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Argentina’s ongoing policy challenges

Argentina’s ongoing policy challenges. Central Bank of Argentina Alfonso Prat-Gay Governor Lecture delivered at the London School of Economics, May 2004. The sunny side of the business cycle. And the right policy mix. Real Interest Rate, Real Exchange Rate and Primary Surplus 2003-2004 .

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Argentina’s ongoing policy challenges

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  1. Argentina’s ongoing policy challenges Central Bank of Argentina Alfonso Prat-Gay Governor Lecture delivered at the London School of Economics, May 2004

  2. The sunny side of the business cycle

  3. And the right policy mix Real Interest Rate, Real Exchange Rate and Primary Surplus 2003-2004 (Real Exchange Rate % change and Real Interest Rate and Primary Surplus difference p.p. against 1994-2001 average) 10 3,9 0 -3,1 -10 -20 -30 -40 Primary Surplus Real Interest Rate (30-day CD) -50 * -49,2 Multilateral Real Exchange Rate -60

  4. Fixed investment finally adding to the capital stock

  5. Human capital no longer falling

  6. Challenges for Monetary Policy • Reputation: a poor track record • Public sector: division of labor • Commercial banks: large counterparty risk • Economic environment: shrinking balance sheet and uncertain money demand • Central Bank: lack of • instruments • practice TO TURN THE CENTRAL BANK INTO A CENTRAL BANK

  7. History is not on our side

  8. The aftershocks of the crisis * Contribution by source of money creation

  9. Developing the spot FX market

  10. Creating a benchmark interest rate

  11. Paving the way to a formal Inflation Targeting regime

  12. Nearly there but not quite

  13. Challenges for Banking Policy • Lack of resources • Outdated rules • Risk aversion and asymmetric information • Balance-sheet mismatches • Sovereign debt restructuring • Banks lack • instruments • practice TO GUIDE BANKS TO FIX THEMSELVES

  14. Too many constraints, too few resources Deposits IMF net Fiscal NW real Contribution (% of GDP) real change Country Crisis disbursements (2) change (1) (mill. US$) Mexico '94 - '95 -15% -64% 19,3% 10.670 approx. US$50 billion Venezuela '94 - '95 -43% -6% 15,0% -657 including US Treasury funds Korea '97 - '00 -6% 15% 31,2% 6.069 Indonesia '97 - '00 -13% -183% 56,8% 10.348 Thailand '97 - '00 -2% 58% 43,8% 3.212 Ecuador '98 - '01 -24% -59% 21,7% 298 Turkey '00 -'02 -27% 97% 30,5% 13.419 Simple average -19% -20% 31% 6.194 -US$6.5 billion including cash-flow Argentina '81 - '82 -36% -9% 55% s.d with IFI Argentina '02 - '03 -41,8% -37% 11,4% -930 (1) between the beginning of the crisis and the deposits trough (2) Net Worth, two year after the crisis

  15. Dealing with the past...

  16. …but focused on the future

  17. Easy go, easy come

  18. Banks are back in black Consolidated earnings ROA 2 0,3 0 -2 -1,9 -4 -4,0 -5,0 -6 -8 -8,9 -10 2002 I. 03 II. 03 III. 03 IV. 03

  19. Banking business: upside much greater than downside Loans to Private Sector ARS billion Apr-04 100 23% of GDP 85 Dec-98: 70 23% of GDP Change needed to reach 23% of GDP: 200% 55 40 Apr-04 7% of GDP 25 Ene-98 Sep-98 May-99 Ene-00 Sep-00 May-01 Ene-02 Sep-02 May-03 Ene-04

  20. Banks need to lend to the private sector; they are free to do so now No borrower discrimination Banks can now deploy AR$12.5 for every AR$1 of capital, to EVERY borrower, regardless of its nature.

  21. The glass is half full

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