Macroeconomic and Monetary Policy Report

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

The international scenario continued to exhibit contradictory signals with respect to global growth, as well as high financial and
exchange rate uncertainty. After five years of significantly expansionary monetary policies and fiscal measures that mostly did not accompany these efforts,
advanced economies are showing signs of a fragile recovery. The heterogeneity in economic performance between countries explained the disparity in policy decisions
by each one, thus abandoning the relative homogeneity that characterized decision-making in the initial stages of the international crisis
. While the United States slightly reduced its liquidity policies (tapering) on two occasions, Japan, the Eurozone and Great Britain
maintained their monetary stimulus, although with different perspectives. As Japan’s
economy shows better activity indicators and inflation converges faster than expected to its target, the euro zone could enter a deflationary cycle of the kind Japan faced for 15 years.
The focus of greatest concern in the current stage of the crisis, however, is focused on emerging economies. Mostly affected by the change
in U.S. monetary policy, these countries had to face strong dismantling of speculative positions in their assets, depreciation and increased
volatility in the value of their currencies and rising interest rates. Although these trends have been observed since the end of October 2013,
they have deepened in recent months. This behaviour, similar to that recorded between May and June 2013 and other periods in recent years,
coincides with the search for refuge in assets considered safer by investors. Thus, once again, the volatility of capital flows contributed to the economic weakening of emerging countries.
Since the possibility of a reduction in the US Federal Reserve’s (Fed) asset purchase policies began to be contemplated in
April 2013, the currencies that weakened the most were those of Indonesia, Turkey, Brazil and South Africa (with depreciations between 17% and 25.2%) and, to a lesser
extent, those of India and Chile. These countries had current account deficits of more than 3% of GDP in 2013, reaching levels of 7% and 6% of
GDP in the cases of Turkey and South Africa, respectively.
The broad-based appreciation of the dollar resulting from tighter monetary policy contributed to the fall in international commodity prices, thus widening the difficulties faced by net commodity exporting emerging countries.
The lower prices reflected in the futures market also reflect, in the case of agricultural products, the effects of high grain harvests
, and, in the case of the prices of metals and minerals and energy, the fragile performance of the global economy. In the latter case, socio-political conflicts in the Middle East partly offset downward pressures on the price of crude oil.
Going forward, there is still a high degree of uncertainty regarding how the global economy will evolve. There is not only concern about a possible continuation
of the dismantling of speculative positions in financial assets of emerging countries, but also about what the impact of these trends
will be on global growth. We are thus faced with a scenario where:
1) there is uncertainty about the size of the recovery in the United States, and about the pace of tapering,
2) there are no substantively positive signs in the rest of the advanced countries,
and 3) the risk of a generalized slowdown in developing countries – particularly China – increases, in a context of devaluations and
rise in interest rates in most of these economies that are combined, in some cases, with high levels of indebtedness and fragility of financial
systems.
In Argentina, the expansion of economic activity moderated during the second half of 2013. However, the strong recovery recorded during
the first half of last year would allow us to estimate growth of close to 5% for the year, 3 percentage points (p.p.) higher than that observed in
2012.
On the demand side, household spending was the most dynamic component and made the largest contribution to GDP, both in the last quarter and throughout
the year. The rise in labor income, transfer policies to lower-income sectors, and the continuity of financing possibilities, sustained household consumption.
Investment contributed to a lesser extent, mainly due to spending on durable production equipment, while construction recovered its
levels of activity prior to the contraction observed in 2012. Thus, the investment rate remained at around 23% of GDP in 2013. Finally, net exports – measured at constant prices – had a negative effect on demand.
On the supply side, the provision of services—which contributes two-thirds of the economy’s value added—continued to be the most dynamic segment.

Its evolution responded both to the increase in household consumption and to the greater demand caused by the sectors that produce goods. The
latter observed heterogeneous behaviors between primary, industrial and construction-related activities.
The increase in value added from the result of the 2012/13 harvest recorded in the first part of the year was not fully passed on to the industry
in the second half of 2013. Thus, the lower levels of milling compared to 2012 (-10% in the second half of the year) weighed heavily on the course
of the activity of the food industry, offsetting the positive contribution of the industrialization of livestock products.
After a record agricultural production during the 2012/13 cycle, around 106 million tons, the current campaign is expected to have positive results
from the increase in wheat and soybeans. Thus, the agricultural sector is expected to have a multiplier impact on economic activity in 2014, both
due to the growth of the harvest and the export of the remnants of the previous season. The rise in agricultural production will in turn have effects
on the activity of industry and services.
With respect to the rest of the manufacturing branches, the traditionally exporting blocs – such as the automotive sector, chemical products and
related sectors, including part of metalworking production – saw declines in the second half of 2013 due to a weakening of
external demand. For its part, construction expanded throughout 2013, both for major public and private works. The Argentine Bicentennial Credit
Program (PRO. CRE.AR.) The construction or renovation of the single family home has been key in sustaining construction
, and its positive impact is expected to continue in 2014.
The labor market remained strong, despite the moderation in economic growth. In the fourth quarter of 2013, the unemployment rate fell
to 6.4% of the Economically Active Population (EAP; -0.4 p.p. year-on-year). The quality of employment also improved in the same period with
a reduction in the Underemployment Rate to 7.8% of the EAP, given the fall in underemployment demanding.
Meanwhile, the informality rate fell in relation to 2012, reaching 34.6% of salaried workers (as of the third quarter of 2013).
Labor market conditions—with wages growing at a rate similar to that of 2012—and government income policies drove
a further improvement in the equity of personal income distribution during 2013. Among the latter, the actions aimed at increasing
the income of the lowest-income sectors – Universal Child Allowance and Pregnancy Allowance for Social Protection – and the increases
in retirement and pension benefits, and the Minimum, Vital and Mobile Wage stand out. Likewise, the National Government recently announced the creation
of the Student Support Program of Argentina (PROG.R.ES.AR) with the aim of providing economic support to young people between 18 and 24 years of age (1.5
million potential beneficiaries of which more than 500,000 people have already enrolled) who have not finished their studies and who do not work or do so
precariously.
In relation to the external sector, according to INDEC data, exports grew 2.6% YoY in 2013, led by manufactures of agricultural origin
and, to a lesser extent, those of industrial origin.
On the other hand, imports increased 8.7% YoY in the same period. Thus, the trade surplus totaled US$9,024 million in 2013, US$3,395 million
below the balance reached in 2012. The reduction in the surplus was mainly explained by the negative balance of the exchange of fuels
and energy, since excluding it results in a trade surplus of goods of US$15,187 million, which implies an improvement of US$385 million compared to
2012. In fact, exports of the rest of the goods rose by 5.4% YoY in 2013, while imports excluding fuels
rose by 5.7% YoY, implying an increase in the trade balance of 4.2% YoY, which represented approximately 3% of GDP.
The current account registered a deficit equivalent to 0.7% of GDP in the accumulated of the last 12 months to the third quarter of 2013, maintaining a
good performance when compared to emerging countries of the G-20. For 2014, a reversal of the current account balance is expected to turn positive since
a favorable effect is expected on the flows of income and expenditures of the trade and services balance, particularly
those related to tourism, derived from the modification of the exchange parity.
The increase in local production of goods and services drove the increase in tax collection, which increased by 26% YoY in 2013.
While the Value Added Tax, the Income Tax and Social Security revenues grew by more than 30% YoY (contributing 83% of the increase in revenue from collection), Nourished by tax resources and, to a lesser extent, by the profits
of the BCRA and by the income from the property of the Sustainability Guarantee Fund (FGS-ANSeS), revenues of the National Non-Financial Public Sector (NFPS) rose 30% YoY.
in the period. Primary expenditure also increased (33.5% YoY), mainly due to the increase in Pension Benefits and Current Transfers
to the Private Sector (which include family allowances and subsidies). NFPS recorded a primary result of around -0.8% of GDP in
2013, while interest payments accounted for about 1.6% of GDP.
During the fourth quarter of 2013, the National Treasury once again covered its financing needs using intra-public sector sources.
Thus, the national public debt in the hands of the private sector – which as of June 2013 stood at 12.3% of GDP – ended the year at these limited levels.
In the new fiscal year, the 2014 Bonar debt swap maturing in January significantly reduced the financial
needs of the first quarter of 2014, obtaining a 77% acceptance rate. In addition, in recent months, progress was made in the signing of various agreements between the National Government
and companies that maintained claims within the framework of the ICSID. More recently, the agreement with Repsol was added, from which the expropriation of 51% of YPF’s shares will be compensated through the issuance of bonds.
In terms of prices, INDEC recently released the National Urban Consumer Price Index (IPCNu). This new indicator is based
on 6 regional baskets (according to the results of the latest National Household Expenditure Survey of 2012/13), making a survey
in 40 urban agglomerations of more than 5,000 inhabitants distributed throughout the country. Thus, the IPCNu provides information on the evolution
of retail prices with a wide geographical coverage and an updated expenditure structure. According to the new index, retail prices rose by 3.7% per month last January.
This behavior was mainly determined by the increase in Food and beverages, Transportation and communications and Recreation, which together accounted for almost 70% of the increase. The increase in the prices of food and beverages (3.3%) was mainly influenced by meat, dairy products, baked goods and food outside the home. The increase in Transport and communications mainly reflected the entry into force of the new tariff scheme for urban and suburban public passenger transport for the metropolitan area, while Recreation
captured the seasonal increases linked to tourist services.
Since the beginning of this year, the Government has implemented a series of price agreements from which reference values were established – which will be
reviewed periodically – for a set of goods. The program covers a wide range of products including food and beverages,
bookstores, cleaning and perfumery products, and medicines. In addition, reference values were set for inputs for housing construction
in order to guarantee the purchasing power of the funds granted under the PRO.CRE.AR, and thus the effectiveness of the programme.
Monetary aggregates in pesos continued to moderate their year-on-year growth rate throughout the fourth quarter of 2013, a trend that continued
at the beginning of 2014. In December, the broader aggregate in pesos (M3) grew 26% YoY, while private M3 grew by 28% YoY. Although all the
components of private M3 rose, fixed-term deposits stood out for their dynamism, with a rise of 35% YoY – a rate lower than that of a
year ago but still historically high.
In order to balance the money market and encourage savings in national currency, as of January the Central Bank began to increase reference interest rates
. The cut-off yields of LEBACs with shorter maturities were close to 29% at the end of February, and the interest rate
of the most mature awarded species stood at approximately 30%. Likewise, variable rate specie was placed again, registering
at the end of February a positive spread over the BADLAR of private banks, which was from 1.2 p.p.
at 1.3 p.p. depending on the term. Banks’ lending and lending rates, which had already risen in December due to seasonal factors, followed the benchmark rates.
It should be noted, however, that the monetary authority has instruments specifically designed to prevent these increases from
deteriorating productive credit. After having disbursed $53,700 million under the Credit Line for Productive Investment (LCIP) between June 2012 and December 2013 with almost 60% destined to Micro, Small and Medium-sized Enterprises (MSMEs), the Central Bank launched the fourth stage
in which around $23,000 million will be allocated to the productive sector during the first half of
2014. On this occasion, the entire quota must be directed to MSMEs with a minimum term of 36 months and a maximum fixed interest rate of 17.5%. However, up to half
of the quota may be allocated to mortgage loans for housing with a minimum term of 10 years – subject to other financial conditions – and to the financing
of investment projects of large companies with purposes determined by regulations – without limitation of interest rates. Recently, the use of credits for productive investment was extended
to the discount of deferred payment checks to 10% in March and up to 10% in April of its quota planned for the first half of 2014. The interest rate of the financing must not exceed 17.5% and, although the minimum term of 36 months will not be applied, the level of application reached in April must be maintained, at least, until June 30, 2014.
Also, as of March 2014, an additional reduction in reserve requirements was provided for financing with a term of more than 5 years granted since January 1, 2014 to MSMEs within the framework of this line of credit.
In addition, the BCRA will continue to tender funds within the framework of the Bicentennial Productive Financing Program (PFPB). From its inception until last December
, $5,860 million were disbursed (about 75% of what has already been awarded), mainly to industry. Thus, together with the LCIP, the Central Bank
will continue to stimulate loans in pesos to the private sector in a context where the level of global leverage of the economy, despite
having recovered 5.9 p.p. since 2010, remains low (17% of GDP in January).
In this way, the secondary creation of money will remain one of the main factors of monetary expansion. In the last three months of
2013, the rise in peso loans to the private sector largely explained the monetary expansion along with operations with the public sector. Taken together
, these factors offset the contractionary effect of net foreign exchange sales in the market.
Partly as a result of the foreign exchange intervention and also due to the debt payments made in foreign currency, international
reserves stood at US$30,599 million at the end of 2013, showing a further drop at the beginning of 2014.
During the last quarter of 2013 and January 2014, a significant increase in volatility was observed in the foreign exchange market, as a result of internal factors that added to the greater instability recorded in most emerging markets.

Within the framework of its managed floating policy, the Central Bank led to a rise in the exchange rate that implied an increase of 23% compared to the value of the currency at
the end of 2013. At the same time, in order to stimulate savings in national currency, as mentioned above, it made several consecutive increases
in the cut-off rates of the LEBAC and NOBAC tenders (which generated an increase so far this year of just over 12
percentage points in the rates for all maturities).
Although in the first two months of 2014 the BCRA absorbed $37,995 million through the issuance of LEBAC and NOBAC – and around $47,000 million
if absorption by passes is included – the stock of these instruments in relation to deposits remains at relatively stable levels.
In addition, in order to normalize the settlement of exports and increase the net supply of foreign currency, exporters in the cereal and oil
sector were allowed to subscribe LEBAC in pesos that can be settled at the reference exchange rate as of December.
In a context of high liquidity in the foreign currency segment, a gradual increase in reserve requirements in these currencies was ordered until April.
In turn, entities were allowed to deduct the equivalent of their holdings from the LEBACs in US dollars that began to be tendered in
January.
In a context where the broad positive mismatch of foreign currency in the financial system stood at 71% of the Eligible
Patrimonial Liability (CPR) at the end of 2013, in February the limit was reestablished to the positive Net Global Position (GNP) of foreign currency (30% of the PRC or
liquid equity, whichever is lower) and another was established to the positive forward GNP (10% of the CPR).
It should be noted that a high coverage ratio with liquid assets of deposits in foreign currency would be maintained, which show a low weighting
in the total funding on the balance sheets of financial institutions.
On the demand side for foreign currency, in January the access of resident individuals to the foreign exchange market for the formation of freely available foreign assets was reestablished – as of February 27 inclusive, purchases for this concept were made for a total of US$253 million. In order to encourage the private sector’s savings in dollars to remain banked, it was provided that if the amount acquired is kept deposited
for at least 365 days, the purchase of foreign currency will not be subject to advance collection – equivalent to 20% of the amount of the transaction – as payment on account of income tax or personal property tax.
In addition, entities were allowed to subscribe LEBAC in dollars based on fixed-term deposits in that denomination raised with
predetermined interest rates higher than those observed in the market prior to this measure. These LEBAC purchases in dollars
may be deducted from the items subject to the minimum cash requirement.
The set of measures implemented has allowed the Central Bank to make net purchases of foreign currency that contributed to international reserves
remaining at stable levels, while helping to mitigate excessive exchange rate volatility. From now on, the
BCRA will continue to work to achieve the purposes indicated in the Organic Charter with the available instruments and in coordination with the rest of
the economic policy.