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

The international scenario during the third quarter of the year showed an increase in instability in the financial markets. The possibility that the Federal Reserve of the
United States (Fed) would begin to reduce its monetary expansion policy by reducing the pace of asset purchases, prevailed
as a source of uncertainty. The sharp reversal of short-term capital flows to emerging countries, which was observed in the face of this probable
change in the behavior of the U.S. monetary authority, once again showed that these funds respond fundamentally
to external factors and that the macroeconomic situation of the countries receiving foreign capital is of lesser importance.
Since May, based on speculation about a lower monetary stimulus from the Fed, commodity prices have increased their
volatility and the prices of financial assets in emerging economies have fallen sharply. In this context, significant
depreciations of currencies, falls in stock market indices and increases in the yields of fixed-income financial instruments took place. This
behavior was widespread, but its impact was greater in those countries that have a weak external position understood as significant
deficits in the current account and a high level of short-term external debt.
For 2013, growth expectations in some emerging economies have been declining.
In this context, the damage that the instability of international capital inflicts on the host nations and justifies regulation is once again verified

prudential of cross-border capital flows. Given the characteristics of these flows, it is necessary to rethink this type of regulation not only as an instrument

individual and isolated but as part of the global macroprudential tool to be applied by both the countries of origin
and the recipients.
For the world as a whole, projections point to real growth in the global economy of 2.5% in 2013, a pace that is still far from the
pre-crisis annual average (3.8% between 2004 and 2013).

The main advanced economies and the growing difficulty that emerging countries have in counteracting the harmful effects of a crisis that has lasted for more than six years.
The somewhat more favourable outlook for the US economy continues to be affected by some weaknesses, in particular those relating
to the functioning of the labour market.
Although the unemployment rate continued to decline, it still registers historically high values. The level of employment has not yet recovered to the
values prior to the crisis that began in 2007, having registered a very unfavourable dynamic in relation to those experienced in past crises.
This slow and partial recovery in employment coincided with a reduction in the participation rate in the last six years of 2.6 percentage points (p.p.).
However, so far this year there has been an increase in domestic private spending, while the fiscal adjustment and the lower contribution of net exports
played in the opposite direction. Going forward, the recovery will be conditioned, among other factors, on the reach of a new agreement to extend the period of implementation of the tax cuts.
In this context, there are conflicting opinions regarding the timing and size of the cut in the Fed’s asset purchase program.
For its part, in the second quarter of the year the euro area grew at an annualized rate of 0.3% seasonally adjusted (s.e.), after 18 months of declines. Thus a weak demand prevails, which suffers

with the high and sustained level of unemployment, fiscal austerity measures, the reduction of credit to the non-financial private sector and persistent uncertainty. In Japan, the unprecedented economic policy

due to the magnitude of the monetary stimulus, and the reforms are beginning to be reflected in the main indicators. For the first time in 13 months, positive inflation rates were recorded, GDP continued to expand and

exports increased. Even with this panorama, market estimates anticipate meager growth for the Japanese economy in 2013 and 2014 (around 1.7% in each year), and the difficulties

to carry out a tax increase without affecting the continuity of the expansion.
Although they still remain the main drivers of global growth, emerging countries continued to reduce their rates of expansion. Among Argentina’s trading partners, it is expected that

China’s GDP will increase by 7.6% in 2013 and a similar increase is projected for 2014. Forecasts
released by the survey of the Central Bank of Brazil foresee a 2.4% increase in the level of activity in that country for 2013, despite
having accelerated its growth rate in the second quarter to 3.3% year-on-year (y.o.y.). In the same vein, after having been revised downwards
in recent months, the Brazilian economy is projected to grow 2.2% in 2014. In Argentina, the international context also influenced the progress of the economy through a lower

demand from the rest of the world but, unlike other countries, domestic absorption was able to sustain a growth trajectory higher than expected by many private analysts and multilateral organizations.

The macroeconomic configuration resulting from a decade of public policies aimed at strengthening the domestic market and reducing sources of external vulnerability, made it possible to mitigate the impact of the crisis

international. Considering the virulence and duration of this crisis and the effects of other external shocks on the Argentine economy, it is shown that the set of policies deployed by the government have managed to situate

Argentina in a position of strength.
The policies implemented by the country in the last 10 years have modified the structure and dynamics of the Argentine economy. In particular,
there are four structural factors that explain the economy’s ability to withstand the crisis and ensure sustainable growth. The first is
the recomposition of the labor market and greater social inclusion. The second is reindustrialization.
The third is the remonetization of the economy and the recovery of credit in national currency and the fourth refers to de-indebtedness.
In relation to the labor market, Argentina achieved a notable reduction in its unemployment rate (14 percentage points—p.p.—from the peaks of
2002) standing at 7.2% in the second quarter of 2013. Likewise, unemployment relative to the active population was kept limited in periods
of extreme tension in international markets through fiscal programs designed to accompany the efforts of the business sector to retain
jobs. This unprecedented stability in periods of global crisis is even more remarkable if one considers that the activity rate has
increased by almost 1 p.p. since the end of 2007. In other words, the virtuous dynamics of the labor market have pushed a larger portion of people to look for work,
in contrast to what is observed in economies hit by the crisis where there are falls in the activity rate.
At the same time, the incorporation of a large part of the population into the labour market, together with active income policies for the most vulnerable sectors (including children, adult employment and the elderly) made it possible to

significantly improve income distribution. The Gini coefficient in terms of
family per capita income demonstrates this improvement, having reached a value of 0.414 in the second quarter of 2013, which represents the best figure in the last 20 years. The Human Development Index

for Argentina, it points in the same direction, reaching record values (0.755 in 2000 vs. 0.811 in 2012) and very favorable in the regional comparison. According to empirical evidence, social advances such as those mentioned above make up

a fundamental pillar to achieve sustainable growth.
The scope in terms of labor and income boosted domestic demand, which allowed the recovery of local industry which, in turn, fed back a virtuous circle of growth. The industry expanded between 2003 and 2012

at an average annual rate of 7.6% with a relatively homogeneous performance within the sector. In this period, there was a 43% increase in industrial employment and a cumulative increase of 52% in labor productivity.

At all times, the managed floating exchange rate regime sought, contributing to financing
policies and fiscal and monetary stimulus, to preserve industrial reactivation by avoiding the nominal appreciation of the peso expected in
a context of good international prices for the raw materials that Argentina exports.
In addition, specific policies were articulated with the aim of stimulating the investment rate.
Between 2003 and 2012, the ratio between investment and GDP averaged 20.9%, almost 2 p.p. higher than the level observed between 1993 and 2001 (19.0%).
In recent years and with the reform of the BCRA’s Charter, it has been possible to deploy a set of policies to direct financing
towards productive activities. In this context, it is estimated that the three six-month phases of the Credit Line for Productive Investment will
accumulate total financing equivalent to approximately 2.5 p.p. of GDP (from its launch in June 2012 until the end of this year). This program also achieved a considerable increase in available loans

for small and medium-sized enterprises. Added
to this result are the disbursements granted through the Bicentennial line and the effects of the
regulatory incentive scheme designed to increase financing in areas with less relative attention in terms of financial services.
In general terms, the increase in the credit channel together with the process of remonetization of the economy expands the space in which monetary policy can stimulate the level of activity, contributing to the sustainability of the economy.

economic growth. The dynamism of the real economy and the improvement in the distribution of income led to an increase in the demand for real balances, generating a persistent monetization of the economy. It is estimated that
the total monetary aggregates in pesos (measured by the M3 that adds the banknotes and coins and the total deposits in pesos) accumulated an increase of
5.9 p.p. of nominal GDP since the beginning of 2003 and stood at 31.1 p.p. of GDP in September of this year. Exchange rate policies, banking regulations on currency mismatch and external deleveraging also contributed
to this process. Even after this important remonetization process
, Argentina remains below the levels observed in the main Latin American economies and even further away from those registered
in advanced countries.
Since 2010 and as a result of the active policies to stimulate productive credit, loans have gained participation as a factor of monetary creation
to occupy a predominant role in it. Bank loans in pesos to the private sector reached a ratio to GDP of 15.1%
so far in 2013, an increase of 6.3 p.p. since the beginning of 2003. Thus, together with loans in dollars, bank financing amounted to 16% of GDP in September.
Finally, the policy of public deleveraging initiated in 2003 constitutes another strength of the Argentine economy. Based on the debt
swaps and the accumulated fiscal results, public obligations fell from 139% of GDP in 2003 to 44.9% at the end of 2012. If the
proportion of public liabilities held by private creditors is considered, the decline was even more pronounced, reflecting a more intensive
use of public sources of financing (from 105% in 2003 to 13% in 2012). Thus, sovereign debt with the private sector reduced its share from 75%
of the total in 2003 to only 29% in 2012.
The deleveraging strategy was also reflected in the evolution of public external debt, which was combined with the decrease in the external
liabilities of the private sector. Thus, Argentina’s total debt to non-residents fell significantly in relation to the size of the economy
from 129% in 2003 to less than 30% of GDP in the middle of this year. The evolution of the private sector’s indebtedness to non-residents was influenced by the capital control policies that

stimulated the entry of short-term speculative flows. Thus, of the total external obligations of the private sector at the end of 2012 (14% of GDP), the majority (10.5% of GDP) corresponded to debts derived from
foreign trade operations and the financing of parent companies to their subsidiaries.
The creation of the Argentine Deleveraging Fund and the Fund for Payments to International Organizations played an important role in the deleveraging strategy
in recent years. These funds have made it possible to channel part of the reserves to meet debt services.
Including the cancellation of liabilities to the International Monetary Fund in 2006 and payments made since 2010, US$42.9 billion would
be allocated to this end by the end of 2013. The alternative to this use of international reserves to service debt could have been to cancel these maturities through the issuance of new debt in the United States.

markets. This would have implied considerable present and future expenditures given the financing costs faced by Argentina and the differential between these costs and the yield on international reserves. Therefore,

The strategy of paying debt with more debt to maintain a higher level of reserves should be analyzed in light of the
costs and benefits that this option implies.
Thus, Argentina’s growth results from combining the macroeconomic bases outlined so far with the prospects of the international context.
Therefore, in the face of the present relatively adverse global scenario, it becomes even more relevant for Argentina to sustain and perfect the strategy
of economic growth with social inclusion implemented in the last decade.