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.

Institutional Vision

Since the onset of the international financial crisis in mid-2007, the world economy has gone through several phases. After reaching a low in
the second quarter of 2009, the national economies regained some dynamism. However, far from maintaining stable growth, a second phase began
in the second quarter of 2011 in which the developed countries suffered a stagnation in the level of activity and the emerging countries
gradually reduced their GDP expansion rates.
The first stage was characterized by a simultaneous and relatively coordinated use of monetary and fiscal policies at the global level. After this initial impulse
that managed to keep economies away from collapse, differences began to manifest themselves in the intensity of the measures and less willingness to keep
fiscal policy active. During this second period, in most advanced nations, monetary policy remained in practice the
only instrument to reactivate economies and as a result of the fiscal adjustments implemented, the incipient recovery vanished.
Developing nations, on the other hand, faced the external shock with more robust macroeconomic conditions. Meanwhile, they had more solid internal markets
and policy spaces to implement counter-cyclical actions. Based on fiscal, monetary, including the prudential administration of international reserves, and financial measures, which in some cases implied the relaxation of inflation targeting schemes and the depreciation of their currencies, developing countries sustained growth by protecting their domestic markets to reduce the adverse effects of lower external demand from the advanced world. Later, and after the peak of the crisis, developing countries implemented
trade and exchange measures aimed at containing the strong appreciation of their currencies as a result of the expansive monetary policies of developed
economies. During this second stage of the international crisis, although emerging countries showed a reasonable economic
performance, they also showed a gradual but sustained slowdown in growth.
From the second half of 2012 onwards, the third phase of the crisis began. Since then, growth rates
have slowed in emerging countries, while in the developed world there are markedly dissimilar macroeconomic conjunctures and policy responses.
The Eurozone remained in recession, despite which some countries continued with fiscal adjustment measures. In Japan—in order to achieve

finally economic reactivation and exit deflation – an ambitious program of monetary and fiscal measures was recently implemented. Meanwhile
, in the United States, some signs of recovery in activity were glimpsed and, perhaps prematurely, signs of
an eventual exit strategy from expansionary monetary policies began to appear.
In fact, in the face of improvements in certain indicators of the level of activity of the US economy and the arguments to discourage the
formation of a potential speculative bubble in that country, those responsible for monetary policy in the United States communicated in a timely manner.

A gradual decline in the liquidity provision program is deliberately ambiguous. This generated a shock of uncertainty in the international financial
centers. The consequent rise in the long-term interest rate in that country put pressure on the domestic and foreign markets, just before
the growth figures of the U.S. economy for the first quarter were revised downwards.
Given the level of interconnectedness of financial markets, these statements had strong repercussions not only in the United States but
also in the rest of the world through the dismantling of positions in emerging economies with capital outflows to destinations classified as
less risky. This redirection of flows led to falls in the prices of equities, sovereign debt instruments and, to a lesser
extent, primary products, and induced depreciations of most currencies. In other words, a communicational action taken in the United States
and, perhaps aimed in part at discouraging the sharp increase in the prices of its stock markets, ended up resulting in a financial shock of considerable dimensions for
the entire world.
Once again, a predominant feature of the international financial architecture was revealed, which is a strong asymmetry in the spillovers
of monetary policy decisions—including announcements—in the core countries, especially the United States. More worrying

In general, the adverse reaction was proportionally greater on the financial assets of emerging countries. Thus, the visions that they usually attribute

The inflow of capital to emerging countries on the basis of internal factors (pull factors) can be considered, at least, as optimistic,
especially if they are short-term flows. The present circumstance warns that factors of an exogenous nature for these economies, such as
liquidity – and the degree of uncertainty – in advanced countries and, more generally, the management of their monetary policy, are global and constitute
the determining cause of short-term financial capital movements (push factors).
This scenario of uncertainty opens up at least two major questions in the medium term. First, it is not clear whether there are indeed objective conditions
in advanced countries that would allow them to dispense with expansionary monetary policies.
There are no conclusive indicators showing a robust recovery in economic growth or employment in the United States, Japan, and, most notably,

in Europe. On the contrary, it seems that the advanced world will continue to grow at very modest rates, while in some economies
the challenge is to overcome the recession.
At the same time, there is no certainty about the duration and persistence of the context of uncertainty and high volatility in currencies and in the financial indicators of the United States.

emerging countries. These phenomena negatively affect the rate of economic expansion of this group of countries in a scenario
in which fiscal space has been reduced to counteract the negative effects of the international crisis.
Given that emerging countries accounted for 90% of global expansion in the last five years – with the cases of
China and India being particularly relevant – a lower dynamism in these economies and the lack of robust growth by advanced countries could leave the world
without relevant drivers of global growth.
Faced with this more adverse international outlook, and as anticipated in last April’s Macroeconomic and Monetary
Policy Report, market projections for global growth for 2013 were again revised downwards, both in advanced
and emerging countries. Thus, for 2013 world output is expected to grow by 2.6 percent, lower than forecast at the end of 2012. It should be noted
that this correction was mainly due to the slowdown in the pace of expansion in the main emerging countries.
In particular, the growth of Latin America forecast by the market was revised downwards by 0.3 percentage points (p.p.) during the second quarter,
with an estimated expansion of 3.2% for the whole of 2013. This correction was due to lower demand from advanced economies and, more importantly, from the United States.

recently, to the deterioration of external financing conditions. Faced with the reversal of capital inflows, Latin American
countries have recorded depreciations of their currencies against the dollar of between 5% and 12% since May, along with abrupt falls in the values of fixed income and equity financial assets
.
In Argentina, in a context where the support and deepening of countercyclical policies contributed to facing the adverse international
context, economic activity gained dynamism.
After growing 3% year-on-year (y.o.y.) between January and March, growth would have accelerated during the second quarter of the year. In this period,

The increase in the production of goods and services continued to be driven by domestic demand—from higher spending by households and firms

— to which was added the improvement in exports due to the impact of sales of the coarse crop and the increase in shipments of industrial products

—mainly Brazil—.
Private consumption regained its strength and grew 6% YoY during the first quarter. This behavior is based on the conditions of the labor market
, which continues to be the main source of income for families. In the first months of the year, 84 thousand new jobs were generated and
informality was reduced to historic minimum levels (32% of salaried workers). In addition, most wage negotiations were
concluded in the course of the second quarter, resulting in annual increases of around 24% for 2013. The combination of a higher level
of employment and recent wage increases allowed a new growth in the wage bill in relation to GDP and boosted household spending during the second quarter of
the year.
Household incomes also increased as a result of the update of government transfers to low-income families
. During the second quarter, family allowances were increased – which include the Universal Child Allowance – a measure
that was added to the increase in retirements and pensions in March. These initiatives implied an improvement in income distribution, based on
a greater participation of the lowest quintiles of the population in total income.
Investment grew 1.3% YoY during the first quarter of the year and, according to leading indicators, deepened its expansion during the rest of the first half of the
year. The rise in the most recent months was due to a new increase in the acquisition of durable production equipment,
mainly imported, while investment in construction was recovered. This dynamic would have been favored by the policies designed
by the BCRA to stimulate productive credit and by the effect on the construction of the Argentine Credit Program (PRO.CRE.AR). The continuity
of these measures, together with the creation of the Certificates of Deposits for Investment (CEDIN), will favor the performance of construction
in the coming months. In the same vein, the Argentine Savings Bond for Economic Development (BAADE) and the Savings Promissory Note for
Economic Development (PADE) will operate, financial vehicles that will allow funds to be channeled to public investment in strategic sectors – such as infrastructure
and hydrocarbons.
During the first half of the year, net exports contributed negatively to the evolution of GDP. The weak performance of Argentina’s external sales
was in line with that observed in other countries in the region and was mainly due to lower demand from
advanced economies. Thus, while in Brazil, Colombia and Uruguay exports of manufactured products decreased in the
first months of 2013, compared to sales in the same period of the previous year, in Mexico and Chile they slowed down their growth rate.
However, in the second quarter, Argentina’s external sales improved after the entry of the 2012/13 soybean and corn crop that increased

the exportable balances of primary products and their manufactures. In addition, shipments of industrial goods,
mainly transport material destined for Brazil, continued to rise. Meanwhile, imports rose by a greater magnitude, with a generalized
increase in all items, as a result of the improvement in the dynamics of the level of activity. Thus, the trade surplus remained at high levels but
below that recorded in the same period of 2012.
In this context, and as previously mentioned, the BCRA continued with its policy of stimulating productive credit, starting with the second tranche
of the Credit Line for Productive Investment (LCIP) and the auction of funds through the Bicentennial
Productive Financing Program (PFPB).
According to preliminary results, one year after the LCIP came into force, the loans granted by banks for productive investment
amounted to $35,000 million.
56.4% of these funds were allocated to Micro, Small and Medium-sized Enterprises (MSMEs). Among the main productive destinations, the

industrial sector that concentrated 34.9% of the amount granted. The primary sector received 23.8% of the funds, followed by services, which took 22.0% of the total line.
Based on the positive result obtained so far, the program was extended to a third stage. During the second half of the year, funds equivalent to 5% of the balance of private deposits in May 2013 of each of the banks involved
will
be allocated for productive loans, which together add up to $20,000 million.
As in the two previous stages, at least half of that amount must be granted to MSMEs, although this time the possibility
is incorporated that this type of companies can allocate up to 20% of the total amount of the project to finance working capital associated with productive investment.
The financing conditions of the first tranche of 2013 are maintained: the interest rate will be 15.25% and the minimum repayment
term will remain at 3 years, even for working capital for MSMEs.
The bidding of funds through the PFPB also continued, granting medium- and long-term loans at a fixed interest rate. As of the second
quarter of the year, the total awarded since the PFPB began amounted to $6,921 million.
It is estimated that the total credits granted and to be granted through these two programs – including the third stage of the LCIP – would
reach $62,000 million, which would represent approximately 2.7% of GDP and around 15% of total loans to the private sector.
The results of the implementation of these programs are evidence of the virtuous effects of the credit regulation policy. The information

LCIP demonstrates its effectiveness in increasing the availability of financing for investment, facilitation

access to credit for the MSME stratum and the improvement of financing conditions. In fact, since the implementation of the line, it is also verified

an extension in loan terms and a reduction in interest rates.
In this way, a greater dynamism was observed in loans in pesos intended to finance legal entities. As a result, loans
to companies increased their share of the total balance of loans to the private sector in pesos and went from representing approximately
43% of the total in 2012 to about 47% in May of this year.
The significant relative growth rate of bank credit to the private sector led to a greater degree of depth in the credit channel, reflected
in an increase in its ratio to GDP. Thus, total loans (pesos and foreign currency) to companies and households accounted for 15.7% of GDP as of June

of 2013, which implies an increase of 1.1 p.p. compared to a year ago, and of more than 5 p.p.
since the recovery that began in early 2010. As a result of its sustained increase, credit has been the main support for the process of
monetization of the economy. The broadest aggregate in pesos (M3) reached a variation of 31.8% YoY in June and accumulated an increase of 10.5% ($76,000 million)
in the first six months of the year. The expansion of loans accounts for around 60% of the increase in M3 accumulated so far in 2013. Also

public sector operations and the Central Bank’s purchases
of foreign currency contributed to monetary expansion.
Thus, a little more than a year after the reform of the BCRA’s Charter, the results achieved in terms of financing the private sector vindicate
the importance of having recovered the monetary and financial policy tools that had been in force for almost half a century.
The prospects for future GDP expansion will depend on the possibilities of continuing to stimulate productive investment and domestic consumption

in a more adverse international context.