Banco Central de la República Argentina "International Crisis and Policy Space: Challenges for Emerging Countries" Mercedes Marcó del Pont Governor Central Bank of Argentina 2th Annual Hyman P. Minsky Conference on the State of the US and World Economies New York City, April 13 15, 211
Due to domestic demand d dynamism Argentina has been the leading case in Latin America. GDP growth in selected LATAM countries (annual rate of change in %, 23-21) Argentina 7.4 Peru 6.4 Uruguay 5.7 Venezuela 4.9 Colombia Latin America Ecuador Bolivia Paraguay Brazil Chile 4.5 4.3 4.3 4.3 4.1 4.1 4. 1 2 3 4 5 6 7 8 Source: IMF 2
Economic growth: domestic demand has been the main driver of growth Argentina GDP growth. 23-21 (accumulated chg. and contribution by expenditure component) GDP 79.5 Private consumption 5.7 Investment 29.7 Public consumption 8.2 accumulated chg. contribution in percentage points Net exports -9.6-2 -1 1 2 3 4 5 6 7 8 9 % Source: INDEC 3
Economic growth and the role of domestic demand: d real wages 16 Real wage in selected LATAM countries (23=1) 15 14 13 Brazil Colombia Mexico Peru Chile Argentina 12 11 1 9 8 7 6 199 1991 1992 1993 1994 1995 1996 1997 1998 1999 2 21 22 23 24 25 26 27 28 29 Soruce: ECLAC 4
Economic growth and the role of domestic demand: employment % of the labor force 25 2 15 1 Unemployment rate 24.1 Labor Market Indicators* % Change 23-21 Labor force 9.68 Unemployment -61.46 Employment 27.24 Underemployment -47.94 Full employment** 48.57 Informal employment -27 * Total urban population ** Difference between Employment and Underemployment 5 Continuous EPH Discrete EPH 73 7.3 7.3 May-91 May-94 May-97 May- Q1-3 Q3-4 Q1-6 Q3-7 Q1-9 Q3-1 Source: INDEC 5
Economic growth and the role of domestic demand: d labor share in GDP Labor share Labor in GDP, participation Argentina p GDP 23-211 5 48 % 48,1 46 44 43,9 42 4 Avg. 93-1 4,2 38 36 34 32 34,3 3 1993 1995 1997 1999 21 23 25 27 29e 21e Source: INDEC e: estimated 6
Economic growth and the role of domestic demand: d social security 1 95 9 85 8 75 7 65 6 55 5 % Argentina. Old age demographic protection ratio (affiliates to a social security institution providing benefits in old age) +42% between 23 87 and 21 83 84 76 69 68 67 64 65 62 61 62 63 64 1997 1998 1999 2 21 22 23 24 25 26 27 28 29 21 Source: "Trabajo y Empleo en el Bicentenario", MTEySS 21 7
Economic growth and the role of domestic demand: d unionization i 6 % Unionization Rate 5 42 45 4 38 3 2 23 21 25 17 26 3 19 23 1 1 9 1 12 Argentina Brazi il Mexico France* Germany Italy Netherlands Spain UK Canada a Russia Japan *Although the unionization rate in France is below 1%, collective bargaining coverage is 92%. Source: ILO. S. Korea China USA 8
Economic growth and the role of domestic demand: income redistribution Evolution of the ratio between the richest 2% of the population and the poorest 2% in selected LATAM counties* Year Argentina Brazil Chile Colombia Costa Rica Mexico Uruguay Paraguay 23 18.14 22.6 15.55 18.88 14.2 1.13 21.21 24 15.31 2.97 21.25 12.67 14.28 11.8 16.61 25 14.7 2.45 12.2 14.76 1.51 17.16 26 14.5 19.9595 13.58 22.71 12.84 13.21 1.77 18.94 27 12.78 18.95 22.9 12.29 11.16 17.98 28 12.32 18.4 11.91 14.35 1.29 15.54 29 12.25 17.77 13.32 13.55 1.17 15.69 21 11.5 Change 23-29 -48% -27% -17% -3% % -35% * The ratio is constructed considering the household income per capita. Source: SEDLAC (National University of La Plata and World Bank) 9
Economic growth and the role of domestic demand: income redistribution.54 Gini coefficient in Argentina, 1991-21.52.5.48.46 44.44.42 1992 1993 1994 1995 1996 1997 1998 1999 2 21 22 23 24 25 26 27 28 29 21 * The ratio is constructed considering the household income per capita. Source: SEDLAC (National University of La Plata and World Bank) 1
Economic growth and the role of domestic demand: investment is above its historical average Investment 25 % (% of GDP) 23.1 REM 211 23.7 22.8 2 Avg. last 25 years 18 2.6 1.5 15 1 4 5 8.3 1993 1996 1999 22 25 28 211 Private construction investment Public construction investment Source: INDEC Equipment investment Gross fixed investment/gdp 11
Economic growth and the industrial sector Argentine catching-up story of the last seven years was not just tail wind due to commodity prices, industrial growth was higher than GDP growth. % 1 8 Industry (y.o.y.) 8.2 billons $ 64 6 56 Industry. Last 5 years 23-21 8.2% 6 52 4 2 2.8 3.2 2.4 48 44 4 196-1974 5.9% 36 32-2 -1.8 28 24-4 7's 8's 9's 's 3-1 Source: OJF and INDEC 2 196 197 198 199 2 21 Source: OJF and INDEC 12
Closing the income gap, Argentina 23-211 211 In 21 income per capita billion $ 44 4 36 1 8 6 4 % GDP Growth (y.o.y.) Argentina. GDP (1993 prices, s.a.) 9.2 BCRA 6.5 relative to USA recovered to 33.1% (22-21 increase: 53%). 32 2 23 24 25 26 27 28 29 21 211 28 In 198 income per In 22 income per 24 capita relative to capita relative to USA was 39.8%. USA was 21.5%. 2 16 Q1-8 Q3-83 Q1-87 Q3-9 Q1-94 Q3-97 Q1-1 Q3-4 Q1-8 Source: INDEC and World Bank 13
Fiscal balance has been supported by domestic demand, simultaneously Argentina has experienced sustained external surpluses. The period 23-21 21 is the only one in Argentine history that combined twin surpluses and high growth. % of GDP 12 GDP, current account and fiscal balance 7 2-3 -8 Primary balance Current account GDP (y.o.y.chg.) -13 195 1954 1958 1962 1966 197 1974 1978 1982 1986 199 1994 1998 22 26 21 Source: BCRA from Treasury Secretariat and "Dos siglos de economía argentina" of OJ Ferreres. 14
Fiscal equilibrium and public debt reducing strategy (dis-indebtedness) indebtedness) % of GDP 16 12 1 138.88 Public debt and rollover risk 14 Excluding intra public sector holdings, IFIs and bilateral debt, public debt with 8 6 4 2 Gross National Public Debt (Dec-3) 21.4 p.p. of GDP held by public agencies (1) 45.6 Gross National Public Debt (Dec-1) (1) ANSes-FGS holdings, BCRA, BNA and other public agencies. (2) IMF, World Bank,, IADB, Paris Club and other bilateral debt. *Excludes holdouts. Source: BCRA on Ministry of Economy and Public Finances and INDEC data. the private sector in foreign currency is less than 12% of GDP 24.2 National Public Debt excluding intra public sector holdings (Dec-1) 6.7 p.p. of GDP (2) held by IFIs 17,6 33% 67% National Public Debt with private sector (Dec-1) 15
External equilibrium: current account balance Current account of the balance of payments million US$ 25, 2, 15, 1, 5, Transfers Goods Services Dividends Interest Current account -5, -1, -15, -2, 1992 1994 1996 1998 2 22 24 26 28 21 Source: INDEC 16
External equilibrium: exchange rate policy Managed floating regime (intervention in the spot and future markets) in order to influence both exchange rate level and volatility $/u$s 4.1 3.9 3.7 3.5 3.3 31 3.1 2.9 2.7 FX Market FX Central Bank's operations (right scale) Exchange rate ($/u$s) u$s million 35 25 15 5-5 -15-25 -35-45 2.5 Source: BCRA Jan-3 Dec-3 Dec-4 Nov-5 Nov-6 Jan-8 Dec-8 Nov-9 Nov-1-55 17
External equilibrium: international reserve accumulation Contrary to the nineties, Argentina has been following a reserve accumulation strategy based on current account surpluses 2, 15, 1, Current Account (LHS) Capital and Financial Account (LHS) International Reserves (RHS) 6, 5, USD Mil lions 5, -5, -1, -15, 4, 3, 2, 1, USD Millions -2, 1992 1994 1996 1998 2 22 24 26 28 21 Source: INDEC 18
External equilibrium: capital controls are an important element of the macroprudential toolkit Real exchange rate and net capital inflows in LATAM 13 5,5 12 4,5 11 3,5 Real exc change rate 2=1 1 1 9 8 7 2,5 1,5,5 -,5 Net capital inflows (% of GDP) 6-1,5 5-2,5 4-3,5 198 1981 1 1982 1983 1984 1985 1986 1987 1988 8 1989 9 199 1991 1 1992 1993 1994 1995 1996 1997 1998 1999 9 2 21 22 2 23 24 25 26 27 28 Real effective exchange rate in Latin America (left axis) Net private capital inflows (right axis) Source: Own calculations based on IMF, Bloomberg and ECLAC. Note:An increase in the RER series represents a real appreciation for the region. 19
Competitive exchange rate Argentina s nominal exchange rate remains above LATAM average Jan-3=1 Exchange rate 13 12 Currency depreciation Argentina 124 11 1 9 Bolivia 93 8 Chile Peru 79 7 6 Colombia 66 65 5 Currency appreciation Brazil 48 4 Jan-3 Jan-5 Jan-7 Jan-9 Jan-11 Source: BCRA from central banks 2
Competitive real exchange rate: Argentina s real exchange rate remains above its long-run average Dec 21 = 1 4.5 Real Effective Exchange Rate -deflated by wages- (march 1995- dec 21) RER-wages Brazil USA Eurozone 4. 3.5 3. 2.5 2. 1.5 1..5 Mar-95 Jun-97 Sep-99 Dec-1 Mar-4 Jun-6 Sep-8 Dec-1 Source: INDEC, IPEA data, EuroStats, BLS and Bloomberg. 21
Competitive real exchange rate Due to terms of trade shock, many countries in LATAM have been appreciating the nominal exchange rate. Argentina has been folowing a different path. Jan-=1 25=1 ARGENTINA 43 25 Jan-=1 22 BRAZIL 25=1 25 36 2 192 2 29 15 164 15 22 1 136 1 15 Bilateral nominal exchange rate Commodity Price Index (right axis) 5 18 Bilateral nominal exchange rate Commodity Price Index (right axis) 5 8 Jan- Oct-2 Jul-5 Apr-8 Jan-11 Source: IMF and DataStream Jan-=1 25=1 155 CHILE 25 8 Jan- Oct-2 Jul-5 Apr-8 Jan-11 Source: IMF and DataStream Jan-=1 25=1 PERU 15 25 14 2 98 2 125 15 91 15 11 1 84 1 95 Bilateral nominal exchange rate 5 77 Bilateral nominal exchange rate 5 Commodity Price Index (right axis) 8 Jan- Oct-2 Jul-5 Apr-8 Jan-11 Source: IMF and DataStream Commodity Price Index (right axis) 7 Jan- Oct-2 Jul-5 Apr-8 Jan-11 Source: IMF and DataStream 22
The challenge of re-primarization The current international context poses three closely related challenges for Argentina and Latin America: 1. high commodity prices, 2. strong capital inflows and 3. real exchange rate appreciation. All these factors tend to exacerbate the tendency to a re-primarization of the productive structure in the region. 23
The challenge of re-primarization Primary Products exports / Total exports. Change in share between 23 and 28 Bolivia Latin America 28 8,9 8,6 (92.8%) (52.9%) Mexico 8,5 Brazil 6,9 (55.4%) Paraguay 5,8 (92.1%) Venezuela* 5,4 (92.7%) Uruguay 5 (71.3%) (27.1%) Chile 4,2 (88.%) Ecuador Peru Colombia Argentina 28 Argentina 21-9 Change in p.p. of share of primary products -3 (69.2%) (64.9%) 3,7 (91.7%) Share of exports of 3,6 (86.6%) primary products in total 2,8 (68.5%) exports in 28 p.p. pp -1-8 -6-4 -2 2 4 6 Primary products includes primary products, manufactures of agricultural origin and fuels and energy 8 1 Source: BCRA calculations based on INDEC and ECLAC data * 26 24
Commodity prices and nominal tensions The positive international shock on terms of trade adds nominal pressure on domestic prices because of its high correlation with the domestic prices International food prices and wholesale prices % 8 7 6 (3 months m.a.; y.o.y. chg.) International food prices (in pesos) WPI (right axis) WPI Food (right axis) % 2 18 16 5 14 4 12 3 1 2 8 1 6 4-1 2-2 Jan-4 Mar-5 May-6 Jul-7 Sep-8 Nov-9 Jan-11 Source: INDEC and World Bank 25
Commodity prices and nominal tensions In Argentina food prices share in consumer price index is higher than other emerging economies. 4% Food prices in CPI basket of selected countries 35% 3% 25% 2% 15% 1% 5% % Argentina Brazil Chile Colombia Mexico Turkey Malaysia United States Canada Euro Area Source: BIS 26
Struggle over income and nominal tensions 25 23 21 19 17 United States Germany Japan United Kingdom United States Germany Japan Jp United Kingdom Productivity and hourly real wage Productivity Real wage (199-28) In advanced economies productivity gains are mainly translated into profits 15 13 11 9 199 1991 1992 1993 1994 1995 1996 1997 1998 1999 2 21 22 23 24 25 26 27 28 Source: NBLS 27
Struggle over income and nominal tensions Productivity and real wages per worker, Argentina: 1997-29 18 (1997=1) 17 16 In Argentina productivity gains are translated into real wages 15 Productivity per worker 14 Real wage per worker 13 12 11 1 9 Source: INDEC 8 1997 1998 1999 2 21 22 23 24 25 26* 27* 28* 29* 28
There are no conditions for explosive price dynamics Positive fiscal balance also contributes to price stability Inflation and fiscal balance % 7 % GDP 3 5 % % GDP 6 56 4 5 42-3 3 3 28-6 2 2 14-9 1-12 -2-14 Inflation Primary Fiscal balance fiscal (right balance axis) -15-1 -3 197 1973 1976 1979 1982 1985 1988 1991 1992 1995 1998 21 24 27 21 Source: BCRA from INDEC and OJF data 29
There are no conditions for explosive price dynamics Positive external balance and exchange rate administration contribute to price stability % 7 Inflation and exchange rate (y.o.y.) % 5 56 4 42 3 28 2 14 1 Exchange rate Inflation -14 197 1973 1976 1979 1982 1985 1988 1991 Source: BCRA and INDEC -1 1992 1995 1998 21 24 27 21 3
Argentina in the international arena: G2 and the challenges for economic policy 31
Capital flows, real exchange appreciation and macroeconomics Developing countries are facing strong pressures in international fora to accommodate the policy mix in a way that limits capital flows regulation, exchange rate management and reserve accumulation. Accepting passively increased capital flows and exchange rate appreciations generates macroeconomic problems in the short as well as in the long term: i. induce RER appreciation ii. iii. iv. create domestic assets prices bubbles (financial and real) generate procyclicality in the financial system by encouraging short-term loans mainly for consumption and speculative investments limits monetary policy autonomy v. create a bias towards primarization Unregulated capital flows extend crisis more easily to countries, even when fundamentals are right. 32
Which is the correct policy mix EMEs? Capital Account Regulation Exchange Rate Flexibility Financial Regulation and Supervision Monetary Policy Reserve Accumulation (sterilization) Fiscal Policy 33
EMEs are doing well, but development is still in progress In the case of EMEs, capital inflows often cause more damage than the domestic financial system negative externalities, even taking into account their macroeconomic externalities -high volatility-. The most damaging bubble in EMEs continues to be exchange rate bubbles pushed by short term capital inflows Although EMEs performance has been on average satisfactory, this does not mean that their economic development level is close to a desirable one. Correction of global imbalances should not condition the most important objective of reducing the development gap among emerging and advanced economies. 34
THANK YOU 35
Annex 36
Macroeconomics and financial stability The Central Bank of Argentina has recently undergone a self-assessment of the domestic regulatory framework based on Basel s s Committee principles. 26 out of 3 items evaluated were fulfilled. In a 1998 study, the World Bank ranked the argentine financial system among the soundest ones, only behind Singapore and in the same position than Hong Kong. In 21, Argentina entrusted IMF and Word Bank with a FSAP. If one compares the results, the FSAP (conducted only a few months before one of the worst financial and banking crisis in argentine history) indicated that 28 out of 3 items assessed where fulfilled, while only 2 needed to be improved. One may then cast some doubt on the relationship between the compliance of these principles and financial stability. However, there is a link between macroeconomic regime consistency and financial system performance and stability. Only an economy that t growths and develops its productive capacity, is capable of constructing a sound financial system. 37