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Argentina’s ongoing policy Argentina’s ongoing policy challengeschallenges
Central Bank of Argentina
Alfonso Prat-GayGovernor
Lecture delivered at the London School of Economics, May 2004
The sunny side of the business cycle
Growth and Inflation(y.o.y. change)
-20
-15
-10
-5
0
5
10
15
20
QI-98 QI-99 QI-00 QI-01 QI-02 QI-03 QI-04*
%
-40
-30
-20
-10
0
10
20
30
40%
GDP
CPI (right axis)
* Calculated from a GDP growth 2,5% s.a. in the first quarter
And the right policy mixReal Interest Rate, Real Exchange Rate and Primary Surplus 2003-2004
(Real Exchange Rate % change and Real Interest Rate and Primary Surplus difference against 1994-2001 average)
3,9
-3,1
-49,2
-60
-50
-40
-30
-20
-10
0
10p.p.
Primary Surplus
Real Interest Rate (30-day CD)
Multilateral Real Exchange Rate
*
Fixed investment finally adding to the capital stock
Investment
10
12
14
16
18
20
22
I-95 IV-95 III-96 II-97 I-98 IV-98 III-99 II-00 I-01 IV-01 III-02 II-03
%
-50
-40
-30
-20
-10
0
10
20
30
40
50
60%
% of GDP
oya % change (right axis)
Human capital no longer falling
Unemployment and Poverty
10
15
20
25
30
35
40
45
50
55
60
May-88 May-90 May-92 May-94 May-96 May-98 May-00 May-02 H2-03
% of the population
32
33
34
35
36
37
38% of the LF
Poverty (Great Buenos Aires)
Employment (total urban; right axis)
Challenges for Monetary Policy
• Reputation: a poor track record
• Commercial banks: large counterparty
risk• Economic environment: shrinking
balance sheet and uncertain money demand
• Public sector: division of labor
• Central Bank: lack of× instruments× practice
TO TURN THE CENTRAL BANK INTO A CENTRAL BANK
History is not on our sideArgentine Inflation Histogram
7
17
10
1
13
64
41
0
5
10
15
20
25
30
35
40
45
< 0 0-5 5-10 10-15 15-20 20-25 25-30 > 30Annual Inflation, %
Relative Frequency, %
Main sources of money creation*(y-o-y change, annualized rate)
-20
-10
0
10
20
30
40
50
60
70
Government Financial Sector BCRA securities External Sector Broad Monetary
Base
%
2002
2003 and 2004
The aftershocks of the crisis
2003 and 2004
* Contribution by source of money creation
Developing the spot FX market
Central Bank daily purchases of foreign currency
0
20
40
60
80
100
120
140
160
180
200
Ene-03 Mar-03 May-03 Jul-03 Sep-03 Nov-03 Ene-04 Mar-04 May-04
million US$
Central Bank intervention
Traded volume by third parties (20-day mov.average)
Creating a benchmark interest rateBCRA Securities in Pesos
0
50
100
150
200
250
300
Mar-02 Jun-02 Sep-02 Dec-02 Mar-03 Jun-03 Sep-03 Dec-03 Mar-04
days
0
20
40
60
80
100
120
140%
Average duration
Average cost (right axis)
Paving the way to a formal Inflation Targeting regime
Broad Monetary Base
35
40
45
50
55
60
Jun-03 Aug-03 Oct-03 Dec-03 Feb-04 Apr-04 Jun-04 Aug-04 Oct-04 Dec-04
billion of $
Observed
Observed - 30 days moving average
Monetary Program range 2003 (end of month)
Monetary Programa range 2004 (average)
Nearly there but not quite
CPI(y.o.y. change)
0
10
20
30
40
2003 2004 2005 2006
%
2003 Monetary Program
IMF targets
R.E.M. 2005
R.E.M. 2004
Inflation (last 12 months)
15
11
877
545
2004 Budget
23%
10,5%
2003 Budget
Challenges for Banking Policy
• Lack of resources
• Risk aversion and asymmetric
information• Balance-sheet mismatches
• Outdated rules
• Banks lack× instruments× practice
TO GUIDE BANKS TO FIX THEMSELVES
• Sovereign debt restructuring
Too many constraints, too few resources
Country Crisis
Deposits
real change (1)
NW real
change (2)
Fiscal Contribution (% of GDP)
IMF net
disbursements
(mill. US$)
Mexico '94 - '95 -15% -64% 19,3% 10.670
Venezuela '94 - '95 -43% -6% 15,0% -657
Korea '97 - '00 -6% 15% 31,2% 6.069
Indonesia '97 - '00 -13% -183% 56,8% 10.348
Thailand '97 - '00 -2% 58% 43,8% 3.212
Ecuador '98 - '01 -24% -59% 21,7% 298
Turkey '00 -'02 -27% 97% 30,5% 13.419
Simple average -19% -20% 31% 6.194
Argentina '81 - '82 -36% -9% 55% s.d
Argentina '02 - '03 -41,8% -37% 11,4% -930
(1) between the beginning of the crisis and the deposits trough
(2) Net Worth, two year after the crisis
-US$6.5 billion
including cash-flow
with IFI
approx. US$50 billion
including US Treasury
funds
Dealing with the past...
Foreign currency mismatch before crisis
(December 2001)
31%
37%
32%
0
10
20
30
40
50
60
70
80
90
Assets
billion $
Public goods sector
dollars
Private goods sector
dollars
Tradable goods sector
dollars
Non-tradable
sector
Liabilities and Net Worth
Liabilities in
dollars
…but focused on the future
Credit risk requirements / Weighted assets (weighted assets according to BCRA - including Public Sector)
3
4
5
6
7
8
9
10
11
1997 1998 1999 2000 2001 2003 Today 2005 2006 2007 2008
%
BCRA
Basel
Growth: progressive, reaching an assets portfolio / GDP ratio of 20% in 2008
Easy go, easy come
Private Sector Loans and Deposits(y-o-y change)
-40
-20
0
20
40
60
80
Jan-93 Jan-94 Jan-95 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04
%
Loans
Deposits
Banks are back in black
Consolidated earnings
-8,9
-4,0
-5,0
-1,9
0,3
-10
-8
-6
-4
-2
0
2
2002 I. 03 II. 03 III. 03 IV. 03
ROA
Banking business: upside much greater than downside
Loans to Private Sector
25
40
55
70
85
100
Ene-98 Sep-98 May-99 Ene-00 Sep-00 May-01 Ene-02 Sep-02 May-03 Ene-04
ARS billion
Dec-98:
23% of GDP
Apr-04
7% of GDP
Change needed to
reach 23% of GDP:
200%
Apr-04
23% of GDP
Banks can now deploy AR$12.5 for every AR$1 of capital, to EVERY borrower, regardless of its nature.
Capital Change
Loans to: Formerly Now %
Public Sector $ 1,0 $ 25,0 $ 12,5 -50%
Large Firms $ 1,0 $ 8,7 $ 12,5 44%
SMEs $ 1,0 $ 7,0 $ 12,5 79%
Individuals $ 1,0 $ 5,0 $ 12,5 150%
Maximum Financing
No borrower discrimination
Banks need to lend to the private sector; they are free to do so now
The glass is half fullLoans to private sector in pesos
Excluding mortgages and pledge-backed loans
14,5
15,0
15,5
16,0
16,5
17,0
17,5
18,0
18,5
Ene-03 Mar-03 May-03 Jul-03 Sep-03 Nov-03 Ene-04 Mar-04 May-04
billion $
15
20
25
30
35
40
45
50
55
60
%
Loans stock (excluding mortgages and pledge-backed loans)
Overdrafts interest rate (right axis)
Personal loans interest rate (right axis)
14,8
18,1