Informe de Inflación

This report and inflation provided a quarterly analysis of the aggregate supply and demand of the economy, prices, public finances, the money market and the international context between October 2003 and May 2012. In July 2012 it was replaced by the Macroeconomic and Monetary Policy Report, seeking to provide an analysis of the international and local economic situation.

Since 2008, the world has been facing an international crisis in which the financial collapse has not only been a direct consequence of the previous deregulation of the banking system and financial markets. This crisis is also related to
the change in the pattern of wealth accumulation in advanced countries, where the boom in indebtedness occurred in a context of deterioration in income distribution. In a period in which
the remuneration of wage earners did not keep pace with the increase in labor productivity, sustaining private consumption levels necessarily implied resorting to increasing levels of indebtedness, which finally proved
unsustainable.
This tension between income and debt is the fundamental reason for the difficulty in reactivating the level of activity in advanced economies after four years of crisis. While central banks try with expansionary monetary policies to stimulate credit and demand – providing liquidity to the financial system and keeping interest rates low – the private sector remains over-indebted and prioritizes healing its finances rather than increasing consumption or making new investments. At the same time, governments are pushed to reduce the fiscal deficit – with the aim of not increasing their indebtedness – affecting the incomes of households and companies and delaying this deleveraging process. Unemployment rates in these countries remain at high levels, and weak economic activity suggests that they will remain at these levels for a long time.
This difficulty in definitively overcoming the crisis, which has been reignited in recent weeks, justifies moving towards an approach that articulates monetary policy decisions with a broader vision of the cycle and growth that includes fiscal and income policy.
In this context of relative instability in the global growth rate, the Argentine economy expanded by 8.9% in 2011 and is expected to return to growth above the regional average in 2012. In the first
months of the year, local demand indicators once again showed a consolidated domestic market, which counteracted the effects of the moderation in external demand on the evolution of Argentina’s GDP, in an
international scenario where economic activity and trade volumes continue to decelerate.
According to the leading indicators for the first quarter, private consumption continued to sustain its growth rate, as a result of the increase in household resources caused by favorable working conditions
and public income policies. In particular, sales in supermarkets showed greater dynamism, while activity in shopping malls and consumption of public services remained solid.
Meanwhile, the volume of domestic car sales is set to set a new record in 2012. The increase in tax collection during the first quarter (29% year-on-year), mainly determined
by the Value Added Tax, Social Security resources and the Income Tax, also reflects the expansion of domestic demand.
On the supply side, mixed signals were observed, with some branches of the goods-producing sectors exhibiting a weaker trend. In particular, industrial activity has shown a more moderate growth rate since the third quarter
of last year, with some branches affected by the fall in external demand – such as the automotive sector due to lower sales in the Brazilian market. For the agricultural sector, it is estimated
that the adverse weather conditions that affected the 2011/12 campaign will generate an annual drop in grain production. However, the sectors linked to the production of services maintain their dynamism, sustained
by transport and communications, trade and financial intermediation.
In a more structural context and in line with the recovery of spaces for economic policy in Argentina, on April 6, the new Organic Charter of the Central Bank of the Argentine
Republic (BCRA) came into force. Under the new legal framework, the monetary authority recovers powers that from 1935 until the 1992 reform had characterized its operation, which was based on a concept of multiple mandate
that contemplated objectives linked to the real economy. Thus, from now on, the Central Bank “aims to promote, to the extent of its powers and within the framework of the policies established by the National Government
, monetary stability, financial stability, employment and economic development with social equity.” In compliance with them, the entity must publish the objectives and plans regarding the development of
monetary, financial, credit and exchange policies before the beginning of each annual fiscal year and must also report on the follow-up of the same in the manner indicated in the Organic Charter.
In order to comply with this comprehensive mandate, the Central Bank also regains the power to direct credit.
In recent years, financing to businesses and households has increased by about 3 percentage points (p.p.) of GDP, with commercial loans contributing more to total credit growth.
This performance has occurred with a solid equity position of the banks: their portfolio shows a greater share of financing in national currency, as well as minimal values of credit
delinquencies in relation to the mass of loans. However, bank credit is still below the levels of other emerging and advanced countries, thus evidencing a high potential for the development of the sector for the
coming years. Indeed, there is significant scope to promote the expansion of loans primarily to the productive sectors, stimulate investment and make growth more sustainable in the
medium and long term.
From now on, it is necessary to underpin financing for small and medium-sized enterprises in greater depth and channel savings in the financial system to the regions of the country that are lagging behind. With the reform of
the Organic Charter, the Central Bank has more instruments to guide credit and regulate its conditions (terms, interest rates and other charges). In the same vein, financing capacity is expanded through
tools such as the Bicentennial Fund, based on the incorporation of new assets that can be accepted as collateral for the advances that the Central Bank grants to the banking system to finance
productive investment.
In relation to the new financial stability mandate, and like many other central banks that in the post-2008 period have sought to fill regulatory “gaps”, the new Organic Charter also
expands the “perimeter” of regulation. Activities that have, directly or indirectly, effects on the financial system are thus incorporated into the BCRA’s orbit.
In addition, certain supervisory functions of financial institutions are returned to the Board of Directors of the Central Bank to ensure consistency with credit, exchange rate and monetary policies.
These modifications, together with the new powers in terms of defending the rights of users of financial services and defending competition, are part of the international paradigm shift in
which, after experiencing a bias towards a financial structure strongly based on the concepts of “self-regulation” and “market discipline”, The need for greater and better intervention
by the public sector was once again recognized.
In the absence of a fixed exchange rate regime, and in full exercise of the power to administer the nominal exchange rate, the new Organic Charter eliminates the fixed relationship between the monetary base and international reserves.
In the future, the magnitude that the BCRA will maintain in reserves will be determined by the demands of the balance of payments, so the level necessary for the conduct of the exchange rate policy must be defined, in each case, through a dynamic and permanent exercise of evaluation of the conditions facing the Argentine economy. In accordance with the current legal framework, those reserves that exceed that level can be used to pay public debt services with international financial organizations and with private creditors or bilateral official external debt.
The policy of accumulation of reserves that the BCRA has carried out in recent years sought, as in other developing countries, to have its own resources necessary to protect itself from the adverse
effects of volatile international conditions. In the case of Argentina, the accumulation of reserves took place mainly from trade surpluses, unlike what happened in the 1990s, when
the increase in international reserves came from foreign debt. As a result, Argentina’s external exposure indicators showed a substantial improvement.
Since 2003, a significant reduction in external debt in relation to the size of the economy has been achieved, accompanied by a lengthening of maturity periods, mainly since the
public debt swaps of 2005 and 2010. The management of the fiscal accounts and the policy of managing liabilities carried out by the National Government allowed the public debt to go from representing 140% of GDP in
December 2003 to about 40% today. In addition, the risk of refinancing has been substantially reduced, to the extent that liabilities in the hands of private creditors, which were equivalent to the GDP of
an entire year at the end of 2003, currently represent less than 14% of GDP.
The combination of public sector deleveraging and reserve accumulation policies—which increased by US$37 billion between 2003 and 2012 despite having canceled US$25 billion in sovereign debt through the use of instruments such as the Argentine Deleveraging Fund—puts our economy in a solid position to meet its external obligations. Indeed, while the reserves-to-output ratio remains at levels above the average of the last twenty years, the debt-to-output ratio has continued to decline.
Going forward, macroprudential regulations will contribute to reducing and keeping limited the external vulnerability of the Argentine financial system. Among these measures are the financial regulations that allow bank borrowing in foreign currency only to those agents who have income in the same denomination – among other rules aimed at avoiding a high risk of currency mismatch – and the regulations on short-term financial flows, which discourage the entry of speculative capital. Compared to the situation at the end of the 1990s, the financial system currently registers a low level of dollarization of both its portfolio of loans to the private sector (only 15% of the total vs. 60%) and of deposits in the same sector (16% vs. 65%), maintains a limited currency mismatch (40% of net worth vs. 75%) and a low level of external debt (2% of total funding vs. 14%).
The reform of the Organic Charter also incorporated a change in Article 20. The BCRA maintains the power to grant Transitory Advances to the National Treasury for up to 10% of public resources in cash and 12%
of the monetary base with a maximum term of one year. This twelve-month limit implies that the monetary impact in each year is equivalent to the flow of Transitory Advances granted during that period. The amended article allows,
in exceptional circumstances, to increase advances by the equivalent of 10% of public revenue in cash for a maximum period of 18 months.
The expansion in the Central Bank’s financing margins to the National Treasury takes place in a framework in which Argentina’s public finances had a positive behavior. In 2011, a consolidated primary surplus was achieved for the tenth
consecutive year, a situation that has not been observed for at least the last six decades. Likewise, in the international comparison, Argentina is among the countries
with the best fiscal situation. This evolution of public finances was compatible with the strengthening of social spending and public investment.
The international economic scenario also exhibits, as has already been recorded in other historical moments, an expansion of the different channels that link treasuries and central banks. Thus, a significant number of monetary authorities can be seen that finance their governments: directly in primary placements, passes, advances or other types of lines or indirectly through interventions in the secondary market, and providing liquidity to the financial system so that it acquires sovereign securities.
In summary, the reform of the Organic Charter constitutes a recovery of the practices and instruments that were at the genesis of central banks and that made it possible for them to play a role in the process
of economic development. This change is part of the macroeconomic regime that has been established in Argentina since 2003 and which is aimed at prioritizing economic growth and the strengthening of the domestic market
based on the recovery of employment, wages and social inclusion. The reform also reflects the needs of a changing world that has been going through one of the biggest financial crises in its history for some years and that has particularly called into question the paradigm of monetary policy and the role of central banks in recent decades.