Wolf at the door

Argentine central bank president Martin Redrado tells Emerging Markets how he intends to keep inflation at bay. Yet sceptics warn that aggressive dollar purchases might not be the answer

  • By Judith Evans
  • 31 Mar 2006
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If Argentine central bank (BCRA) president Martin Redrado is troubled by the extent to which president Nestor Kirchner’s footprints are all over his turf, he shows no sign of it. Interviewed in his grand office in the 130-year-old Italianate seat of the bank, he projects the aura, energy and confidence of someone who is really running the show The exquisitely dressed 45 year old, who assumed his new post in September 2004, is quick to put in context the central bank’s most controversial policies – a steady build-up of reserves and dollar purchases to maintain the peso’s current value (approximately 3:1) – which hinge on Argentina’s unique post-crisis conditions

Consensus tends to be rare among economists who analyse Argentina, but a basic agreement seems to have evolved in recent months. Uncomfortably high inflation and insufficient investment are, the view holds, the economy’s two chief problems. Neither, many economists argue, is being vigorously confronted by the central bank, which is seen as hamstrung by presidential orders to accumulate reserves and keep the “competitive” peso exchange rate.

According to Redrado, who returned to Buenos Aires from Wall Street over 15 years ago, deeper analysis of the causes of Argentina’s higher than desirable price increases demonstrates that the bank’s contribution to fighting inflation can only be a modest one. Of the three root causes, the most significant element in driving the CPI to its current 12+ annual rate is to be found in the conditions that prevailed at the time of the 2002 devaluation.

Delayed effect

While Argentina devalued by 200%, he points out, in the following three years consumer prices rose by only 70%. The surprisingly low pass-through of the devaluation to prices was applauded but, he says, “Unfortunately, in my view as an economist, we now have a delayed effect, a process of price readjustment.”

Citing the case of Chile, which experienced an average inflation rate of 12.5% between 1981 and 1985, Redrado expects that “it will take several years for the dust to settle and for prices to find their steady state, their long-term trend.” Although complacency is not an option, he maintains that the reaccommodation is an inevitable factor for an economy in transition. To fight this process is like fighting the laws of gravity, he says.

A second reason for price increases is to be found in structural problems in the agricultural sector. Due to the country’s more aggressive trade policies, exports reached a record $40 billion in 2005, almost a 30% increase over 1997, the previous peak year. This, plus the expansion of soy production into cattle raising areas, has created supply restrictions in the domestic market.

Finally, with specific regard to monetary policy, Redrado pointedly answers those – and there are quite a few – who want higher interest rates as a means of cooling off the dramatic growth rates (roughly 9% for each of the last three years). Because Argentina’s financial system is underdeveloped and has a credit channel of merely 10% of GDP (compared, for example, to 45% in Brazil), the impact of higher interest rates would be minimal. Moreover, the expansionary monetary policy implemented in 2003 and 2004, grounded in the high output gap and under-utilized capacity, was shifted in 2005 and the monetary base decreased by 1.5% in real terms.

But what has been expansionary, Redrado insists, is fiscal policy, as seen in the decline of the primary fiscal surplus from 4.5% to 3.2%. In a characteristic bow to a former official Alfonso Prat Gay (in late February he praised former economy minister Roberto Lavagna at a meeting in Washington), Redrado concluded, “I am very, very pleased with the record that my predecessor and I have on monetary policy, which has over 10 quarters accomplished its self-imposed goals.”


Because of the grumbling about inflation – understandable in a country with Argentina’s dreadful record – some of the accomplishments achieved by the BCRA since 2002 are often overlooked, says Redrado. For example, the financial system, which many expected to implode, is considerably more solid, and banks actually turned a profit last year, even as they cancelled debt with the central bank. In addition, the BCRA has implemented a number of measures to encourage longer-term financing for investment.

Still, almost across the ideological spectrum, economists are convinced that the aggressive central bank dollar purchases are not compatible with an anti-inflation strategy that goes beyond administering prices in supermarkets. Economist Juan Llach, president of the editorial board of El Cronista, a respected financial daily, put it succinctly: “This policy is not only incompatible with a reduction in inflation but will, if it isn’t modified, lead to its increase.”

In terms that might be open to interpretation, and even viewed as cautionary, Redrado might agree. “Macroeconomic policy is structured in Argentina. To deal with inflation we need strong coordination between fiscal policy, wage policy and monetary policy. In terms of priority, monetary policy comes third.”

With contentious salary negotiations scheduled throughout March and April, there will be lots of places and people to blame should inflation become more serious before anyone gets around to the central bank and Martin Redrado.

bullet proof?

Not that he can be assumed to be bullet proof. As one of the few high officials in the government not drawn from Kirchner’s inner circle, his resignation – or replacement – is frequently rumoured.

Almost inevitably referred to in the press as “the golden boy”, given his youthful appearance and sandy hair, he can still hope his luck holds out. As he reminded Emerging Markets, he is the seventh central bank president in 10 years and the first since 1999 to have a shot at a full term.

  • By Judith Evans
  • 31 Mar 2006

All International Bonds

Rank Lead Manager Amount $m No of issues Share %
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1 Citi 313,852.39 1175 8.95%
2 JPMorgan 286,674.13 1305 8.17%
3 Bank of America Merrill Lynch 281,869.72 974 8.04%
4 Goldman Sachs 214,547.99 704 6.12%
5 Barclays 205,147.76 790 5.85%

Bookrunners of All Syndicated Loans EMEA

Rank Lead Manager Amount $m No of issues Share %
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1 Deutsche Bank 31,971.88 102 6.87%
2 HSBC 31,940.18 140 6.87%
3 Bank of America Merrill Lynch 29,065.55 82 6.25%
4 BNP Paribas 24,679.63 135 5.30%
5 SG Corporate & Investment Banking 22,195.55 122 4.77%

Bookrunners of all EMEA ECM Issuance

Rank Lead Manager Amount $m No of issues Share %
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1 JPMorgan 14,960.44 66 7.87%
2 Morgan Stanley 13,992.90 72 7.37%
3 Citi 13,566.56 83 7.14%
4 UBS 13,028.25 52 6.86%
5 Goldman Sachs 11,994.74 65 6.31%