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.

Institutional Vision

Since the beginning of the international crisis, more than five years ago, the National Government has deployed a set of policies aimed at
alleviating its effects on the local economy.
These policies sought to sustain domestic demand and protect the employment and income of the most disadvantaged sectors of the population. This
orientation of the actions developed contrasts with what happened at other times in national history in which, in the face of external
shocks that had a full impact on the Argentine economy, policies took the path of “austerity”.
In recent years, the response to the slowdown in foreign trade and the lower relative growth of our partners has been to
use the room for manoeuvre gained to sustain living standards and encourage production and productive investment.
For the Central Bank, the countercyclical role of credit has been among its main objectives. In this sense, liquidity
requirements were adapted in order to favor less developed areas of the country and Small and Medium-sized Enterprises (SMEs), while it was arranged that larger banks
would direct part of their deposits towards productive investment and, in particular, towards SMEs. These specific
policies meant that, on this occasion, the evolution of credit to the private sector, mainly investment and working capital, did not accentuate the
cycle of slowdown in growth.
The exchange rate policy accompanied this process through BCRA interventions in the foreign exchange market, within the framework of a managed floating
strategy that seeks to mitigate excessive exchange rate pressures. Thus, for example, in recent years a nominal revaluation
of the local currency has been avoided, as happened in many other emerging countries aimed almost exclusively at meeting a monetary target – in a
context of sustained increase in commodity prices and high international liquidity.
Thus, it was possible to maintain a real multilateral exchange rate with respect to wage levels that continues to compare favorably with that of past
times. Objective data such as the balanced result of the Current Account of the Balance of Payments indicate that the exchange rate parity continues to be
at an appropriate level with the objectives of economic policy.
The experience of previous crises and, more generally, the secular cyclical behavior of the international financial market — even before the present
crisis — had led our country to adopt prudential regulation of speculative capital inflows. With this instrument, it was
possible to contain part of the appreciative pressures arising from the abundant global liquidity.
Since the beginning of the international crisis, other countries in the region have alternately used tools that went in the same direction.
This crisis also highlighted the need to make progress in eliminating other destabilizing factors of a structural nature in the Argentine economy
: foreign indebtedness — which limited the country’s economic sovereignty — and the displacement of national savings towards the formation
of foreign assets. Thus, from the renegotiation of the debt in default, the total cancellation of the debt with the International Monetary Fund and, more recently, the

recently, through the use of international reserves—made up exclusively of genuine foreign exchange earnings from a significant trade balance—

Argentina’s level of external debt has been significantly reduced. At the same time, hoarding
in foreign currency was regulated, limiting the diversion of national savings to placements abroad.
The circumstances in which these actions took place were not favorable. The economic performance of 2012 was conditioned by the
effects on the agricultural sector – in its exports and its demand on the other sectors of the economy – of one of the most serious droughts in decades.
In addition, last year also saw a significant slowdown in the growth rate of some economies to which products are exported

manufactured. Both factors contributed to the fall in foreign sales in real terms of goods and services in 2012 – which resulted in 6.6% year-on-year (y.a.).

similar to that observed in 2009, a year of great turbulence due to the international financial crisis. However,
the level of economic activity (1.9%) was maintained and, above all, investment continued to register satisfactory levels in relation to
GDP (23% on an annual average).
For its part, private consumption presented a favorable behavior in the year, with an expansion of 4.4% y.o.y. The strength of the labor market—
reflected in employment levels and rising wages—and the support of income policies aimed at vulnerable
sectors underpinned consumption. In fact, the improvements in working conditions achieved in the current expansionary cycle were maintained throughout 2012 when,
even starting from high levels of employment, jobs grew by 1.3%.
Transfers aimed at improving income distribution were also intensified, with an increase in the
number of beneficiaries of assistance coverage since 2003.
The evolution of external and internal demand was offset by a heterogeneous behavior among the different segments of supply. Thus,
while export-oriented industrial sectors showed a contraction in the year – particularly associated with the Brazilian economic
cycle – the industrial branches aimed at supplying the domestic market expanded again. Services behaved in the same way, growing
by 4.2% in the year.
These negative external factors brought about a certain turbulence in the foreign exchange market that, for various reasons, presents a high complexity in the Argentine
case. The appropriate exchange rate levels for the real functioning of the economy do not always coincide with the levels that
would balance the demand and supply of dollars as a financial asset.
In the face of temporary events of lower influx of commercial dollars for circumstantial reasons, as occurred in 2012, in Argentina the precautionary and/or speculative financial demand for foreign currency increases
. Thus, the gap between the exchange rate necessary for the normal
functioning of the economy and the one that would balance the demand caused by this transitory event widens significantly.
Certainly, the dynamics of exchange rates are also influenced by subjective factors that, in contrast to the fundamentals or objective
elements of the economy, are basically related to the evolution of expectations about what future prices will be like.
In Argentina, exchange rate expectations are occasionally guided as if sudden devaluations of the currency were the natural and unequivocal
outcome of any moment of uncertainty. This belief is based, in part, on learning from past experiences. The most disruptive
events in our economic history were associated with the external strangulation or balance of payments crisis that implied significant devaluations and
structural changes in macroeconomic dynamics.
Likewise, whenever a devaluation of magnitude took place, there was a dramatic redistribution of income that was strongly regressive,
benefiting the sectors with the greatest capacity to save in foreign currency. These episodes of external strangulation of the Argentine
economy had their origins in fiscal disasters, in both public and private external over-indebtedness, in an enormous formation of net foreign assets
and in a weak, primarized productive profile that was excessively dependent on imports. These factors are not present at
present.
When analyzing the results of the Current Account of the Balance of Payments, it can be seen that Argentina is, within Latin America, one of the economies
that has managed to maintain positive or balanced balances (average surplus of 2.4% of GDP between 2003 and 2012). Argentina’s
external accounts and their comparison with other economies in the region indicate that our country does not face a fundamental imbalance that requires abrupt corrections
in the exchange rate parity. In other Latin American economies, current
account deficit levels currently reach magnitudes in the order of 3 points of GDP.
As previously stated, another objective element that is usually considered to assess the external vulnerability of an economy is
the level of indebtedness. The ratio of total external debt (public and private) to GDP in Argentina is currently in the order of
30%, which represents a very low value in any international comparison. For its part, public debt in foreign currency was reduced
after the exit from convertibility from 106% to 24% of GDP, while payment terms were substantially extended. As a result of the process of de-indebtedness,

as of June 2012, only the equivalent of 9.4% of the product of this debt was in private hands, obligations considered to be at
greater risk of refinancing. As for future flows, public debt payments in foreign currency, excluding services corresponding
to holdings by public sector agencies, will represent only 1.3% of GDP in 2013 and would reach 1.7% in 2014, with the eventual payment of the GDP coupon for the latter
year.
In the last decade, the level of private debt has also been substantially reduced. The external debt of the private sector decreased by 52 points
of GDP in this period, with a ratio of 14.7% of GDP as of December 2012. When commercial debt and intra-group
debt are extracted from this total, the external debt of the non-financial private sector represents only 3.8% of GDP. Thus, both the private and public sectors
have significantly reduced the structural foreign exchange requirements to meet their external commitments, while changes
in the holdings of these debts have also reduced the risks of refinancing.
Thus, the objective data of the economy do not support the devaluation expectations that have been manifested in the illegal exchange market, characterized by

by quotations that are very volatile – as a result of the low volume traded – and where their value contemplates the additional cost of carrying out
operations outside of fiscal supervision and exchange regulations.
In contrast, the volume formally traded in the Single and Free Exchange Market in 2012 exceeded US$300,000 million and in the first
quarter of 2013 that figure rose to US$59,000 million.
In this framework, the implementation of a more intense prudential regulatory scheme on the balance of payments that regulates the purchase of
foreign currency must be understood. The long-term objective is to tend to greater monetization, seeking to channel towards productive investment those flows
that used to withdraw from the economic circuit – in the last ten years the net formation of foreign assets totaled US$90,000 million – to contribute
to the generation of national wealth.
For the medium and long term, and in order to increasingly reduce the disruptive impact of external and internal shocks, policies must continue
to be oriented towards deepening the process of structural transformation. Indeed, it is understood that a specialization profile based only on natural resources
, where variations in international prices or climatic conditions generate volatility and uncertainty, is incompatible with a
pattern of lasting economic development.
The policies deployed by the BCRA in relation to the orientation of credit to productive activities, reduction of transactional costs
, increase in the monetization of the economy and the aforementioned administration of the exchange rate are inscribed in this logic. Deepen the degree of financial intermediation,

Combining the dynamism of credit with high investment rates, it requires a remonetization of the economy, that is, monetary aggregates
that grow faster than Output.
It also implies rates of increase in loans that allow the deepening of the credit channel that is still well
below the values of comparable economies in Argentina.
In this context and in line with expectations, during the past year the increase in private M3 was mainly driven by the increase
in loans in pesos to the private sector, especially those lines with commercial use (advances and documents). Lending in national currency to this
sector accelerated its growth throughout the year and ended 2012 with an increase of 40.5% YoY, 8.6 percentage points (p.p.) more than in December
2011. Thus, bank financing to the private sector in pesos increased again in relation to the size of the economy, to represent
16.6% of GDP (+1.7 p.p. compared to 2011).
A similar trend has continued so far in monetary aggregates, with loans to the private sector once again being the main
driver of the increase in private M3.
For 2013, local economic activity is expected to gain momentum from the recovery of external demand and investment, to which will
be added the continuity of the increase in private consumption.
Higher economic growth will make it possible to sustain labor market conditions. The production of goods will rebound, led by industry
and the agricultural sector. Manufacturing activities linked to external demand, such as the automotive and basic metals sectors, will
benefit from the higher economic growth expected in Brazil. The rest of the industrial sectors will increase their production due to the higher
expected domestic demand. On the other hand, agricultural production in the 2012/13 campaign would experience a growth of around 12% in relation
to the previous cycle, based on the higher volumes harvested of corn and soybeans.
The evolution of prices will continue to be conditioned by the behaviour of international prices, the distributive bid and the characteristics of
the production structure, such as the concentration of supply in some segments and sectoral bottlenecks. In particular, in the face of the dynamics

observed by the prices of some goods in 2012, especially food, and with the aim of containing upward pressures and converging
expectations, the National Government implemented at the beginning of 2013 a price agreement with large supermarket chains and
with production firms of great relevance in the determination of prices. It was initially proposed for a period of 60 days and then extended
for a second two months.
Faced with the scenario of international crisis, the challenges of maintaining a high level of activity, investment and employment as well as higher incomes
of the popular sectors are important. The BCRA’s response will be to continue with its policy of promoting productive credit and, in particular,
that destined to key investments to ensure employment and development, in line with the text of the third article of the Organic Charter.
It will also continue with the managed exchange rate policy, avoiding abrupt fluctuations in the parity of the peso, while maintaining
the macroprudential regulations and the process of external deleveraging that have made possible the longest and most intense period of growth
in Argentine history.