The year 2021 also witnessed the COVID-19 pandemic. In Argentina, there has been a systematic drop in the infection rate since June 2021, reaching minimum levels in October. Vaccination campaigns and a better health infrastructure have been essential for the epidemiological situation to improve. However, the emergence of more contagious COVID-19 new strains fuels uncertainty for the coming months. Indeed, there was a significant increase in the infection rate in the last few weeks, though with low hospitalization and mortality levels compared to previous waves. The lower economic impact of the second wave of infection cases during the second quarter of 2021 and the ensuing fast recovery favored the reopening and revitalization process of the domestic economy, reaching pre-pandemic activity levels in July.
Within a more dynamic macroeconomic framework, retail inflation stood relatively high in the past year. Inflationary inertia was high and some temporary factors were more intense than expected. The most outstanding factors were, namely: the impact of international prices—firstly, of commodities and, lately, of energy prices and global manufacturing costs—; supply restrictions of some products caused by supply chain disruptions; the recovery of trade margins in some sectors; and the readjustment of private service benchmark prices upon the resumption of activities within an improved epidemiological context. There was also higher financial volatility caused by the electoral process, which was reflected in higher devaluation expectations in the last quarter of 2021. The BCRA's managed floating exchange rate strategy enabled the depreciation pace to gradually adjust to the current needs, counteracting, at least partially, inflationary pressures. Moreover, the BCRA reviewed its intervention in forex spot and forward markets and implemented foreign exchange regulations to preserve foreign exchange stability and promote a more efficient allocation of foreign currency.
On the fiscal front, the recovery of health conditions observed from the second half of the year allowed the National Government to focus on the assistance for the sectors left behind and the most vulnerable segments of the population. This recovery together with an increased tax revenue led to a reduction of the fiscal deficit. Thus, monetary financing to cover the National Treasury’s needs was reduced. In this sense, the National Government together with the BCRA continued strengthening the restructuring process of the domestic debt market.
International financial conditions are expected to be less favorable in 2022 than in previous years. Global inflationary dynamics and the economic policy responses of different governments of developed and emerging countries pose a potential slowdown in the global growth, higher foreign financing costs, and lower international commodity prices. It cannot be ruled out that international financial markets may make corrections in the face of the uneven development of the real economy due to financial assets high prices within a context of high levels of public and private indebtedness.
In this context, the BCRA issues the monetary policy guidelines for 2022 to meet prevailing economic conditions.
Interest rate: the BCRA will adjust the interest rates to safeguard greater availability of savings instruments with positive returns on both inflation and exchange rate, contributing to stabilize foreign exchange expectations, and favoring the disinflation process. The readjustment of the interest rate structure will be supplemented by ensuring the continuity of existing policies focused on encouraging credit to the private sector.
Liquidity management: the BCRA will manage liquidity to prevent any imbalances that may directly or indirectly affect the disinflation process, allowing the real growth in the monetary base to accompany a higher demand of real stocks derived from economic expansion and the strengthening of the labor market. In this sense, the BCRA gave exceptional assistance to the Treasury for two years with a view to facing the needs of the COVID-19 pandemic within a framework of a restructuring domestic capital market and in the absence of external financing access. Within this context, the following factors pose a scenario with a significant drop of financial assistance to the Treasury: the normalization of the debt market in pesos achieved by the National Government; and prospects for attracting foreign financing from multilateral and bilateral organizations. Monetary sterilization is expected to be reduced in this new stage. Thus, the demand for monetary base will be favored by the interest associated with the BCRA’s remunerated liabilities, and by a potential reduction of their stock. However, the BCRA will maintain a prudential management of the monetary aggregates, sterilizing potential liquidity surplus in order to preserve monetary balance.
Exchange rate: at present, the exchange rate remains at competitive levels. Indeed, the multilateral real exchange rate remains at its historic average, in a context of external sector surplus. To preserve external competitiveness, the BCRA will gradually adjust the rate of crawl to keep pace with the inflation rate within the framework of the current managed floating scheme, without overlooking the impact of higher international inflation on the real exchange rate. This strategy is in line with the objective of strengthening the position of international reserves. Foreign exchange regulations: the BCRA will prudently manage forex regulations in order to adjust them to the current needs, ensuring monetary and foreign exchange stability. As long as macroeconomic conditions so allow, macroprudential regulations will be relaxed in the medium- and long-term so that they are consistent with dynamic capital flows channeled to the real economy.
Credit policy: in order to keep on supporting the economic activity and the structural change, the BCRA will continue boosting both the financial intermediation and inclusion of individuals and companies to help meet financing needs for the development of consumption, productive investment, and technological change. Credit assistance channeled to the sectors most affected by the pandemic will be gradually reduced as long as they consolidate their recovery process.
Financial policy: the current set of structural characteristics of the financial system help to keep systemic financial risk to a minimum. In particular, the ensemble of financial institutions has solid indicators of both liquidity and solvency; and a regulatory and supervisory scheme that is in line with international recommendations on best practices without neglecting the domestic market reality. Within this framework, the BCRA will keep micro- and macro-prudential regulations up-to-date in line with best international practices, without neglecting the intrinsic characteristics of the Argentine financial market. Moreover, the BCRA will continue monitoring financial institutions in order to foresee and address any potential vulnerabilities, thus, preserving adequate levels of liquidity and solvency within the ensemble of financial institutions.
Financial education: the BCRA will promote financial education by expanding and democratizing the use of financial services as a necessary condition to allow all the segments of the population to contribute to and benefit from the economic growth. In this sense, the BCRA will expand federal actions, designing and developing education programs, and reaching out to more and more people—the most vulnerable segments first—by way of new agreements.
In a context of an acute debt crisis, a strong macroeconomic imbalance, and a pressing social environment, the country had to develop a COVID-19 response strategy using the instruments available in a time of economic emergency without access to the international credit market.
In the wake of an unprecedented pandemic with no clear end in sight, authorities have been forced to rethink policy priorities. BCRA’s financial assistance to the Treasury and credit initiatives became central to an emergency health and economic strategy that sought to prevent the crisis from leaving behind permanent consequences on an already heavily hit economy.
The main activity indicators show that the effects of the pandemic concentrated in the second quarter, while a gradual and heterogeneous recovery of activity is observed in the third quarter of the year.
The country succeeded in negotiating an unsustainable public debt. However, the foreign exchange market has given rise to expectations that need to be immediately addressed.
Therefore, the BCRA has updated the guidelines issued on January 27, 2020 to meet prevailing economic conditions.
• Interest Rate and Liquidity Management
In a strained foreign exchange market, the development of the monetary policy as a financial and foreign stabilization instrument comes to the fore. The BCRA will redouble its efforts to develop savings and investment instruments that allow Argentine citizens to earn positive returns not only in terms of the evolution of inflation, but also on the evolution of the exchange rate. In this regard, it will strive for gradually harmonizing monetary policy instruments’ benchmark rates, thus minimizing the impact on the cost of sterilization.
On the other hand, the need to respond to the pandemic has led to a significant liquidity increase. The BCRA closely monitors the evolution of monetary aggregates and acts accordingly using all available tools.
Taking into account the favorable outcome of the public debt normalization process, the BCRA will, in the exercise of its intervention capacity, conduct open market operations in order to promote greater liquidity, depth and transparency in sovereign debt markets, with a view to embarking on a new phase in which the local capital market is key to the public sector financing strategy.
• Exchange rate At present, the exchange rate is competitive. The multilateral real exchange rate is above its historical average, and the trade balance shows a significant surplus, which is confirmed by the current account positive result of the balance of payments. The BCRA reaffirmed its commitment to follow the strategy of sustaining the stability of the real exchange rate, which is in line with the objective of building up international reserves. Within the framework of the managed floating strategy, the daily depreciation rate will gradually adapt to the needs of the current situation in order to avoid unwanted effects on competitiveness, domestic prices, assets and liabilities evolution as well as income distribution.
• Foreign Exchange Regulations In a context marked by scarcity, foreign exchange market regulations seek to avoid any temporary imbalances that could affect the position of international reserves. In this sense, they are meant to be a necessary instrument for the coordination of individual decisions, while some progress has been made on the fiscal, external and monetary situation. Coordination will then be a priority during the transition to avoid negative impacts on productive activity. The medium-term goal is to have macroprudential regulations compatible with the dynamization of capital flows oriented to the real economy.
• Credit Policy To mitigate the economic impact of the pandemic, the BCRA has launched a set of credit instruments, as a result of which there was an unprecedented growth in financing channeled to small and medium-sized enterprises (SMEs). The activity levels that have started to show signs of recovery in some regions and sectors will enable to gradually reduce credit assistance and to strive for lending at negative real rates by adapting to the needs arising in this new phase.
Depiction of the Economic Situation
The Argentine economy is facing a critical macroeconomic reality characterized by the coexistence of very high inflation records, and a deep and lingering recessive process, which turned into noticeable levels of unemployment, precarity and poverty. In turn, the shortage of foreign currency has generated a marked weakness in the foreign sector, which, as it already happened in the past, severely conditions the economy's aggregate performance.
This new shortage of foreign currency originated by the mid of last decade with the contraction of international prices of commodities, domestic weaknesses regarding industrial and technological policies, and a slowdown that the economy and trade started to exhibit at a global level. These limitations on foreign currency flows for trade purposes added to the loss of access to voluntary lending and new domestic capital flight given the vulnerability that originated from a foreign indebtedness process which was, without a doubt, unsustainable.
The inflation rate followed the same path. After rising significantly in the same period, it accelerated notably in the last two years of the former government due to diagnosis and policy mistakes, which tended to underestimate the difficulties to lead to a sustainable drop of an inflationary process based on structural factors and with clear inertial components. This misconception led the former administration to address the issue exclusively through monetary policy tools. Meanwhile, the hypothesis of a sine die continuity of a reality characterized by plenty foreign financing led to the mistake of inducing a full deregulation of the foreign exchange market and an unrestrictive financial opening. Last, a biased economic idea and an excessive supply-side conception boosted the reduction of national and provincial taxes to the detriment of the fiscal picture.
Thus, the result was a mixture of fragile (monetary, financial, fiscal) policies, which led to a serious crisis regarding the balance of payments, a marked depreciation of the domestic currency, and the ensuing deepening of recession and inflation rate acceleration, thus originating a harsh economic and social impact.
Towards the end of its administration, the former National Government decided upon a series of restrictive measures to access the foreign exchange market—essential to mitigate the crisis and the worsening of the balance of payments—, compulsively rescheduled domestic debt maturities, while fiscal deficit, with no possibilities of being financed with foreign debt, started to be financed with money issuance.
In this scenario, the new National Government adopted some social, productive, regulatory and fiscal consolidation measures with the aim of facing the most visible signs of the crisis and stabilizing the macroeconomy and, from then onwards, redefining policy priorities to lay the foundations for a sustainable economic development process. These measures are stated under Law No. 27,541 on Social Solidarity and Productive Reactivation, which provides the conditions for fiscal and public debt sustainability, with a community-oriented objective, by means of progressive tax schemes. Likewise, the law seeks to promote economic reactivation by consolidating the income of the most vulnerable sectors of the population so that they can restore their levels of consumption, and also by providing tax debt relief to SMEs.
On the regulatory side the obligation to transfer foreign currency funds from exports to the domestic forex market, and the limits on the build-up of foreign assets with domestic resources continue in effect. Also, a tax was imposed on the purchase of foreign currency for saving purposes and on the payment of tourist services and trips abroad.
In addition to the tax measure mentioned above, the increase in export duties, changes in employer social security contributions, rearrangement of consumption taxes, changes in property tax and statistical fee are also included.
In the framework of the document recently signed by business leaders, trade unions and social organizations, titled Compromiso Argentino para el Desarrollo y la Solidaridad (Argentine Agreement for Development and Solidarity), the National Government has implemented active income policies among which there is the Agreement on Preserved Prices and the freeze of public service rates for up to 180 days, until the end of the renegotiation process of the current schemes. Likewise, a series of measures have been adopted to alleviate the situation of the most vulnerable social sectors by means of a fixed increase of social security wages and benefits, and the National Program on Food and Nutrition Security.
Monetary and Foreign Exchange Policy Guidelines
In this context of economic and social emergency, and of a critical situation regarding access to voluntary foreign lending, the BCRA considers it necessary to give exceptional assistance to the Treasury, both in the cases of foreign debt payments—if strictly necessary and within prudent limits in line with monetary market equilibrium—and financing in domestic currency.
Considering that the Government is focused on reestablishing public debt sustainability, the Executive Branch finds it relevant to delay the presentation of the National Budget for the fiscal year. As a result, until progress can be made on those issues, it is not possible to devise a monetary policy strategy with specific objectives about the expansion of monetary aggregates or inflation.
Bearing these limitations in mind, and in line with its mandate to “promote—within the framework of its powers and the policies set by the National Government—monetary and financial stability, employment, and economic development with social equality”, the BCRA finds it necessary to set a series of useful guidelines to contribute towards the formation of expectations of the different economic players in our country. Such guidelines refer to the following core concepts: interest rate, prices, monetary aggregates, exchange rate, credit, economic activity and employment.
• Interest rate. Given the inertial components of the ongoing inflationary process and the shallow local credit market, the attempt to reduce inflation by solely appealing to excessively high real interest rates has proved to be ineffective and eventually counterproductive. The real interest rate must preserve the economy’s financial and foreign stability and must be in symphony with production financing and a longer-term yield curve, favoring domestic currency savings. The latter implies managing interest rates so that they may not be negative in real terms.
• Prices. The aim is to cause the inflation rate to gradually, though sustainably, go down following a prudential monetary policy consistent and coordinated with the rest of the economic policy and income policy promoted by the national government. In this context, inflation rate is expected to slow down well below 2019 due to concurrent monetary, exchange and fiscal policies, price agreements, and coordinated short- and long-term strategies followed by different institutions.
• Monetary aggregates. They are at historically low levels in terms of GDP. Against the backdrop of confidence recovery and a gradual reduction in interest rates that may improve credit conditions and boost economic activities, the remonetization process is expected to be gradual. The monetary policy should promote a prudential expansion of monetary aggregates, avoiding imbalances that may directly or indirectly affect the inflationary process.
• Exchange rate. A managed floating exchange rate policy is a suitable instrument for avoiding marked fluctuations in the exchange rate parity that may adversely affect competitiveness, domestic prices, and income distribution. The exchange policy will also promote the precautionary acquisition of international reserves derived from the proceeds from exports.
• Credit. Domestic credit intermediation is very low in relative terms. Strategically it should be expanded to meet the needs of households and production in the short-, medium- and long-term.
• Economic activity and employment. The policies adopted so far will allow defining a new macroeconomic standpoint based on the domestic market recovery and the growth of exports, leading to investment and productivity increases, which will combine the expansion of demand and employment with the productive change needed to achieve long-term continuity.
This quarterly publication analyzes the national and international economic context, assesses inflation dynamics and its outlook, and openly explains the rationale behind monetary policy decisions.
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