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