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

During the first half of 2014, the level of global activity grew less than expected at the beginning
of the year. Several factors influenced this performance: poor weather conditions in the United States
in the first quarter, geopolitical conflicts in the Middle East and Eastern Europe, and
the slowdown in some large developing countries, such as China and Brazil. The moderation
in global activity was correlated with the evolution of internationally traded volumes,
reflecting a lower rise among emerging countries and a similar behavior to that of previous
quarters in the case of advanced countries.
For 2014, although the projection of lower growth for the main emerging nations is maintained,
a global expansion of 2.8% is expected in 2014 (vs. 2.5% in 2013) from the recovery of high-income
economies.
In the United States, beyond the transitory fall in the level of activity during the first quarter,
the situation and the forecasts for economic activity and the level of employment remained favorable.
In this context, the Federal Reserve (Fed) once again reduced monetary stimulus, aiming to start a cycle
of interest rate hikes starting in 2015. In the euro area, the monetary authority continued with an expansionary bias
in its policies, directing its efforts to avoid a deflationary process, in the face of sovereign debt
levels that remain high and a recovery that is very uneven between countries. Finally, the Central Bank of Japan maintained
its biannual program of “quantitative and qualitative” expansion, although its impact on the level of activity has been
partially eclipsed by the increase in internal taxes. In emerging nations, foreign exchange interventions
persisted in order to limit volatility – even with less pressure on their currencies – while the monetary policy measures
adopted generally responded to the slowdown in growth. But while some
countries made progress in defining additional fiscal, monetary and financial stimuli, the economies most dependent on
external financing tended to keep their benchmark interest rates above the levels in force
a year ago, conditioned by the future actions of the authorities of the central countries. In this sense,
the initiative of Brazil, Russia, India, China and South Africa (BRICS) that recently formed the New Development Bank
stands out, which could partially counteract the negative impact of capital, by constituting an alternative
financing for these economies.
The prices of agricultural commodities accumulated a decrease in July, both in relation to their values
a year ago and those recorded at the end of 2013, in a context where the dollar appreciated. The prices of the main grains
retracted, influenced by the favorable prospects for crops in the northern hemisphere,
after the rise in values recorded in the first five months of the year. In the case of soybeans, this situation
was already discounted months ago by the futures markets. Prices of metals and minerals remained slightly
below the values at the beginning of the year and below the levels of the same period in 2013, reflecting the weak
global economic performance. Energy commodities remained high but experienced
some volatility affected by geopolitical conflicts in the Middle East and Eastern Europe.
In international financial markets, the greater volatility observed at the beginning of the year was subsequently attenuated, allowing
improvements in the stock indices of the main developed
economies to accumulate in the first seven months of 2014 and some contraction in the yields of their long-term sovereign debt. A positive trend
has also been observed in emerging markets in recent months, accumulating in 2014 an increase in the prices of financial assets, both fixed
income and equities. Caution was generally maintained, with investors focused on monitoring changes in monetary policies
in developed economies, such as the US and Europe, growth in large emerging
countries, and developing geopolitical tensions in different regions.
In Argentina, due to both external and internal factors, the production of goods and services decreased 0.8% in seasonally adjusted terms
during the first quarter of the year, placing GDP slightly below the level recorded in the same
period of 2013 (-0.2% year-on-year). Unlike previous quarters, private consumption stopped growing compared
to the previous quarter and, affected in part by its high base of comparison, was 1.2% below its levels of a year ago.
Public
consumption moderated its rate of expansion to 3.4% y.o.y., while net exports of goods and services reduced their negative contribution,
subtracting only 0.2 percentage points (p.p.) from the variation in GDP. Finally, Gross Capital Formation increased 1.9% YoY in the first quarter
of 2014, placing the Investment Rate at 20.9%.
From the point of view of supply, the goods-producing sectors registered a combined decline of 1.4% YoY in the first quarter,
while services moderated their growth rate to 1.1% YoY. Agricultural activities contracted 7.3% YoY, mainly affecting
the contraction of the production of goods. They were followed, by its weight in this segment, by the manufacturing industry, which showed
a fall of less than one percentage point and, with a lesser impact, construction also contributed negatively. The decrease in commercial activity
(-3.1% YoY) and the slowdown in transport and communications (+0.8% YoY) reflected lower domestic consumption and the reduction
in volumes traded abroad. On the other hand, financial intermediation rose 16.5% YoY and continued to concentrate
the greatest positive impact on the provision of services.
Partial indicators for the second quarter anticipate a behavior of economic activity similar to that of the first three months of the
year. While industrial production, as measured by the Monthly Industrial Estimator, contracted 3.2% YoY between April and June, a rate similar to that of the first quarter,
the Synthetic Indicator of Construction Activity slightly trimmed the fall to 2.3% YoY. On the other hand, services would have slowed down their growth again, as anticipated by the Synthetic Indicator of Public Services (+3.6% YoY vs. +5.0% YoY between January and March 2014).
The lower dynamism of economic activity slightly affected the labor market at the beginning of the year. The employment rate in the 31 urban agglomerations fell
in the first quarter to 41.8% (-0.4 p.p. y.o.y.), showing that jobs grew at a slower rate than the natural growth rate of the population. Likewise, labor force participation decreased 0.8 p.p. compared to the same period of the previous year, placing the activity rate at 45.0%. In this context, the unemployment rate of the surveyed centers reached 7.1% of the Economically Active Population (EAP).
In this context, the authorities intensified policies aimed at financing investment and consumption, sustaining the level and quality of employment, and
providing economic assistance to the most vulnerable families.
Among the main measures are:
1) the expansion of the BCRA’s lines of credit, the creation of a regime of maximum interest rates for loans to individuals and incentives to boost transactions with the CEDINs;
2) the Argentine (FON.DE.AR.);
3) the launch of soft credit programs for the purchase of nationally produced vehicles (PRO. CRE. AUTO)
and for the renewal of the fleet of short buses
distance;
4) the launch of the PRO plan. EMPLOY, the enactment of the Law on the Promotion of Registered Work and the increase in penalties
for labor infractions and;
(5) the consideration in the
Honorable Congress of the Nation of a bill corresponding to the second stage of the Social Security Inclusion Plan that would allow the universalization of the system’s coverage from an already high current level of assistance that reaches 94% of the elderly.
In addition, the National Government continued to deepen its income policies aimed at serving the lowest-income sectors based on the granting of a new increase in family allowances – effective since June and a maximum increase of 40% – and the execution of the Argentine Student Support
Program (PROGR.ES.AR).
Finally, within the framework of the Pension Mobility Law, pensions were increased by 11.31% as of March and, next September, a new increase of 17.21% will be applied
.
In the external sector, sales fell 10% YoY in the first half of 2014, with falls in all items except for agricultural manufactures
, which grew driven by the soybean complex. In the case of primary goods, the contraction in corn exports explained most of the year-on-year deterioration and was mainly due to the delay in the harvest due to climatic issues. While as of June 2013 84% of corn
had already been harvested, this year that proportion rose to only 58%. For its part, half of the year-on-year fall in the export values of manufactures of industrial origin was explained by the automotive industry, partly due to the decrease in purchases from Brazil. Although imports
also decreased – a behavior widespread among the groupings by use with the exception of capital goods – the surplus balance was reduced,
standing at US$3,684 million. In this context, the Current Account of the Balance of Payments accumulated in the last 4 quarters to March 2014 a deficit equivalent to 1.0% of GDP.
In fiscal matters, in the first 7 months of 2014 the national tax collection accelerated its expansion rate to 35% y.a., supported by taxes associated with foreign trade and, to a lesser extent, those linked to the domestic market. Meanwhile, in the first five months of 2014, primary expenditure rose 41% YoY, with a greater contribution from Pension Benefits and Current Transfers from the Fund for Economic Development to the private sector. Thus, the primary and financial results of the National Non-Financial Public Sector in the last 12 months accumulated to May stood at -0.7% and -2.1% of GDP, respectively.
Although the National Treasury (TN) continued to be financed mostly within the public sector, during the first half of 2014 debt was placed in the
local market for an original nominal value of $10,000 million. Regarding the liability management policy, the general
conditions for the refinancing of eligible debt within the framework of the Paris Club were established, with a first payment being made last July. Compensation
was also implemented to the company REPSOL for the obligations arising from the expropriation of 51% of YPF’s shares.
It should be noted that on June 16, 2014, the Supreme Court of the United States rejected the request for certiorari of the Argentine Republic, leaving final
the judgment of the Court of Appeals confirming the judgment of the first instance that orders the execution of the pari passu clause in such
a way that, prior to or simultaneously making a payment to the restructured bondholders, the payment of their debts to the plaintiffs must be accredited.
This final resolution led to the lifting of the stay of the effects of Judge Griesa’s sentence. Without prejudice to the resolution, at the end of June the Argentine Republic made the deposit corresponding to the maturity of the interest of the different series of the Discount bond. However, the deposited funds have not been transferred pursuant to an order of the judge in the case. The Argentine Republic repeatedly requested a
new stay, which was not granted. In addition, as is publicly known, the Argentine Republic, in its discussions with the designated Special Master
, would have once again offered the claimants entry into the exchange under conditions similar to those of the operations carried out in 2005 and 2010,
in order to achieve a viable and sustainable solution.
The continuity of the financing strategy and the liability management operations, including the swaps of 2005 and 2010
, allowed a significant improvement in the various solvency indicators since 2003. This improvement would be maintained even if the normalization of the
debt with the Paris Club, added to the agreements with REPSOL and those made within the framework of the ICSID, lead to an increase in the liabilities of the public sector.
While at the end of 2003 the national public debt represented 138.8% of GDP, as of September 2013, the latest information available, it amounted to
36.5% of GDP. Considering public debt with private creditors – with a greater risk of refinancing – the fall was even more noticeable, since it
went from representing 105% of GDP to only 9.8% (of which 7.5% of GDP corresponds to obligations denominated in foreign currency). A similar
behavior was observed in external public debt, which stood at 11.9% of GDP in the first quarter of 2014 (70.8 p.p. below the figure
at the end of 2003). Seen from what each Argentine inhabitant owes, the national public debt per capita in constant dollars fell from US$6,012 in
2003 to US$4,885 in September 2013, while it went from almost 60 times the minimum wage to 8.6 times in the same period.
In terms of prices, throughout 2014 the National Urban Consumer Price Index (IPCNu) registered a decrease in the monthly rate of increase.
Several factors influenced this slowdown, including monetary and exchange rate policy and price agreements, all in
a context of declining economic activity.
In this way, the annualized rate of the 3-month moving average of the monthly variation retracted by up to 20% last June, a dynamic that was also
influenced by seasonal factors. In the accumulated of the first six months of the year, the IPCNu showed an increase of 15%, mainly due to the rise
in the prices of Food and beverages and Transport and communications.
For its part, the Implicit Output Price Index (IPI) rose 24.6% YoY between January and March 2014, +6 p.p. YoY in relation to the previous quarter, influenced by the increase in the nominal exchange rate in the value in pesos of goods traded abroad.
The BCRA’s policy at this juncture continued to be aimed at maintaining conditions of monetary and financial stability. Thus, the Central Bank adopted a
set of measures with the aim of reducing exchange rate volatility – after the depreciation at the beginning of the year – and improving the conditions of access to credit for companies and households, in a context of adequate levels of solvency and liquidity of financial institutions.
In this context, monetary aggregates in pesos generally moderated their rate of expansion throughout the first half of 2014. The monetary
base registered a year-on-year rate of change of 17.7% as of June, which was the lowest since the beginning of 2010. This was the result of the fact that the monetary
expansion generated by the Central Bank’s purchases of foreign currency and by the operations of the public sector was mostly sterilized through the placement
of LEBAC and NOBAC. The broadest aggregate in pesos (M3) rose 22.2% YoY in June, while private M3 was the only aggregate that maintained
its growth rate, at around 25% YoY. However, it should be noted that this growth was mainly driven by fixed-term deposits
from the private sector, which showed a 37% YoY increase in the same period. These placements were encouraged by the BCRA’s policy that
favored higher yields on them, and which, like the rest of the market interest rates, reflected the movements in the cost of
the Central Bank’s primary placements: with a marked increase at the beginning of the year and then stabilized and partially reversed in the most recent months
.
Loans in pesos to the private sector slowed their year-on-year expansion to 25% YoY at the end of the first half of 2014.
Considering the segment in pesos and in foreign currency, total loans to the private sector represented 12.9% of GDP (+4.3 p.p. since the recovery
that began in early 2010).
In a context of lower economic activity, the Central Bank continued to implement policies to stimulate productive credit. In the case of the Credit Line
for Productive Investment (LCIP), a new quota was established for the second half of 2014 for at least 5.5% of the deposits in pesos of
the private sector that the entities covered by the regulation computed at the end of May 2014. This amount must be agreed in full
to Micro, Small and Medium-sized Enterprises (MSMEs), with a minimum term of 36 months and with a maximum fixed interest rate of 19.50%; in cases
of application defect, there are other permitted destinations.
Likewise, as of March, a reduction in the minimum cash requirement was provided for an amount equivalent to 16% of the financing
that would have been agreed within the framework of the LCIP to MSMEs as of January 1, 2014 and with a term of more than 5 years. Meanwhile, the financial system
continued to disburse long-term funds for investment at a fixed total financial cost in pesos under the Bicentennial Productive Financing
Program.
More recently, the Central Bank has taken steps to establish more favourable credit conditions for households. In particular, a regime of maximum interest rates was
established for loans to individuals (personal and automotive pledges) and for portfolio investments.
According to the regulations, 2 groups of entities were defined, each of which has different reference rates. The maximum rate is calculated based on
the product of the reference interest rate (average of the cut-off rates of the LEBACs, with a term of less than 90 days, of the second month immediately prior to the disbursement of the credit) by a coefficient that depends on the type of financing and entity in question. In addition, it was established that financial institutions must have prior authorization to increase the cost of financial products and services considered
basic, and a regulation was provided for credit assistance by non-financial credit providers (mutuals, cooperatives and non-financial issuers
of credit or purchase cards, among others).
Within the framework of a managed floating scheme, the measures implemented by the Central Bank made it possible to reduce the volatility of the value of the
peso throughout the first half of 2014, while this institution was a net buyer in the foreign exchange market for US$4,510 million
(US$3,236 million more than what was purchased in the same period of 2013). The peso continued to depreciate during the first seven months of the year, both
against the US dollar, the real and the euro. The average quotations in July 2014 were $8.16/US$, $3.67/Real and $11.04/€, which
implied an increase compared to December 2013 of 28.9%, 36.0% and 27.2%, respectively. Considering a broader group of trading partners,
it can be seen that the Multilateral Nominal Exchange Rate Index increased 29.9% in the first half of the year. In the same period, the multilateral real
exchange rate increased by 15.5%.
Thus, the readjustment of the value of the peso and the higher levels of interest rates compared to 2013 contributed to recomposing the level of international reserves since April. In order to have additional support to implement financial, exchange rate and monetary policies and improve financial conditions to promote economic development, in July the BCRA signed a new local currency swap agreement with the Central Bank of the People’s Republic of China. The commitment includes an amount equivalent to US$11,000 million and a term of three years. Unlike the swap signed
between the two central banks in 2009, this agreement is of a commercial and financial nature, having significantly improved the conditions
of use, by making the terms more flexible, reducing costs and authorizing additional uses to those that had previously been agreed.
This instrument will also strengthen the relationship with the world’s second largest economy and have the availability of the ninth largest currency traded
globally. Indeed, the process of internationalization of the renminbi achieved in recent years is reflected in the fact that its volume of payments has already
displaced other traditional reserve currencies, such as the Swiss franc. In addition, today, the renminbi can be freely converted into
dollars, euros or any other currency in international markets such as Hong Kong, London or Singapore.
This condition has led several central banks to decide to invest a portion of their reserves in the Chinese currency.
For the coming months, external demand is expected to remain weak, considering that the level of activity of our trading partners will register the lowest growth since 2009. Commodity prices would continue to have a negative impact on the terms of trade.
On the local financial level, the focus will be on the evolution of the litigation with vulture funds. However, from a macroeconomic perspective
, the measures adopted throughout the year, together with the increase in wages and the continuity of social policies, will support the economic activity of the branches most closely linked to domestic demand. In developing countries, the reversal of the flows