Banco Central de la República Argentina

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1 Macroeconomic effects of commodity prices evolution and its relation with monetary policy in emerging countries Banco Central de la República Argentina The implementation of monetary policy: Lessons from the crisis and challenges for coming years Kuala Lumpur, Malaysia, October 211 1

2 Global framework Agenda Long term evolution of commodity prices Structural and short term factors Domestic issues The linkages bt between commodity prices and economic performance EMEs. Stylized facts Economic policy challenges. The case of Argentina 2

3 Agenda Global framework Long term evolution of commodity prices Structural and short term factors Domestic issues The linkages between commodity prices and economic performance EMEs. Stylized facts Economic policy challenges. The case of Argentina 3

4 Commodity prices accumulated large increases in recent months, in some cases exceeding 28 levels 7, Jan' 71=1 Commodity prices (current US$) 6, Ener gy 5, Agricultural 4, Metals and Minerals 3, 2, 1, Jan-71 Feb-76 Mar-81 Apr-86 May-91 Jun-96 Jul-1 Aug-6 Sep-11 *: Includes cocoa, coffee, tea, coconut oil, peanut oil, palm oil, soybean oil, soybean meal, barley, corn, Source: World Bank rice, wheat, banana, beef, chicken, oranges, sugar, wood, cotton, rubber and tobacco. 4

5 The hikes are widespread due to the presence of common factors driving the rise and the high correlation between these prices 1971=1 8 Commodity yprices (current US$ index) 1971=1 8 8, Soybeans Corn Wheat Crude oil (right axis) 7, 6, 5, 4 4, 3 3, 2 2, 1 1, Dec-71 Dec-77 Dec-83 Dec-89 Dec-95 Dec-1 Dec-7 Source: World Bank 5

6 Expressed in real terms, the increases are still significant, although not reaching the peak achieved in agriculture in the 7s 1971=1 1, 9 Ener gy Agriculture 8 Mtl Metals and minerals 7 6 Real commodity prices (in constant SDR*) 1, 1971= Sep-5 Sep-6 Sep-7 Sep-8 Sep-9 Sep-1 Sep Dec-71 Dec-76 Dec-81 Dec-86 Dec-91 Dec-96 Dec-1 Dec-6 * Deflated by weighted average CPI of SDR currencies (dollar, euro, yen and pound sterling). **: Includes cocoa, coffee, tea, coconut oil, peanut oil, palm oil, soybean oil, soybean meal, barley, corn, rice, wheat, banana, beef, chicken, oranges, sugar, wood, cotton, rubber and tobacco. Source: BCRA from Bloomberg, World Bank and IMF 6

7 The boom in prices was accompanied by more volatility than in previous periods Standard deviation* of annual growth of commodity prices 1. % 's 9's 's Energy Agriculture Metales and Minerals Source: BCRA from World Bank data *:The Standard deviation is a measure of the dispersion of values from the mean (average). 7

8 Global framework Agenda Long term evolution of commodity prices Structural and short term factors Domestic issues The linkages bt between commodity prices and economic performance EMEs. Stylized facts Economic policy challenges. The case of Argentina 8

9 Fundamental factors affecting the prices of raw materials Food ddemandd Structural Biofuels Production capacity Stocks Medium term Costs Short term Regulations Weather/Production US dollar changes Commodities as financial assets 9

10 Although declining rates, world population will continue to expand in the coming decades % World population p Emerging countries population (right axis) Advanced countries population (right axis) Emerging coutries population growth Advanced coutries population growth billions Source: Population Division of the UN -2 1

11 The reduction of infant mortality is accompanied by a sharp increase in life expectancy years Life Expectancy and Infant Mortality Advanced coutries infant mortality (right axis) Emerging countries infant mortality (right axis) Advanced countries life expectancy Emerging countries life expectancy in 1 live births Source: Population Division of the UN 11

12 Beyond the reduction achieved in the incidence rate, the number of hungry people showed a slight constant increase million 1, In number of people Impact of World Hunger % 22 9 In percentage (right axis) Sour ce: FAO

13 It is expected that food consumption grows substantially in the next decades, partly due to population growth billions World population and food demand Grains demand (right axis) World population million tons 3,5 3, 2,5 2, 1,5 1, Source: BCRA from UNCTAD and FAO data 13

14 The sustained increase in production in recent years accompanied with a limited performance the demand growth 196= World grain sown area, production and yield W orld production World sown area World yield / / / /1991 2/21 21/211* * September estimated Source: BCRA from USDA data 14

15 There is a substantial increase in food consumption in emerging economies, especially China and India 14 million tons China. Soybean oil consumption million % India. Soybean oil consumption tons % 1 Soybean oil demand 12 Soybean oil demand Share in global consumption (right axis) 8 1 Share in global consumption (right axis) / / / /23 26/27 21/11*. 199/ / / /23 26/27 21/11* Source: BCRA from USDA data *September forecast Fb f t Source: BCRA from USDA data *September forecast Fb f t 15

16 To the growth in world demand for food is added the boom in biofuels industry million tons For ethanol production Other uses Ethanol / total (right axis) USA corn consumption % /25 25/26 26/27 27/28 28/29 29/21 21/ /212* Source: BCRA from USDA and FAPRI data *September estimates 16

17 that also received pressures for oil price developments US$ per barrel 12 Crude oil price and biofuels production million galons 3, 1 Biofuels production (right axis) 25, 8 Crude oil price 2, 6 15, 4 1, 2 5, Source: World Bank and FAPRI 17

18 The speculative demand in the markets for agricultural products have implicated more volatility in prices in recent years thousands of W heat. Prices and open interest of future contracts and options* contracts US$/tn thousands of Corn. Prices and open interest of future contracts and options* contracts US$/tn. 3, , , , Jan-7 Oct-7 Jul-8 Apr-9 Jan-1 Oct-1 Jul-11 Source: US CFTC (*) Data for the last week of each Jan-7 O ct -7 Jul-8 A pr -9 Jan-1 O ct -1 Jul-11 Source: US CFTC (*) Data for the last week of each thousands of contracts 1,2 Soybeans. Prices and open interest of future contracts and options* US$/tn. 7 1, Open interest Price (right axis) 2 1 Jan-7 Oct-7 Jul-8 Apr-9 Jan-1 Oct-1 Jul-11 Source: US CFTC (*) Data for the last week of each 18

19 The depreciation of the dollar contributed to the rise in commodities prices 25 index =1 25 Commodity prices and US dollar rate US$/Euro Commodity prices US$/Euro (right axis) dollar depreciation dollar appreciation Sep-5 Sep-6 Sep-7 Sep-8 Sep-9 Sep Sep-11 Source: Bloomberg and IMF 19

20 Global framework Agenda Long term evolution of commodity prices Structural and short term factors Domestic issues The linkages between commodity prices and economic performance EMEs. Stylized facts Economic policy challenges. The case of Argentina 2

21 Given the consumption baskets, the impact of food prices is greater in emerging economies than in advanced ones 4 % g Weight of food in the CPI Latin America Advanced Economies Argentina Brazil Chile Colombia Mexico Peru Venezuela United Sour ce: BIS States Canada Eurozone 21

22 In emerging countries, there is a positive correlation between international food prices and domestic consumer indexes Latin America. Selected countries. Consumer prices y.o.y. % chg. 1 y.o.y. % chg Brazil Mexico Chile Uruguay Colombia -2 Food price index (right axis) -4 Sep-5 Sep-6 Sep-7 Sep-8 Sep-9 Sep-1-4 Sep-11 Source: BCRA from Bloomberg and W orld Bank data 22

23 In Argentina the rise in commodity values also has a significant incidence on prices Price indexes 24 % (y.o.y. chg.) % GDP Implicit Prices Private Consumption Implicit Prices -2-8 W holesale Price Index -12 Commodities prices in $ (IPMP; right axis) Q1-4 Q1-5 Q1-6 Q1-7 Q1-8 Q1-9 Q1-1 Q IPMP: BCRA Commodity Price Index

24 Small open economy Stilyzed Facts of Argentina Low degree of financial deepening (regarding to banking sector and capital market) Highly dollarized d Current account highly dependent on its trade balance 24

25 Impact of an increase in commodity prices Effectin consumer prices Foreign exchange earnings Exchange rate evolution Currency mismatches Monetary aggregates PublicFinance Less exposure from the financial system to the public sector 25

26 Argentina is a strong net exporter of commodities, especially agricultural million US$ 6, 5, 4, 3, 2, 1, -1, -2, -3, Expor t s Imports Trade balance Foreign trade by product groups (accum. 12 months to July 211) Primary products Agricultural Industrial Fuels and energy manufactures manufactures Source: BCRA from INDEC data 26

27 Commodity exports represent an important portion of total exports 8, million US$ Argentina. Goods Exports 7, Crude oil Copper 6, Soybean complex Corn 5, Wheat Rest 4, (21) Wheat 1% Corn 5% Rest 62% Soybean complex 26% Crude oil 4% Copper 2% 3, 2, 1, Source: BCRA From INDEC data 27

28 Export revenues from agricultural exports show a seasonal behavior that affects domestic monetary markets Agricultural export settlements million US$ 4, 3,5 3, 2, (Oilseeds and cereals) billion US$ Quarterly settlements I II III IV 2, 1,5 1, 5 Jan Feb Mar Apr May Jun Jul Aug Sep Oct N ov Dec Source: BCRA from CIARA-CEC data 28

29 The evolution of the exchange rate has shown low volatility despite external shocks Dec'1 = Argentina. Exchange rate $/US$ Multilateral real exchange rate (deflated by wages) Nominal exchange rate (rigth axis) Jan-1 Jan-3 Jan-5 Jan-7 Jan-9 Jan-11 Source: BCRA from Bloomberg data. 29

30 Central Bank reduces the volatility of the exchange rate through intervention in the foreign exchange market $/u$s FX Central Bank's operations (right scale) Exchange rate ($/u$s) FX Market u$s million Jan-3 Dec-3 Dec-4 Dec-5 Dec-6 Mar-8 Feb-9 Jan-1 Jan-11 Sour ce: BCRA

31 Exchange interventions are accompanied by sterilization operations million $ 35 Sterilization ti of FX Operations (3 month moving average) Expansion of the MB due to FX operation Sterilization due to Reverse Repo+BCRA Securities+Rediscounts+Reserves Requirements Jan-5 Oct-5 Jul-6 Apr-7 Jan-8 Oct-8 Jul-9 Apr-1 Jan-11 Oct-11 Sour ce: BCRA 31

32 % 19 Central lbank also tries to equilibrate the money market LEBACs Int er est Rat es - Prim ary Mar ket 17 3 Months 4 Months 1 Months 12 Months Jan-5 Jul-5 Jan-6 Jul-6 Jan-7 Jul-7 Jan-8 Jul-8 Jan-9 Jul-9 Jan-1 Jul-1 Jan-11 Jul Source: BCRA

33 Exchange rate evolution has a direct effect on domestic deposits 14% % Exchange Rate Volatility and Retail Time Deposits billion of US$ 4 1% 3 6% 2 2% 1-2% -1-6% 2 days cumulative change of International ti Reserves due to FX operations -right scale- -2-1% Retail Time Deposit 2 days Rate of Change (%) -3 Annualized Volatility ($/US$) -14% May-5 May-6 May-7 May-8 May-9 May-1 May-11 Sour ce: BCRA -4 33

34 Global framework Agenda Long term evolution of commodity prices Structural and short term factors Domestic issues The linkages bt between commodity prices and economic performance EMEs. Stylized facts Economic policy challenges. The case of Argentina 34

35 The pillars of the monetary policy are based on: Monetary policy based in the control of monetary aggregates International Reserves Accumulation with precautionary motive Regulation of capital flows and managed float exchange rate Regulatory and supervisory policies to strengthen the banking system and promote financial intermediation Objectives Ensuring sustainable growth and development Provide monetary and financial stability Minimize external vulnerability 35

36 Economic Policy Challenges After several decades, the sustained rise in commodity prices represents an opportunity for the EMEs. There are structural conditions for the situation to continue. Economic policy should accommodate to this new boom scenario where uncertainty in international financial markets is also an issue. Favorable conditions should be used to address structural conditions of poverty and inequality. The mainfocus is to sustain economic growth in a highh and volatile l commodity prices environment, paying attention to the impact on food prices. 36

37 Monetary Policy Challenges Large fluctuations in commodity prices could generate negative effects on domestic prices and real exchange rates. The "external prosperity" can be transferred to local economies without introducing monetary or relative prices imbalances. Improvements in local financial systems are needed to channel the flow of capital to productive uses and to allow central banks tomanage liquidity efficiently. Particularly l monetarypolicy has the adequate toolkit to handle this kind of issues, and the recent financial crisis management is an example of this. 37

38 Monetary Policy Challenges In open small economies, with shallow in its financial and capital markets, kt like Argentina, is vital toregulate lt the flow of financiali capital in the short term to avoid the generation of monetary imbalances and pressures on the foreign exchange market In particular, monetary policy should aim at providing a framework of equilibrium in the monetary and financial system stability 38

39 Thank you