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.