Good morning. It is an honor for me to welcome you at the 2016 Money and Banking Conferences organized by the Central Bank of Argentina. I am thankful for the time and company of all our friends who have come to Argentina to enlighten us for a day and a half.
We have addressed this Conference with the certainty that Argentina still has a long way to go in terms of macroeconomic stability. However, we are aware that our problems do not differ from the ones faced by such countries whose representatives are present here today.
Thus, we have the chance to listen and learn from other countries’ experiences.
When we took over, we defined three topics, which are central to our administration: inflation reduction, financial development, and the increasing adoption of new technologies to be implemented in the monetary system with the aim of eliminating cash from our economy.
To begin with, let me tell you briefly about the progress we have made on each of these topics in nine months’ time, and the way we have dealt with them. From the very beginning, we said that our prime objective would be monetary stability. That is, to achieve a low and predictable inflation and a reliable currency for our population. The first months of this process were crucial. On December 17, we dismantled a great part of the regulatory machinery known as “exchange clamp” which had been hampering our economy’s growth. I still remember that Board’s meeting which adopted the resolution to implement these changes; it started at midday and finished next day at 2 am. We spent a whole day of in-depth discussion so as to dismantle the “bomb” without causing uncertainty or alarm.
Subsequently, we sought to withdraw the monetary surplus we had inherited both from last year’s excessive issue and from futures contracts already sold out. By the end of February, with a virtually normal operating monetary market, we resorted to interest rate as a monetary policy tool.
Inflation was very high so we set the annual inflation rate at 38% in March and kept it unaltered until we were absolutely sure that inflation was beginning to lower. Since then, the rate has decreased more than 10 p.p., with an inflation sharp decline.
In April, once the conflict with holdouts was solved, the Central Bank of Argentina presented its Monetary Policy plan 2016 and its inflation target for the years to come. At that time, we announced that we would announce the operational framework of an inflation targeting system in September. In fulfilment of this commitment, we have decided that inflation target will be announced in September 26. Even since April, inflation expectations showed a downward trend, converging to 1.5% as from September.
Today, we can say that inflation data went was hand in hand with that decreasing trend. Let us consider the monthly inflation rate calculated by the City of Buenos Aires, as the rate displayed by the National Statistics and Censuses Institute (INDEC, in the Spanish acronym) is only available as from May. In April, the inflation rate was above 6% because of an increase in utilities after a decade of price freezing. Afterwards, inflation rate went down to 4% in May, 3% in June, 2% in July and 0.9% in August. In fact, the last figure was -0.8%. The difference between these values was due to oil price reversals, which will surely be revised in the coming months.
However, this progress does not mean that the battle has been won, especially because a 1% monthly inflation rate is still high. Indeed, a 1% monthly inflation rate—as we will certainly see later on—is the starting point to fight against inflation as evidenced by many countries. We seek to achieve a low inflation rate that may encourage growth, as expressed in our target of 5% annual inflation rate in 2019. Thus, we consider that the battle against inflation has just begun.
Accordingly, the progress made so far was like preparing the battlefield against inflation. In other words, this battle is about to start in Argentina. Here it is paramount to understand the process which other countries went through to fight against inflation and we are honored to hear such stories from the protagonists themselves. Karnit Flug will disclose the extraordinary success achieved in Israel, which, as we will see, resembles Argentina’s case in many aspects. José De Gregorio will tell us about the process in Chile, as we all know, the most successful in the region. In turn, Arminio Fraga will refer to Brazil’s experience. He was responsible for a stability far-reaching change in an economy that experienced an even more complicated inflationary process in the ‘80s than that of Argentina. All this will be rounded off by Guillermo Calvo’s analytical and deep thought. He comes from the Columbia University and we welcome him once again to our Central Bank.
Let me now pass on to “financial development”, our second topic of discussion. Like inflation reduction, we should work on this topic in order to grow with equity.
One of the roles of banks is to change terms for financial system’s users. Long-term financial assets enable a family to buy a house, an SME entrepreneur to make his business grow or a big company to launch into investing in transforming projects of the country’s economic matrix. In the absence of a strong financial system, there cannot be distributive equity given investment is only reserved to those who already have money, which keeps the existing economic structures and cuts down dynamism onto the processes of rising social mobility.
At present, Argentina has a transactional financial system that only lends a 15% of the GDP to the private sector, being four times less than Brazil and five times less than Chile. The residual maturity of more than 80% of deposits in pesos is less than a month, so this credit ends up diverted in the short-run and is not enough to contribute significantly towards the objectives of development and equity.
How have we got to this point? In Argentina, there has been a tendency towards saving in foreign currency and away from the national financial system. Some people hold that this is a cultural feature of Argentineans. However, I think it is consequence of a macroeconomic volatility history in which returns on local currency savings in our financial system were lower than those of other assets. This may have resulted in a cultural trend. In any case, it is part of developments with underlying specific economic elements which, in my view, can be easily overturned if economic incentives change.
Let me revisit an example you may have already heard from me: assuming that a person invested 100 pesos in a fixed-term deposit in an Argentine bank at the beginning of the 80s, s/he would only have 1.5 pesos today in terms of goods. That is, after 35 years he would have lost 98.5% of his investment in real terms. Let us compare the return of this investment in pesos with typical Argentine investors’ alternatives such as real estate and dollars. A person who invested in real estate in 1981 would have 598% of his investment, if we consider the capitalization of the real estate rentals he had been charging. Contrary to people’s expectations, dollar investment did not even keep purchasing power, as it yielded 77% of the invested value. However, both options comfortably exceed a 1.5%.
Thus, it is far from a coincidence that our financial system is small and merely transactional. In view of this, we have already laid the foundations for the development of the industry. In the first place, we have let banks freely determine the adequate interest rate to compensate depositors. Meanwhile, we have changed regulations to foster competitiveness and transparency in the industry so that banks may provide Argentine depositors with more incentives to delve into the system. Moreover, the first topic I referred to—that is, to lower inflation—will be of utmost importance because actors will feel more confident to embark on longer-term agreements. Argentina has already recovered an interest rate curve in pesos, which extends for two years and, I am sure, will last longer as we consolidate a low inflation rate.
To help in this process, we have also introduced Units of Purchasing Power (known in Spanish as UVAs) for deposits and credit facilities in pesos, an instrument that is protected against inflation. These units enable banks, depositors and debtors to know for sure the real value their assets and obligations will have in the future, which fosters their commitment to projects with broader horizons. Finally, this comes together with prudential regulations, which have already reached the highest international standards and banish the risks of systemic crises from the industry.
Today, two panels will discuss these issues. First, we will listen to Raghuram Rajan and Robert Townsend, two experts on these topics. Raghu has not only had a varied and impressive career that led him from being the IMF’s chief economist to Governor of the Reserve Bank of India, but he was also the first economist to identify the incentives’ problems that would end up in the Lehmann Brothers’ crisis. Regarding Rob, we know he has much to share with us, as one of his books’ title is “Financial Systems is Developing Economies”.
Then, we have organized a panel with the following bankers: Enrique Cristofani from the private sector, Juan Curutchet from the public sector, and Andrew Powell from international organizations. We will get an insight into the work to be done from the perspective of experienced professionals. Surely, they will also share good ideas with us for our financial system to grow, to reach more population sectors, to broaden financing terms and to contribute to the development and equality of opportunities.
Now let us move on to our third central topic, new technologies and innovations heading towards means of payment. Our objective is to help bankarization, which stands for the formalization of economy. An economy where cash flows are deterred restrains corruption, informal work, tax evasion and drug dealing. A bankarized economy is fairer because its formal structure results in a more even tax burden thus, lower for everyone. This is a critical issue in our agenda. Indeed, the whole world is going through a revolution in means of payment.
At the BCRA, we have already taken measures to boost electronic transfers, enable users to make more bank transactions from their PCs or phones, facilitate electronic payments in shops and in web pages other than credit cards. In this sense, we are highly interested in learning about the outlook of such specialists who will give their presentations tomorrow, as we would like to go on improving for a fairer and more productive system.
The members of the first panel will be Stefan Ingves, Governor of the Central Bank of Sweden, and Fernando Álvarez from the University of Chicago. Stefan has turned Sweden into leader of means of payment modernization hence, minimizing cash flows. In our bilateral meetings in Basel, I have highly benefitted from his experience and it will be a pleasure to listen to him tomorrow. The same applies to Fernando Álvarez, expert in macroeconomics and monetary policy, who has also shaped the payment decisions of economic actors.
We have also organized a panel on means of payment, in which we integrated an emerging country regulator— Lorenza Martínez Trigueros from the Bank of Mexico—, and a payment network operator— Gilberto Caldart from Mastercard who was also summoned to tell us about the British experience as to the regulator’s decision to force banks to get rid of payment networks; they ended up buying Mastercard. Osvaldo Giménez from Mercado Pago represents an alternative means of payment from the perspective of an Argentine multinational company listed in NY, and Julián Scopinaro embodies the figure of innovation by rivalling all the others and is central to a creative and dynamic ecosystem.
The last panel will be composed of my colleagues Ilan Goldfajn and Rodrigo Vergara, whom I thank so much for their time. They will discuss the challenges their economies are facing.
As you see, we have invited specialists in interesting topics that are relevant to this Central Bank. I would really like to thank you for accepting this invitation and attending this Conference. I also thank all the audience, both the people present here today and those who will view the video of this conference online. In fact, only few people from the audience are present here given the Conference is being broadcast by streaming and by many public universities in the different provinces in our country. Thanks to all of them for being with us. Technology has also allowed us to present this Conference at home once again, for which we are proud. Likewise, the Bank’s staff has set up a mobile application where you can find all the presentations, information on the panelists, among others. You are welcome to download it.
Lastly, I suggest our visitors to take a few minutes to visit our Numismatic Museum as you can imagine the history of currency in Argentina has much to say.
Welcome home once again. Now, let us get to work.
September 19th, 2016