in general, as I said before, economies with high, bad taxes do not to grow as much as expected. On the contrary, low inflation tends to create a business climate conducive to real wealth creation.
Improving transparency in the sector and simplifying the way prices are communicated to customers are on the agenda. Always preserving one of the great achievements of this institution and the country in recent decades: a prudential regulatory system for our financial sector that keeps the risks from systemic crises in the sector away.
The agenda at this point focuses on expanding the financial sector to the entire population, one of my core projects. A few years ago, Banco Ciudad, together with Banco Santander, was one of the pioneers in opening branches in marginal areas. We have to make sure that the financial sector reaches every corner of our country and every Argentine citizen.
Finally, we have a third item on the agenda—means of payment. In the short term, we may also have to rethink the characteristics of the money in circulation, since we have kept the same denominations for many years, even though prices have multiplied more than tenfold. But the real agenda is to promote the use of banking services, which stands for a formal economy. The ideal version would be a cashless economy, a distant goal perhaps, but nevertheless a clear one.
Because an economy where cash use is deterred restrains corruption, informality, tax evasion and drug dealing. A banked economy is fairer because its formal structure results in a more even tax burden, thus lowering for everyone.
This is a critical issue in our agenda. Indeed, the whole world is going through a revolution in means of payment. Today, we live with a device in our pocket that is a telephone, a supercomputer, or a payment terminal. We have to work to make it possible for people to open a bank account or send money to their relatives in other countries without leaving their homes. The means of payment department should be the office that takes us into a more efficient and fairer future. We have a great job ahead, with various ramifications, such as consolidating electronic communication with customers, eliminating paper and contributing to the preservation of our environment.
I would like to share with you a few thoughts on what I have said at the beginning. The sense of pride. As I told you, this was a clear goal during my time at Banco Ciudad. A step that began with details that were symbolic, such as when I waited until an out-of-service ATM was fixed, because an organization can never forget its objective, in this case to serve a customer well. That is why measuring the quality of service, improving the quality of the physical spaces, or answering a tweet from an angry customer were all elements of an agenda that had to do with that objective of restoring pride in being part of that institution.
I’ve come to the BCRA with great enthusiasm, but also with great humility. I recognize the enormous human capital of this institution. And I will try to respond to them with work, passion and dedication.
Finally, I want to say that I know that in recent years many of you may have felt that cronyism took precedence over hard work and professional quality. Our administration will do the opposite. We believe in meritocracy, and we know you do too.
We will prioritize career employees, giving them more and better opportunities for progress and growth. Meetings will start on time because respect means respecting each other’s time. And with these parameters, we will go out to defend together the goals we have set, and once we have achieved low inflation, a strong financial system and a fairer country, we will be able to say with the greatest pride that we belong to a central bank that provides excellent services to all Argentines.
Thank you all. I wish you all have a good day and let’s work together to build that future.
[1] Javier Cercas (2009): Anatomía de un instante (Anatomy of a moment). Random House Mondadori, page 109.
[2] Levy-Yeyati, E. and Sturzenegger, F. (2003): “To Float or to Fix: Evidence on the Impact of Exchange Rate Regimes on Growth” American Economic Review, 93(4): 1173-1193.
[3] Eswar S. Prasad & Raghuram G. Rajan & Arvind Subramanian (2007): “Foreign Capital and Economic Growth,” Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 38(1), pages 153-230.
[4] Levy-Yeyati, Eduardo & Sturzenegger, Federico & Gluzmann, Pablo Alfredo (2013): “Fear of appreciation,” Journal of Development Economics, Elsevier, vol. 101(C), pages 233-247.
