Informe Macroeconómico y de Política Monetaria

This report, published between July 2012 and December 2015, provided a periodic analysis of the recent evolution of the international context and the Argentine economy, the evolution of economic activity, socioeconomic conditions, the external sector, public finances, the money market and prices. It also gave an account of the main characteristics of the BCRA’s monetary policy and issues of particular international and national relevance.

Executive Summary

Since the last edition of the Macroeconomic and Monetary Policy Report last August, global growth forecasts for 2015 and 2016 have been marginally revised downwards.

Although advanced countries once again recorded better economic performance, with some heterogeneity within the group stimulated by the prolonged expansionary monetary cycle and a certain fiscal neutrality, in emerging nations economic activity continued to slow down, with this trend influenced in some cases by the sharp decline in commodity prices and the presence of less favorable external financing conditions.

In the third quarter of the year, a significant fall in asset prices and a sharp increase in expected volatility were observed in the financial markets. In addition to the Greek crisis and the uncertainty about the impact that the imminent start of the contractionary cycle of monetary policy in the United States will have on the global economic trajectory, the stock market collapse in China and the depreciation of the renminbi will have on the global economic trajectory. However, at the beginning of the fourth quarter, prices improved and volatility decreased, so that so far in the second half of the year, mixed results have accumulated in the financial markets.

In this context, the dollar surpassed the previous year’s records with respect to the generality of the currencies, beyond some stability at the margin. The multilateral appreciation of the dollar, together with the oversupply of raw materials, continued to act as bearish factors in the prices of these products.

Meanwhile, financialization (speculative and arbitrage positions in the financial asset markets) associated with these goods exacerbated the movements.

Projected global growth for 2015 is 2.8 percent, an increase equivalent to the previous year. This performance contemplates a higher rate of expansion of advanced nations, while developing countries would show a less favorable evolution than in 2014. For next year, an acceleration in the rate of increase in activity in both groups of countries is estimated, which would lead to a growth of 3.2% of world GDP.

However, a number of factors persist that could reduce the dynamism of global growth. Among them are an eventual slowdown in growth

of China, doubts about Greece’s permanence in the euro area, the impact of a sharp correction in oil prices, deflationary pressures in advanced economies and the contagion effects that could be generated by increased volatility in the markets. In relation to the latter, it is not known to what extent prices in the financial asset and commodity markets have incorporated the impact of the potential change in monetary policies in developed economies, so new episodes of financial stress that lead to greater implicit volatilities in the prices of certain assets are not ruled out.

Throughout this year, Argentina faced an external context characterized by the fall in international prices of the main export products and the slowdown in the growth of its trading partners. In fact, the Commodity Price Index – prepared by the BCRA and which captures the evolution of the prices of the country’s main primary export products – continued to contract in 2015, and in the third quarter was 17% below its level a year ago. On the other hand, an economic expansion of close to 1% in 2015 is estimated for the main trading partners, again lower than the world average. The forecasts for 2016 point to a certain rebound in growth in the group of countries that concentrate our external demand, while the prices of the main export products are expected to remain similar to those of 2015.

In this context, the quantities exported of goods and services decreased 0.5% year-on-year (y.o.y.) in the first half of 2015, a trend that continued between July and September. Despite this, economic activity showed an increase in the first half of the year (2.2% YoY), mainly due to the performance of private consumption (0.8% YoY), and to a lesser extent, of investment (3% YoY).

The leading indicators show a new year-on-year increase in household spending in the July-September 2015 period. Turnover in the main supermarket chains and shopping centers accelerated its growth to 27.7% YoY and 41.2% YoY, respectively. In the same sense, the collection of value added tax grew more strongly, rising 32.4% y.o.y. in the same period.

All this in a context in which the inflation rate remained unchanged and with a high degree of correlation in all indicators. For their part, the indices that measure the quantities demanded of consumer goods also showed increases in the third quarter: sales in retail stores rose 2.2% YoY; auto imports increased 7% YoY, while imports of consumer goods increased by around 17% YoY.

Private consumption continued to be leveraged by favorable working conditions—which were reflected in the maintenance of high levels of the wage bill—and income policies aimed at strengthening the resources of the most vulnerable sectors. In fact, the wage bill expanded in the third quarter of 2015 as a result of the increase in employment and a slight acceleration in wages (29.5% YoY). The employment rate represented 42.2% of the population, indicating an increase of 0.9 percentage points (p.p.) compared to that registered a year ago, leading to a reduction in the unemployment rate to 5.9% of the economically active population.

For its part, the improvement in investment performance was reflected in higher imports of capital goods and their parts and accessories. Likewise, construction, which was one of the most dynamic sectors during the first half of the year, maintained its expansion between July and September (7.2% YoY; according to the Synthetic Indicator of Construction Activity).

Among the recent measures aimed at promoting capital expenditure is the regulation through which the Superintendence of Insurance of the Nation (SSN) established a series of criteria so that the Mutual Investment Funds (FCI) of infrastructure and Small and Medium-sized Enterprises (SMEs) can be considered computable to the “subsection k” that obliges insurance companies to make productive investments. The way in which these funds are computed in compliance with the subsection was also changed. For its part, the CNV set requirements for the majority of FCIs to redirect up to 2.5% of their investments to productive, infrastructure and SME financing.

These provisions are in addition to the set of instruments already available to finance investment. In this regard, the Central Bank had a new stage for the granting of loans within the framework of the Productive Investment Credit Line (LCIP); while the National Government gave continuity to the Argentine Credit Program (PROCREAR) and the Argentine Economic Development Fund (FONDEAR), among others.

The increase in domestic spending in the third quarter of 2015 was made possible by higher domestic production and, unlike in the first part of the year, by the increase in imported volumes. In fact, the quantities of goods purchased abroad grew in that period, practically offsetting the fall in prices. Thus, between July and September, the value of imports cut the fall to 1.9% YoY, after having accumulated a decrease of 13.5% YoY in the first six months of the year. Exports of goods also registered an increase in the quantities shipped between July and September, from the recovery of sales of agricultural manufactures linked to the soybean complex. This improvement in exported volumes was combined with the sharp fall in prices, resulting in a decrease in foreign sales of 11.8% YoY, accumulating a decrease of 15.8% YoY so far in 2015. Thus, the trade surplus totaled US$1,551 million between January and September of this year, US$4,064 million below that observed in the same period of 2014.

The weak performance of the external sector resulting from lower international commodity prices—which was reflected in a sharp fall in the terms of trade—and weak external demand was common to all countries in the region. In this context, a decrease in international reserves was observed, influenced, among others, by those payments of public debt services with an impact on the balance of payments, which were particularly high when the cancellation of the Boden 2015 for a total of US$5,899 million was registered. Thus, between July and October, international reserves decreased by US$6,900 million, reaching a level close to US$26,000 million at the end of that period.

In fiscal matters, so far in the second half of the year, national tax collection grew by around 30% compared to the levels of a year ago. Taxes linked to domestic transactions—such as social security resources, income tax, and value added tax—maintained high year-on-year growth rates, while those associated with foreign trade had a more limited performance. The increase in total revenues of the National Non-Financial Public Sector (NFPS) was 38% YoY during July — the latest information available — while primary expenditures expanded at the same rate, driven by current transfers to the private sector (which include family allowances and subsidies), pension benefits, and salaries. Thus, in the last twelve months to July 2015, the primary and financial results of the NFPS were close to -1.7% and -3.6% of GDP, respectively. The National Treasury (TN) continued to meet its financing needs both from various placements of instruments in the market (around $48,000 million between July and October) and from sources from the rest of the public sector.

In the money market, the policies in place aimed at promoting credit to the productive sector, together with those aimed at promoting financing under more favorable conditions for families, were the main drivers of loans to the private sector, which so far this year have been showing an acceleration in their growth rate, going from a nominal increase of 27.4% YoY in June to 33.6% YoY in October.

This greater dynamism of loans was largely funded by the rise in fixed-term deposits of the private sector, which grew 47% y.o.y. at the end of the tenth month of the year, contributing to the rise in monetary aggregates in pesos —35.6% y.o.y. for the

M3 and 39.4% y.o.y. for private M3. Private sector fixed-term deposits, mainly those in the retail segment, benefited from the minimum interest rate policy established by the BCRA in October 2014, whose coverage was extended last July. The amount of deposits reached by the measure increased as of July of this year from $350 thousand to $1 million, and since then the limit covers both the contributions of individuals and legal entities.

In addition, at the end of October the BCRA raised the interest rates of the LEBAC at the default rate by 3 p.p. to 28.93% and 29.35% for the terms of 90 days and 120 days, respectively. Given that these interest rates are used as a reference to establish the minimum rates on time deposits according to the aforementioned scheme, this increase meant that, as of November, rates for savers would be around 26%, for placements of 30 to 44 days and above 29%. for 180 days or more for amounts less than $1 million.

Finally, towards the end of July, the Central Bank increased the interest rates of its pass corridor between 5 p.p. and 7 p.p., and at the end of October, it increased them again, in this case an additional 3 p.p.. These measures seek to limit the volatility of interest rates in the Inter-financial market in the face of changes in the levels of short-term liquidity in the entities, by aligning the interest rate corridor, adapting it to the structure of the market interest rates. In turn, it seeks to deepen financial stability in a context of greater volatility.