Nº 42 - October 2018 Economic GPS

Tracking The start of a new monetary policy 04

Industry Roadmap Automation and digitalization 09 of trucking: prospects of a new business model

Zooming The Effect of a Devaluation in the Balance of Trade 10

Global Coordinates Argentina, a Country with a Future? 13 Why a sharp fall in inflation towards the end of the year is so important?

After the currency crisis amount of currency issued to meet interest payments on that began in the autumn the Central Bank interest-bearing liabilities should be and the long winter of 2018, sterilized with new debt and, if those liabilities continue little remains standing of the to grow in excess of the adjustment rate of the non- model of gradual redress of intervention trading band for the Argentine peso (that macroeconomic imbalances. is, if the rate of inflation is persistently higher than the Instead, a tough fiscal and monthly exchange adjustment rate), it will pave the monetary adjustment schedule, way for a further rise in the value of the dollar, with supported by IMF financing, a potentially abrupt adjustment to the exchange rate, tries to organize variables as occurred in the past, but in this case it could have and cause its main symptom, implications beyond the foreign exchange market. inflation, to subside. Although it’s true that there are idiosyncratic, inertial But, why is it important that this happens as soon as and relative price adjustment factors that could delay possible? The implemented schedule could face two the fall in inflation, it is also true that the breadth of certain limitations if inflation does not ease quickly. the non-intervention trading band and the current According to this model, the contractionary movement exchange rate level offer the possibility of a long enough in both the fiscal and monetary lever leads to a shrinkage time horizon for the convergence to take place and the of the level of activity, with the consequent expected degree of uncertainty is not such that it could result in a decline in prices (and in the equilibrium of the external carry trade, with the consequent currency appreciation sector due to a fall in imports). beyond sustainable levels. It is worth noting that as long as the nominal exchange rate increases, the band margin However, if the inflation adjustment is delayed, the percentage will diminish, compared to its central trend. intensity and persistence of the adjustment to the level of economic activity could badly affect its political and In brief, the model is the key to achieving convergence in social sustainability. inflation performance at a compatible rate; first, with the exchange adjustment schedule established and, second, Further, to maintain zero growth in the monetary base, with a level of economic activity that is politically and the Central Bank must offer a positive interest rate level, socially sustainable. This will be defined in the coming which implies nominal interest rates above the rate months. of inflation. While inflation does not fall rapidly, the

José María Segura Chief Economist PwC Argentina Economic GPS

Tracking Industry Roadmap The start of a new monetary policy Automation and digitalization of trucking: prospects of a new business Argentina has a new monetary policy since October 1. model The new authorities of the Central Bank of Argentina (BCRA) have introduced significant changes to the monetary policy to stabilize the exchange market and By 2030, trucking and logistics will be an ecosystem curb inflation. of autonomous vehicles directed by a digitized supply chain, combining driverless, wireless trucks and delivery hubs staffed by robots. 04 09

Zooming The Effect of a Devaluation in the Balance of Trade

Devaluations improve the balance of trade of countries, as is usually argued, although, in general, the reply to whether this result is sustainable over time is not so clear. Recent Argentine history can provide elements to understand whether a devaluation can have lasting effects in the balance of trade or not. 10

Summary Global Coordinates Argentina, a Country with a Future? The start of a new monetary policy 04

In spite of the current administration’s attempts to Automation and digitalization raise optimism and hope, it seems we live in a climate of trucking: prospects of a new 09 of disappointment and failure. Now, why can we not business model take advantage of the potential we do have? The Effect of a Devaluation in the Balance of Trade 10 Argentina, a Country with a Future? 13 Monitors 14 Table of indicators 15 13 Our services. Contacts 16 Tracking The start of a new monetary policy

Argentina has a new monetary policy monetary policy, in an effort to handle intervention and a non-intervention since October 1. The new authorities of the exchange rate fluctuations and zone for the nominal exchange rate, the Central Bank of Argentina (BCRA) reduce the stocks of LEBAC, which allowing the currency to float within a have introduced significant changes when he took office in June exceeded range of 34 to 44 pesos per US dollar to the monetary policy to stabilize the one trillion pesos and accrued interest (the non-intervention zone), with exchange market and curb inflation. for approximately USD 1.2 billion per daily adjustments at a monthly rate month, so as to stabilize the exchange of 3% until the year-end. In addition, Argentina started the year 2018 with market. it was established that no financial an Inflation Targeting monetary policy, assistance would be granted to the by which the monetary authority Towards the end of September, after Treasury for the rest of the year and set an inflation target and used the the devaluation of the peso by 40% on 2019, a source of money that not so interest rate as the main instrument to average in two months and on the day long ago had been very significant. accomplish that target. Many parts of before a new agreement was reached Within this framework, the monetary the world use this method, but it did with the IMF, Luis Caputo resigned authority will control the liquidity not produce the expected results in our as governor of the BCRA and the new levels of the economy through country. governor, Guido Sandleris, took office. Liquidity Bills (LELIQ1), by internally Under the new scenario, the Central determining the value of the interest After the currency crisis unleashed Bank adopted effective October 1 a rate that strikes a balance between between April and May, (in the new monetary policy framework, with money supply and demand. In other fifth months of the year the peso control of monetary aggregates, and an words, the monetary policy now exerts was devalued by 17% on average, exchange rate regime within crawling a stricter control of the amount of compared with the previous month), bands. The monetary authority money in the economy, at the cost of and in view of the impossibility to has committed to not increase the facing in the short term an interest rate resolve that crisis, the governor of the monetary base, which comprises the that has stood at approximately 72% Central Bank handed in his resignation, amount of pesos in circulation and per annum. Commercial banks may and the inflation targeting framework current account deposits in pesos use these short-term bonds to meet came to an end. His successor, Luis at the BCRA, until June 2019. The reserve requirements. Caputo, followed an aimless long-term monetary authority has also defined an

1 7-day Liquidity Bills of the Central Bank in pesos, exclusively for banks

4 Economic GPS

Graphic 1: Exchange rate regimes + monetary policy worldwide

Floating + Inflation targeting Crawling Peg Floating + No explicitly + Exchange monetary policy rate anchor

Free floating + No explicitly monetary policy No separate legal tender / Currency board / Conventional Stabilized arrangement + Exchange rate Free floating + Peg + Exchange rate anchor anchor Inflation targeting Floating + Monetary aggregate target

Source: Prepared by the authors based on information from the IMF Note2: The IMF annually surveys its member countries’ monetary policy frameworks and regimes. Latest available information as of April 30, 2018 on the monetary policy frameworks applied by IMF member countries in 2017. Argentina changed its exchange rate arrangement recently and was thus excluded. In the case of the countries with both a de jure and a de facto exchange rate arrangement, what was actually applied was considered for the purposes of the graphics

Exchange rate arrangements exception of a specified number of outliers disorderly market conditions and if the or step adjustments) and is not floating. authorities have provided information or data Exchange rate arrangement with no Classification as a stabilized arrangement confirming that intervention has been limited separate legal tender: The currency of requires that the statistical criteria are met to at most three instances in the previous another country circulates as the sole legal and that the exchange rate remains stable as six months, each lasting no more than three tender. Adopting such an arrangement implies a result of official action (including structural business days. the complete surrender by the monetary market rigidities). The classification does not authorities of control over domestic monetary imply a policy commitment on the part of the Monetary policy framework policy. country authorities. Exchange rate anchor: The monetary Currency board: A monetary arrangement Crawling peg / Crawling peg arrangement: authority buys or sells foreign exchange based on an explicit legislative commitment Classification as a crawling peg involves the to maintain the exchange rate at its to exchange domestic currency for a specified confirmation of the country authorities’ de predetermined level or within a range. The foreign currency at a fixed exchange rate, jure exchange rate arrangement. The currency exchange rate thus serves as the nominal combined with restrictions on the issuing is adjusted in small amounts at a fixed rate or anchor or intermediate target of monetary authority to ensure the fulfillment of its legal in response to changes in selected quantitative policy. obligation. indicators. The exchange rate must remain within a narrow margin of 2 percent relative Monetary aggregate target: The Conventional peg: The country formally to a statistically identified trend for six months intermediate target of monetary policy is a (de jure) pegs its currency at a fixed rate to or more (with the exception of a specified monetary aggregate such as M0, M1, or M2, another currency or basket of currencies. number of outliers) and the exchange rate although the country may also set targets for The country authorities stand ready to arrangement cannot be considered as floating. inflation. The central bank may use a quantity maintain the fixed parity through direct (central bank reserves or base money) or price intervention (that is, via sale or purchase of Floating: A floating exchange rate is largely variable (policy rate) as operational target. foreign exchange in the market) or indirect market determined, without an ascertainable intervention (for example, via exchange rate or predictable path for the rate. Foreign Inflation-targeting framework: This related use of interest rate policy, imposition of exchange market intervention may be either involves the public announcement of foreign exchange regulations, exercise of moral direct or indirect, and such intervention serves numerical targets for inflation, with an suasion that constrains foreign exchange to moderate the rate of exchange and prevent institutional commitment by the monetary activity, or intervention by other public undue fluctuations in the exchange rate, authority to achieve these targets, typically institutions). but policies targeting a specific level of the over a medium-term horizon. exchange rate are incompatible with floating. Stabilized arrangement: Classification as a Other monetary frameworks: The country stabilized arrangement entails a spot market Free floating: A floating exchange rate can has no explicitly stated nominal anchor, exchange rate that remains within a margin be classified as free floating if intervention but rather monitors various indicators in of 2 percent for six months or more (with the occurs only exceptionally and aims to address conducting monetary policy.

2 Cambodia, Liberia, Zimbabwe, Syria, Algeria, Belarus, Congo, Gambia Guinea, Sierra Leone, Surinam, Myanmar, Azerbaijan, Haiti, Kyrgyzstan, South Sudan, Vanuatu and Venezuela were excluded; they were included in the IMF report, but they have no exchange rate arrangement or regime within the proposed classification.

5 Graphic 2: Exchange rate and crawling bands

35 The possibility for financial institutions to meet minimum cash requirements 30 with LELIQs allows them to have

25 interest-bearing reserves, which has somehow extended to the interest rates 20 received by savers (Graphic 4). This 15 reduces the demand for dollars and Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Aug-18 Sep-18 Oct-18 Nov-18 Dec-18 the exchange rate volatility in the short Exchange rate BCRA Lower limit Upper limit term.

BCRA exchange rate – Lower limit – Upper limit By application of the new monetary Source: Prepared by the authors based on information from the BCRA policy, the nominal exchange rate stopped increasing, showing during the first two weeks of the month an Graphic 3: Country Risk – EMBI Argentina, basis points appreciation of 11.4% (October 12 as against September 28). Likewise, 900 country risk stabilized below 700 points, without increasing any further. 800

700 However, the balance in the levels of these variables is having an impact 600 on economic activity, since the high interest rates restrict access to credit 500 by companies, especially small and

400 medium-sized enterprises, which are most affected for not having other 300 short-term financing alternatives. This situation increases the risk of delays in 200 Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Aug-18 Sep-18 Oct-18 the payment chains.

Source: Prepared by the authors based on financial information

Graphic 4: Interest rates on deposits

85%

75%

65%

55%

45%

35%

25%

15% Jul-18 Jul-18 Jul-18 Jul-18 Jul-18 Oct-18 Oct-18 Apr-18 Apr-18 Apr-18 Apr-18 Jan-18 Jan-18 Jan-18 Jan-18 Jan-18 Jun-18 Jun-18 Jun-18 Jun-18 Mar-18 Mar-18 Mar-18 Mar-18 Feb-18 Feb-18 Feb-18 Feb-18 Aug-18 Aug-18 Aug-18 Aug-18 Sep-18 Sep-18 Sep-18 Sep-18 May-18 May-18 May-18 May-18 May-18

Time deposits rate 30-44d B ADLAR rate* T20 rate** Monetary policy int erest rate

Source: Prepared by the authors based on information from the BCRA * 30/35-day deposits for more than $1 million. ** 30/35-day deposits for $20 million and more.

6 Economic GPS

Graphic 5: Percentage of rejected and unpaid checks, compared to cleared checks, first 9 months of each year

3% An indicator of the above is the percentage of rejected checks out 2% of the total cleared checks3, which in the first 9 months of the year 1% reached 5%, and the percentage of unpaid checks was 1.8%. As shown 0% by Graphic 5, these are the maximum levels for the series in the period under consideration, and the critical Reject ed Unpaid moments were April, June and Source: Prepared by the authors based on information from the BCRA September, coinciding with the worst moments of the currency crisis.

Bank overdraft facilities are another Graphic 6: Interest rate on overdraft facilities and monetary policy rate means of financing of working capital for companies, and their cost has 85% increased as a result of the higher 75% benchmark rate (Graphic 6). 65% With the implementation of the new 55% monetary policy, the Central Bank stopped the run on the currency in the 45% short term to the financial market’s 35% relief and showed its commitment to fulfill its goal to not allow monetary 25% aggregates to grow, which shrank 15% 0.9%, while M1 and M2 decreased 10.9% and 6.2%, respectively.

At the same time, the reduction of Bank overdraft * Monetary policy int erest rate the stocks of LEBACs continue, and will reach zero by the end of the year. Source: Prepared by the authors based on information from BCRA *Interest rate on bank overdraft facilities in Argentine currency (with 1-7 day arrangements for 10 million LELIQs, which will replace LEBACs, or more) granted to non-financial private sector companies must be monitored to avoid situations of stress, as has occurred with LEBACs.

By mid-October, the stocks of LELIQ 3 A cleared check is a check that has been verified by the drawer’s exceeded $ 450 billion, which meant bank and its payment has been approved. Checks are rejected when after having been transferred to the clearing system (that is, an interest accrual (at the current rate the check has no observations), there are not sufficient funds in the levels) of almost $27 billion per month. drawer’s account to transfer to the payee’s bank.

7 To ensure stability of the peso, in the Graphic 7: Stocks of LEBAC and NOBAC, LELIQ and Monetary Base short term, the challenge is to reduce gradually the amount of pesos in 2.500.000 circulation in the economy, to be able to properly adjust relative prices and 2.000.000 give the necessary signals to avoid devaluation/deficit/crisis. 1.500.000

1.000.000

500.000

- 2-oct-18 4-oct-18 6-oct-18 8-oct-18 2-sep-18 4-sep-18 6-sep-18 8-sep-18 1-ago-18 3-ago-18 5-ago-18 7-ago-18 9-ago-18 10-oct-18 10-sep-18 12-sep-18 14-sep-18 16-sep-18 18-sep-18 20-sep-18 22-sep-18 24-sep-18 26-sep-18 28-sep-18 30-sep-18 11-ago-18 13-ago-18 15-ago-18 17-ago-18 19-ago-18 21-ago-18 23-ago-18 25-ago-18 27-ago-18 29-ago-18 31-ago-18

LEBAC y NO BAC LE LIQ BM

Source: Prepared by the authors based on information from BCRA

8 Economic GPS Industry Roadmap Automation and digitalization of trucking: prospects of a new business model.

By 2030, trucking and logistics will In this way, stakeholders, truck Lastly, the third effect resulting be an ecosystem of autonomous makers, long-distance freight from the technological advances vehicles directed by a digitized transportation truck companies will be an extension of the amount supply chain, combining driverless, and suppliers, among others, of time in a vehicle’s daily life wireless trucks and delivery hubs will face a context of big that it is actually in use (the so- staffed by robots. transformations, where changes in called utilization rate), which trucking and logistics generated by will translate into a productivity As a consequence of the technology will affect their future increase of long-haul trucks on the technological advances, in a few behavior. road. years, the trucking industry will be an autonomous and digital In addition, the future logistics The imminent changes that will ecosystem, with a fully automated model will generate savings. come hand in hand with the model that will bring about Manufacturers will have to expand disruptive technological advances changes in the current business their product range to include threaten not only the business models. new engines, such as the electric model of the truck manufacturers and the hybrid, which will reduce themselves, but also their But what about the efficiency and fuel costs significantly for trucking customers’ and the leasing and the costs behind these changes? companies. Moreover, companies logistics companies’. The entire The study conducted by PwC should focus production on ecosystem as we know it today is Strategy&1, which includes autonomous long-haul trucks, thus at risk (Table 1). Yet, it is essential statistics with a focus on the reducing the labor cost as it will that the industry acknowledges European Union but shows trends eliminate the need for a driver, and works to keep pace with the that will likely be reflected at a but also the production cost of the incremental disruptive changes global level, presents the following vehicle, given that the cab is one of in technology and automation findings: the most expensive parts of a truck. over the coming years — a transformation that will create a • Trucking logistics costs will new and more cost-efficient supply fall by 47% by 2030, largely chain by 2030. through reduction of labor. • Delivery lead times will fall by Table 1: 40%. New technologies will create a more cost-efficient logistics supply chain by 2030 • Trucks will be in use on the road for 78% of the time, Current technology By 2020 By 2025 By 2030 rather than the current -5% -20% -47% industry average in Europe of Virtual platforms Logistics mobility- Nearly all hub-to-hub All hub-to-hub logistics Warehouse robots as-a-service (MaaS) logistics done by drone by MaaS 29%. introduced MaaS Partially automated Processes for standard trucking Drone-automated Processes (except delivery 100% The process of matching the inventory taking commissioning) automated Electric vans delivery of goods and the available Platooning begins automated Fully autonomous trucks trucks will be fully automated. Significant share of Partially autonomous without driver trucks, requiring To stay competitive, original electric vans Synchronized, driver heterogenous delivery equipment manufacturers Commercial delivery fleet (OEM) need to expand their drones product portfolios to include new engines and focus production on autonomous long-haul trucks. 1 The study carried out by PwC Strategy& for the European Union arises from the report called:– “The era of digitized trucking: Charting your transformation to a new business model” –, which examines the changes Large tech companies will become in the business model that will resulting from innovations, and how they will the major feature in the delivery save companies and customers time and money. market, with new technologies.

9 Zooming The Effect of a Devaluation in the Balance of Trade

Devaluations improve the balance of short-term, due to the increase in the Therefore, the implications of a trade of countries, as is usually argued, cost of imports; a situation that will devaluation of the real exchange rate although, in general, the reply to subsequently reverse, with exports might be different in the short and whether this result is sustainable over driving a positive result. long run. time is not so clear. Recent Argentine history can provide elements to This mechanism starts with an initially For the case of Argentina, currently understand whether a devaluation can worsening trade balance due to a facing a deficit in the balance of trade have lasting effects in the balance of rise in internal prices of imports, on and recently suffering a significant trade or not. one side, while the amounts tend to devaluation of its currency, it is react late due to the technological relevant to assess the relationship Generally, devaluation of the exchange characteristics of the production in the short- and long-term existing rate is a medium to correct the deficit process. On the other side, the fact between both variables. in the balance of trade of a country’s that the amounts exported are rigid at current account. This mechanism first, their prices in local currency do operates by increasing the internal increase. price (in pesos) of imports and reducing the average external price (in US dollars) of exports, discouraging Graphic 1: Changes in the real multilateral exchange rate index, base 17-12- pesos and promoting dollars, thus 15=100 improving the net result. Some theories have it that improving the 250 balance of trade is a combination of 200 a sufficiently great price elasticity of demand1 and a low price elasticity of 150 supply. There is a significantly reduced 100 amount of products and services purchased abroad, when their price 50

increases and the amount of products - and services sold abroad is only reduced somewhat when their price slightly declines. Source: Prepared by the authors based on information from the BCRA

However, the result of devaluation is often empirically ambiguous, depending on the country and Graphic 2: Balance of trade, ratio (X/M) period considered. Even when

meeting conditions and improvement 3.5

finally occurs, at first the balance 3.0 of trade could be affected before it 2.5 subsequently improves: with both a short-term and a long-term effect. The 2.0 “J curve” effect, as indicated by its 1.5 name, the course of the curve supposes 1.0 that, after a devaluation, the deficit in 0.5 the balance of trade will deepen in the -

1 A measure of the sensitivity or Source: Prepared by the authors based on information from the INDEC responsiveness of the demand for a product in the event of price change

10 Economic GPS

From theory to practice

The objective of this work is to assess, empirically, through an econometric model, the impact of a devaluation of the real exchange rate on Argentine foreign trade. For this purpose, the balance of trade is set as a model based on the real exchange rate, local GDP and GDP of the rest of the world. For determining the existence or not of a relationship between the real exchange rate and the trade balance, we used quarterly information from January 1997 to June 2018 from the BCRA, INDEC and the US Federal Reserve Bank of St. Louis.

The series selected for the analysis of this model were: the ratio of the value of exports (X) and imports (M), whose effect is assessed in view of the variation of the real exchange rate; the Argentine GDP2 (a variable that indicates internal demand, whose a The impact of variations in the real Results for the long-term show that priori effect is ambiguous, as its rise exchange rate on the balance of trade the relation of the (X/M) ratio as increases imports due to the need may be ambiguous: this means that to the REER shows little elasticity. for inputs, but it may also generate the coefficient a may be both positive Thus, a 1% variation in the REER, a substitution effect by reducing 2 and negative. If a devaluation or keeping constant the rest of the them), US GDP is the proxy chosen to depreciation of the national currency variables, generates a variation in indicate the effect on net exports of occurs, then the real exchange the (X/M) ratio of 0.55% in the same an increase in demand abroad, and rate increases, and the rise in the direction. That is, the direct effect of the real multilateral exchange rate competitiveness in prices for the a devaluation of the exchange rate in (REER), elasticity would be obtained country should result in higher exports Argentina generates improvement in for the dependent variable (X/M) in and fewer imports (“volume effect”). the balance of trade result. the event of variations in the Argentine However, the higher the real exchange GDP, US GDP and real exchange rate, rate, the higher the value of each As to elasticity of the (X/M) ratio in with evaluation done on a logarithmic import unit (“value effect of import”), relation to the Argentine GDP, we basis3. which would tend to decrease the noted that a variation of 1% in this balance of trade. variable reduces the (X/M) ratio for The reduced form of the equation4 of the period by 1.274%. In the case of the proposed model is as follows: To prove this relation, an estimate the (X/M) ratio elasticity as to US GDP, was made5 resulting in the following we noted that a 1% variation in this ln = + ln + equation whose estimated parameters variable, keeping constant the other 푋 6 ln 1 +2 ln + were statistically significant : variables, increases the (X/M) ratio by 푀 푡 훼 훼 푅퐸퐸푅 1.14%. 3 퐴푅퐺 4 푈푆 푡 훼 퐺퐷푃 훼 퐺퐷푃 휀 ln = 4.389+ 0.547ln 1.274푋 ln + 1.144ln From the analysis performed, we infer 푌 푡 푅퐸퐸푅 − that the long-term effect of a variation 퐺퐷푃퐴푅퐺 퐺퐷푃푈푆 in the domestic GDP is greater than 2 We employed the variation of the real GDP basis 1993 to create the series for the years 1997 to 2003, at which time the series basis 2004 began, both provided by INDEC. the long-term effect of a variation in 3 To estimate price elasticities of the ratio (X/M) as to REER and GDP of Argentina and US, the real exchange rate. Therefore, the we use the exponential model, where the powers are the elasticities estimated, and using logarithmic transformations. dynamics of the growth of internal 4 Where the E is the error term t demand tend to prevail over the result 5 At the time of preparing the econometric model through the classic least squares method, the assumptions of Gauss-Markov were analyzed to determine the efficiency of the estimators in balance of trade for Argentina. at issue. The condition of stationary variables was also proven and the co-integration of variables was tested through the Engle-Granger test. 6 At 5%.

11 Furthermore, an impulse-response test was made to assess the relation in Graphic 3: (X/M) ratio response in the event of a devaluation of REER the short-term of a change in the real exchange rate over the balance of trade (to verify or not the existence of the “J curve” effect ).

In graphic 3, in the case of Argentina the “J curve” effect is not verified. That is, in the short-term, a devaluation tends to improve the balance of trade result (for two quarters); however, subsequently, this relation is rapidly reversed. This result is rather usual and observed in similar analyses for other countries.

In view of the results obtained, in the Source: Prepared by the authors Note: the horizontal axis measures periods in quarters and the vertical axis variation in percentages. short-term there is a positive impulse- response effect contrary to the theory of “J curve, one might infer that this could happen in the case of Argentina with other countries in the exporters’ the price generated by a depreciation due to the production and export of a production process. In other words, it of the real exchange rate may improve great deal of agriculture manufactured depends on the source of all imported the balance of trade in part. For products with internationally given inputs (direct and indirect) and on the this improvement to be lasting, an prices and import of most of the destination of the end consumption. enhancement of the quality of products industrial inputs. The impact of the and processes and an opening of new devaluation generates an immediate To conclude, although it is possible markets, implying more competitive increase in costs that, due to the that under certain circumstances the exports worldwide, irrespective of the high pass-through that characterizes improvement in the competitiveness of local currency price are needed. Argentina, is transferred to internal prices of the economy generating a decline in the REER and adversely influencing the (X/M) ratio, as seen from the second quarter in graphic 3.

The fact that the initial impulse of the REER later generates negative responses of the (X/M) ratio might have other explanations8, where the reason why export volumes do not increase under a depreciation of the currency is the existence of global chain values that imply that the countries now need to import to produce exports and, often, export inputs which are re-exported by their commercial partners. For this reason, the consequences of a devaluation of the currency for the export volumes depend on the types of ascending and descending interconnections

7 Cholesky Impulse-response test 8 Global value chains and export elasticities: All linkages matter. https://voxeu.org/article/global-value-chains-and-export- elasticities-all-linkages-matter.

12 Economic GPS

Global Coordinates Argentina, a Country with a Future?

By Juan M. Procaccini

In spite of the current triangle” which accounts for 80% spends more than it generates, an administration’s attempts to raise of the world reserves, and has as issue that must be resolved. optimism and hope, it seems we live well many other mineral resources in a climate of disappointment and with huge export potential. By After having lived through an failure. Now, why can we not take simply observing that we share the exchange and financial crisis, one advantage of the potential we do Andes with Chile and this country of the strongest since 2001, a new have? exports nearly USD 35 billion per process for surmounting the fiscal year compared to just USD 3 billion deficit is about to come. This could Many Argentines continually think exported from Argentina, this huge lead to a recession that would that our country has no solution, potential is evident. be felt until mid-2019. Yet again no future and, certain another long-term investment would be crisis is looming. This view leads Besides the abundance in natural postponed. us to be extremely shortsighted in resources, our country has highly our actions without thinking in the qualified human capital, with a However, we have a unique medium to long-term, to project remarkable and favorable position opportunity ahead: to change sustainable growth, investment within Latin America. A young and this short-term vision; to respect and development. well-trained population are fluent our commitments to the IMF; in English with entrepreneurial and all parties, both politicians Argentina is an extremely rich skills who are highly flexible, and and unions, to agree on the 2019 country. With considerable land (it ready to adapt to change. budget. Think as entrepreneurs, ranks as the eighth largest territory although the situation is difficult, in the world), with abundant So, why can’t we transform into and as entrepreneurs increase fertile soil and potable water; it a thriving, growing country with investment and job creation. It is produces agriculture commodities sustainable growth and economic the only way to regain the world’s to feed more than 400 million well-being? The reason is that trust. people. It has also a huge variety these wonderful resources and of energy resources, from being skills have to be developed in line Becoming a developed Argentina the second shale gas reservoir in with a significant and sustained with sustainable growth is possible the world to excellent solar and investment that requires a long- if we can change our vision, with a wind factors for the development term vision. What is key to attract strong direct foreign investment on of renewable energies. It has one this type of capital is to be both average levels in the Latin America of the most sought after minerals politically and economically region (4% of GDP). If this goes in the world -lithium- forming reliable and predictable. We have a undone, we will be no more than a with Bolivia and Chile the “lithium country that in the last sixty years developing country with potential.

13 Inﬂation Exchange rate: spot and futures

50,0% 59 Spot CPI* dec - 18 45,0% Inflation prospects 54 mar - 19 jun - 19 40,0% 49 44 35,0% 39 30,0% 34 25,0% 29 20,0% 24 15,0% 19 14 07-14 09-14 14-14 01-15 03-15 05-15 07-15 09-15 14-15 01-16 03-16 05-16 07-16 09-16 11-16 01-17 03-17 05-17 07-17 09-17 11-17 01-18 03-18 05-18 07-18 09-18 12-17 01-18 02-18 03-18 04-18 05-18 06-18 07-18 08-18 09-18

Source: Own calculations based on CPI Congress and UTD Source: Own calculations based on Rofex *CPI Congress. As of November 201 it is considered CPI City of Buenos Aires

Price of Soy and Oil, index2004=100 Reserves and Central Bank Assets

Reserves, USD mn, end of period Reserves/Assets 205 Public Sector Assets/Assets 185 80% 60000 165 70% 50000 145 60% 40000 125 50% 40% 30000 105 30% 85 20000 20% 10000 65 10% 45 0% 0

Source: own calculations based on CBOT y TI NME Source: own calculations based on Central Bank

Real Exchange Rate Index: base Dec-99=1 Monthly Industrial Estimator

8,0% Brazil Euro China United States 6,0%

3,5 4,0%

3 2,0%

2,5 0,0% -2,0% 2 -4,0% 1,5 -6,0% 1 -8,0% 0,5 -10,0% 0 04-16 05-16 06-16 07-16 08-16 09-16 10-16 11-16 12-16 01-17 02-17 03-17 04-17 05-17 06-17 07-17 08-17 09-17 10-17 11-17 12-17 01-18 02-18 03-18 04-18 05-18 06-18 07-18 08-18 01-99 01-00 01-01 01-02 01-03 01-04 01-05 01-06 01-07 01-08 01-09 01-10 01-11 01-12 01-13 01-14 01-15 01-16 01-17 01-18

Source: own calculations based on the Argentine Central Bank Source: own calculations based on INDEC

Foreign Trade Income and Expenses of the National Non-Financial Public Sector

Commercial balance, USD MN Imports, USD MN 350.000 Total income Exports, USD MN 300.000 Primary expenses 10.000 250.000 8.000 200.000 6.000

4.000 150.000

2.000 100.000

0 50.000

-2.000 0,00 07-17 08-17 09-17 10-17 11-17 12-17 01-18 02-18 03-18 04-18 05-18 06-18 07-18 08-18 09-18 03-13 05-13 07-13 09-13 11-13 01-14 03-14 05-14 07-14 09-14 11-14 01-15 03-15 05-15 07-15 09-15 11-15 01-16 03-16 05-16 07-16 09-16 11-16 01-17 03-17 05-17 07-17 09-17 11-17 01-18 03-18 05-18 07-18 09-18

Source: own calculations based on INDEC Source: own calculations based on Secretary of Finance Inﬂation Exchange rate: spot and futures Activity and Prices 2015 2016 2017 jun-18 jul-18 aug-18 sep-18 Real GDP, var % y/y 2.6% -1.8% 2.9% -4.2% - - nd 50,0% 59 Spot CPI* dec - 18 CPI Federal Capital, var % y/y 26.9% 41.0% 26.1% 29.8% 31.0% 33.6% 39.5% 45,0% Inflation prospects 54 mar - 19 jun - 19 CPI San Luis, var % y/y 31.6% 31.4% 24.3% 30.2% 32.9% 35.5% 43.3% 40,0% 49 Industrial Production, var % y/y nd -4.6% 1.8% -8.1% -5.7% -5.6% nd 44 35,0% 39 International Reserves (end period, USD mn) 25,563 39,308 55,055 61,881 57,996 52,658 49,003 30,0% 34 Import Cover (month of reserves) 5.10 8.44 9.88 11.34 9.39 8.35 10.43 25,0% 29 Implicit exchange rate (M0 / Reserves) 24.41 20.90 18.18 16.87 18.39 22.95 25.50 20,0% 24 $/USD, end period 13.01 15.85 18.77 28.86 27.34 37.12 38.03 15,0% 19 14 07-14 09-14 14-14 01-15 03-15 05-15 07-15 09-15 14-15 01-16 03-16 05-16 07-16 09-16 11-16 01-17 03-17 05-17 07-17 09-17 11-17 01-18 03-18 05-18 07-18 09-18 12-17 01-18 02-18 03-18 04-18 05-18 06-18 07-18 08-18 09-18 External Sector 2015 2016 2017 jun-18 jul-18 aug-18 sep-18 Source: Own calculations based on CPI Congress and UTD Source: Own calculations based on Rofex *CPI Congress. As of November 201 it is considered CPI City of Buenos Aires Exports, USD mn 56,784 57,879 58,427 5,099 5,385 5,179 5,013 Imports, USD mn 60,203 55,911 66,899 5,458 6,174 6,310 4,699

Price of Soy and Oil, index2004=100 Reserves and Central Bank Assets Comercial Balance, USD mn -3,419 1,969 -8,472 -359 -789 -1,131 314

Currency liquidation by grain exporters, USD mn 19,953 23,910 21,399 3,225 2,701 1,605 1,311 Reserves, USD mn, end of period Reserves/Assets 205 Public Sector Assets/Assets 185 80% 60000 165 70% 50000 Labor* 2015 2016 2017 jun-18 jul-18 aug-18 sep-18 145 60% 40000 Unemployment, country (%) nd 7.6 7.2 9.6 - - nd 125 50% 40% 30000 Unemployment, Greater Buenos Aires (%) nd 8.5 8.4 11.4 - - nd 105 30% 85 20000 Activity rate(%) nd 45.3 46.4 46.4 - - nd 20% 10000 65 10% 45 0% 0 Fiscal 2015 2016 2017 jun-18 jul-18 aug-18 sep-18

12-201601-201702-201703-201704-201705-201706-201707-201708-201709-201710-201711-201712-201701-201802-201803-201804-201805-201806-201807-201808-201809-2018 06-13 09-13 12-13 03-14 06-14 09-14 12-14 03-15 06-15 09-15 12-15 03-16 06-16 09-16 12-16 03-17 06-17 09-17 12-17 03-18 06-18 09-18 Income, $mn 1,537,948 2,070,154 2,578,609 298,853 293,894 293,418 295,818 Source: own calculations based on CBOT y TI NME Source: own calculations based on Central Bank VAT, $mn 433,076 583,217 765,336 92,127 91,454 98,116 103,570 Income tax, $mn 381,463 432,907 555,023 90,350 59,703 68,701 59,398 Social Security System, $mn 401,045 536,180 704,177 69,789 89,033 69,916 70,650 Real Exchange Rate Index: base Dec-99=1 Monthly Industrial Estimator Export Tax, $mn 34,822 55,305 69,259 8,243 9,767 10,787 10,249

8,0% Primary expenses, $mn 1,427,990 1,790,789 2,194,291 264,254 230,113 213,504 229,933 Brazil Euro China United States 6,0% Primary result, $mn -291,660 -343,526 -404,142 -56,664 -14,280 -10,356 -22,854 4,0% 3,5 Interest, $mn** 120,840 185,253 308,048 45,382 60,547 6,504 53,535 3 2,0% Fiscal results, $mn -282,180 -474,786 -569,050 -88,866 -62,380 -14,517 -55,858 2,5 0,0% -2,0% 2 -4,0% 1,5 -6,0% Financial - interest rates*** 2015 2016 2017 jun-18 jul-18 aug-18 sep-18 1 -8,0% Badlar - Privates (%) 27.54 20.04 23.18 30.44 34.39 35.15 41.75 0,5 -10,0% 0 Term deposits $ (30-59d Private banks) (%) 27.95 19.51 21.80 28.63 32.60 33.42 39.78

04-16 05-16 06-16 07-16 08-16 09-16 10-16 11-16 12-16 01-17 02-17 03-17 04-17 05-17 06-17 07-17 08-17 09-17 10-17 11-17 12-17 01-18 02-18 03-18 04-18 05-18 06-18 07-18 08-18 Mortgages (%) 22.85 19.70 18.61 22.92 30.17 33.95 36.91 01-99 01-00 01-01 01-02 01-03 01-04 01-05 01-06 01-07 01-08 01-09 01-10 01-11 01-12 01-13 01-14 01-15 01-16 01-17 01-18 Pledge (%) 26.03 20.82 17.42 21.76 23.62 21.32 24.84 Source: own calculations based on the Argentine Central Bank Source: own calculations based on INDEC Credit Cards (%) 39.97 44.45 42.21 44.71 47.22 47.31 49.93

Foreign Trade Income and Expenses of the National Non-Financial Public Sector Commodities**** 2015 2016 2017 jun-18 jul-18 aug-18 sep-18 Soy (USD/Tn) 347.3 362.6 358.9 340.0 312.6 316.7 306.4 Commercial balance, USD MN Imports, USD MN 350.000 Total income Exports, USD MN Corn (USD/Tn) 148.3 141.1 141.4 143.6 137.5 141.1 138.7 300.000 Primary expenses 10.000 Wheat (USD/Tn) 186.4 160.3 160.2 184.0 186.4 197.8 185.1 250.000 8.000 Oil (USD/Barrel) 48.8 43.3 50.9 67.3 70.6 67.8 70.1 200.000 6.000 * Quarterly figure. The year corresponds to Q4 4.000 150.000 ** includes intrasector public interest *** data 2012/13/14 corresponds to the daily weighted average of December 2.000 100.000 **** One moth Future contracts, period average 0 50.000 p: provisional

-2.000 0,00 Source: INDEC, Secretary of Finance, Ministy of Economy, BCRA, AFIP, Unión por Todos, CIARA, CBOT, NYMEX 07-17 08-17 09-17 10-17 11-17 12-17 01-18 02-18 03-18 04-18 05-18 06-18 07-18 08-18 09-18 03-13 05-13 07-13 09-13 11-13 01-14 03-14 05-14 07-14 09-14 11-14 01-15 03-15 05-15 07-15 09-15 11-15 01-16 03-16 05-16 07-16 09-16 11-16 01-17 03-17 05-17 07-17 09-17 11-17 01-18 03-18 05-18 07-18 09-18

Source: own calculations based on INDEC Source: own calculations based on Secretary of Finance Our services

Macroeconomic Sectorial/Quantitative Litigation Regulatory analysis - Follow up and projection - Support of experts’ - Tax benefits - Monthly/quarterly by sector reports relating to report economic matters - Benefit/price structure - Quantification of - Conferences demand - Dumping - Quantification of impacts - Projections and data - Applied econometrics - Antitrust

- Revenue forecast

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Contacts

José María Segura Leandro Romano Paula Lima [email protected] [email protected] [email protected] +54 11 4850 6718 +54 11 4850 6713 +54 11 4850 6000 int. 4128

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