Monetary policy and economic situation in Argentina
The economic situation in Argentina
Capital control ended a week after the current president of Argentina, Mauricio Macri, assumed power in December 2015, which led to the weight depreciated 36.07% on December 17, 2015, going from 9.7995 to 13.3340 Argentine pesos per dollar. The change of exchange regime of "administered flotation" and "exchange control", imposed by the administration of Kirchner, at an exchange rate with dirty flotation adopted by the Macri government sought to establish a unique price (and consequently a single market)For foreign currencies, grant absolute freedom for the purchase of dollars in any financial entity or exchange agency without the obligation to submit a foreign currency application. However, the new administration maintained conditions on the possession of foreign currencies, since the purchase of cash dollars was subject to a 5% tax on the exchange rate established in the market and ordered that, although companies would not have a limitTo acquire dollars, natural persons could have up to 2,000 million dollars. The implementation of this policy helped reinforce international reserves that until then had deteriorated widely. In December 2015, international reserves accumulated a total of 25,563 million dollars, while by February 2018, reserves reached a historical maximum (according to information from the BCRA) of 61,726 million dollars, which is equivalent to an increase of 141.5%.
After suppressing control over the exchange market, the Argentine government decided. Regarding this, it is important to note that 2017 was a complicated year, due to the political and economic tensions that were presented at the interior of Argentina. In the political aspect, the mid -term elections to renew the congress that were held in October of that same year, represented a risk because the results would determine the capacity of the administration to give continuity to the reforms promoted by Macri toboost country growth and reduce inflation and high levels of debt, which had been mainly used to finance current spending instead of investment.
The above led to the Macri administration to approve in 2017 a set of reforms (fiscal, pension and labor) that would help solve tax problems and encourage employment, investment and growth of the economy.
It is important to note that, in a historically, the high levels of inflation registered in Argentina have been the main result of the monetary policy focused on the fixation of annual growth goals of the monetary aggregate M2, as well as the inflationary pressures generated by the controls andRestrictions of certain imports and for the high taxes applied to exports of the agricultural sector. In fact, it is important to emphasize that the constant high -inflation periods have been one of the factors that explains the high level of dollarization that exists in Argentine markets, since the US dollar has been used as a savings vehicle that allows Argentinesprotect yourself from high inflation.
The high price levels recorded in Argentina after the exchange rate end at the end of 2015, led to the fact that in September 2016, the Central Bank of the Republic of Argentina (BCRA) decided to adopt the inflation goals regime, with theObjective of gradually decelerating prices, which that same year led the annual inflation rate to be 37.03%. In principle, the change showed positive results, because in the second quarter of 2017, the inflation rate was at 23.17%. However, inflationary pressures caused by the gradual retreat of public services subsidies, as well as the hardening of external conditions, led to the inflation of December 2017 rising slightly to 24.8%, something that the BCRA considered temporary.
Given this, at its first meeting of the year, the BCRA decidedan expansive, which remained until March. The BCRA decided to cut the interest rate in 150 base points at 27.25% during the first monetary political meetings of 2018, because monetary policy makers considered that the inflation pressures observed at the end of 2017 corresponded to a greater extent to temporary factors.
The reasons behind the monetary policy posture change are mainly due to an adjustment in the estimated inflation target at the end of 2018 of an inflation objective of 10% +/- 2%, to a 15% objective. The announcement, which took the market by surprise, was made by the Minister of Finance, Nicolás Dujovne, and not by the president of the BCRA, Federico Sturzenegger, which led the market participants to speculate that, as in past administrations, the Central Bank could begin to lose autonomy. However, it is important to note that the BCRA, unlike Banco de México, has multiple objectives, so it can be said that it is measured only by the management of monetary policy instruments to meet the objectives established by the ExecutiveGeneral. Therefore, the rise in the objective of the inflation rate was carried out in order to relax monetary policy, cut the interest rate to make loans more accessible and encourage the growth of the economy and help the government return toComply with, again, with your fiscal goals.
Although the monetary policy communications issued after the cuts in the interest rate at the beginning of 2018 mentioned that the change in monetary position would only be maintained depending on the evolution that the disinflation showed, the market interpreted the change of the Central Bank andThe adjustment in the inflation objective, such as the beginning of a relaxation in the monetary position, causing distortions in inflation expectations and accelerating the depreciation of the Argentine weight.
Like the Bank of Mexico, the BCRA can intervene in the market in a complementary way to the management of the interest rate. In this way, between March 5 and April 10, when the Argentine peso already accumulated a depreciation of 8.24% against the dollar in what was going on the year, the central intervened in the market on 16 occasions, injecting 2,427 million dollars (152 million dollars for an average intervention), equivalent to 3.9% of the total international reserves. With this, the Central Bank managed.1317 and 20.3195 pesos per dollar between the period of March 12 and April 20.
However, the strengthening that the US dollar began showing as of April 18, led to the currencies of emerging economies registering generalized losses. Given this, the market intervention efforts by the BCRA ceased to have effect on the Argentine weight, so the central resorted to increasing the interest rate with the aim of preventing weight depreciation could generate a disruptive effectto alter inflationary dynamics. Thus, between April 27 and May 4, the BCRA decided to make three subsequent increases in the interest rate, carrying it from 27.25% to 40%, while for its part, the Macri government announced an adjustment in public spending, cutting its tax deficit goal of 3.2% to 2.7% of GDP for this year. Together, both measures managed.29%, quoting in 21.8642 pesos per dollar at the end of the market on May 4. By then, the Argentine peso had managed to accumulate a depreciation of 17.40% in 2018.
Although the increase in the interest rate seeks, on the one hand, to reduce the high levels of dollarization of the Argentine economy and on the other, to encourage investment in financial assets in pesos and attract foreign capital, the fact that public finances are significantlyVulnerable to external factors limits the impact that this increase in rates could have on the real economy. In balance, the strong depreciation that the Argentine weight has registered, together with inflation above 30% and a restrictive monetary policy, will press the growth of GDP, which makes it likely that the economy contracts again.
It should also be added that the uncertainty in the exchange and financial markets of Argentina increased after President Macri announced the start of conversations with the International Monetary Fund to access a credit line that allows themhas presented in recent weeks. According to the Minister of Finance, the IMF loan, which would be the first since 2003, would be at a rate of 4% and guarantee the financing of the Argentine Administration until December 2019, when the government of Mauricio Macri concludes.
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