The Governor of the Central Bank of Argentina, Federico Sturzenegger, participated in the 50th Annual Conference closing ceremony organized by the Latin American Federation of Banks in which he made a presentation on “Global context challenges for banking in emerging countries”. The full speech is as follows:
“I am pleased to be here in the closing ceremony of the FELABAN Congress and proud to welcome you again to Argentina in times of change, enthusiasm and new opportunities.
I attended this conference as President of Banco Ciudad many times in the last few years. Today I am addressing you as Governor of the Central Bank of Argentina.
Considering the diversity of countries represented here today, my speech will focus on some challenges that the bank system faces in emerging markets, without delving into Argentina’s concerns as you may have already heard much about it. The topics I will explore by the end of the presentation are central to Germany for next year’s G20 work.
I would like to share three thoughts about the climate of international finance. The first one has to do with understanding the phenomenon, let us say, “public anger”.
In the last few years, we have witnessed widespread social unrest. This was evidenced in Brazilian streets, in the Brexit vote, in Spain’s political deadlock, and in the United States where an anti-system candidate is presented for election. What is behind this annoyance? That is the first question I will attempt to answer today. The second one is related to the problem being faced by developed economies, many of which are represented here today. The issue here is related to the very low or even negative real interest rates. What difficulties does this unusual phenomenon pose? This is my second question and I fore say that the perspective of a country like Argentina shows a glimmer of hope to solve it. Finally, I will address the problem of understanding how a negative real interest rate world can coexist with a positive return world in emerging countries. And this is everyone’s challenge.
Let’s start with the phenomenon I called “public anger”. In Argentina, we suffered a serious financial and economic crisis in 2001/2002 and people in the streets answered for years: “out with them all!” It seems that today that “out with them all!” shout has a more generalized audience. Some months ago, before the Brexit vote and in a governors’ summit in Basel (where governors of central banks share their views and opinions), someone asked about the likely plebiscite result in the United Kingdom. The general consensus was that there was no place for the United Kingdom outside the European Union. However, there was an exception: the then governor of the Central Bank of Poland, Marek Belka, commented on the remarkable progress of Polish economy during the last three decades (in which progress he played a leading role as Prime Minister of Poland). Nonetheless, he claimed that in Poland there is a similar mood to that of “out with them all!”. And he hastened to ask: “How can so many people be annoyed with the system in a country that has made such a progress?
This annoyance is comparable to that of the Brazilian streets leading President Rousseff to political trial, to the annoyance perceived during the election campaign-finishing today- in the United States, to the feeling that made people in the UK vote for leaving the European Union. It was also this same feeling that made Spain remain headless for so long. The “out with them all!” slogan is felt daily in Athens, and it was also present in Colombia where voters rejected the peace treaty proposed by their political leaders.
Wherever we go, it seems that people want something different or need to express their anger by punishing anyone proposing a solution, whatever the proposal may be.
The fact that this “uprising” is taking place in different parts of the world makes us think that we are undergoing a worldwide phenomenon. One hypothesis states that this anger is the product of the losers in a globalization process. However, this is far from being convincing as anger is even noticed in prosperous countries, like in Poland, or simply because voices of dissatisfaction exert far-reaching effects. We cannot assure that voters against Brexit or Donald Trump voters are all system losers. I will bring forward my hypothesis about this phenomenon. To my mind, the world is going through a process of fast-paced technological changes. We can notice how everything changes faster and in a more unpredictable way. My 11-year-old son watched TV when he was 6, that was only five years ago. First, Discovery Kids and then, Disney Channel.
But my 6-year-old daughter hardly knows television programs as she only watches viewings on YouTube and Netflix. For instance, in the United States, the job with the most man-workers is that of truck-drivers, about 3.5 million people. Yet, Uber has just launched a city-to-city freight system that transports goods with self-driving cars (let me tell you that our farmers have been sowing with self-driving tractors for a long time and monitoring their crops with drones). In our own industry, banking, means of payment change daily, predicting profound transformations in the way we will use cash, open our branches and interact with our clients.
In our everyday lives, we increasingly interact with digital media. Our lives are digitalized, the GDP is digitalized, and not only the way we interact but also the way we produce shows important transformations. Some jobs disappear and others arise. Changes anticipate relevant improvements in the inhabitants’ income and quality of life as well as in production methods.
It is nonetheless true that in many of our debates we claim that current growth is poor and productivity is not increasing as it used to be. This seems to be the leitmotiv in the IMF or G20 summits. In fact, the headline in the last April’s IMF “World Economic Outlook (WEO)” was “Too Slow for Too Long”, highlighting the fact that the increasingly disappointing pace of economic growth to which the world economy is exposed may slow down, in the long-run, worldwide production and potential output growth.
However, it is worth remembering that the same was said in the 70s (Nobel prize winner Robert Solow said, “you can see the computer age everywhere but in the productivity statistics”) and then it turned out to be a decade of PC revolution up-taking that later gave rise to a production upturn in the 80s and 90s. In my opinion, this decade is also a decade of another up-taking, the revolution of knowledge, big data and software that will bring about a complete revolution in the two decades to come.
And, I think, the whole world fears that revolution. Not because people are not aware that this is unavoidable and good but simply because they do not know how they will fit in this new world, where cards will seemingly be shuffled once again.
Then, that was the first thought I wanted to share. Ours is a world of changes to come, fledgling technological developments, and higher uncertainty inherent to a revolution.
The G20 international agenda deals with this global problem but focusing on the past. The analysis is directed towards understanding the growth process so far, for instance by considering whether it was inclusive enough or not. But the problem (and its solution) is not in the past but in the future.
Now, this is related to the second topic: international low interest rates.
An interest rate drop is a secular trend that started three decades ago but it has reached extreme levels in recent years. At present, about 16 billion dollars are placed worldwide at negative interest rates (with an average of -0.20%), considering stock invested in sovereign bonds as well as corporate debt of high credit rating.
What is the relationship between low interest rates and the changing world I described before? From a global perspective, the interest rate will be low if deposits increase but investment demand goes in the opposite direction. And the world I described implies both phenomena at once.
On the one hand, investment has become less capital-intensive. In the future, the world will need fewer offices, bricks, and even fewer computers and hardware to work. In the future there will be more investments in knowledge and software. Then, this does not mean that there are fewer technological changes. On the contrary, this technological progress requires less spending. Last week, in the IMF annual conference on Economy, Lewis Alexander and Janice Eberly presented a paper proving this phenomenon for the American economy.
In turn, greatest uncertainty, population’s ageing, or birth rate fall (especially in China) cause people to save even more.
So we have a world that needs less capital against a backdrop of a greater capital supply. This means that the saving price or the real interest rate will be lower and will remain as such for a long time. I mean that real interest rate does not depend on the interest rate that the Fed or the European Central Bank determines but on a long-term global savings and investment pattern.
As to the second fact, interest rates will be low in the short and long-terms.
To this respect, I consider that global discussions neglect two points that Argentine history lets us see clearly. One point is that the emphasis to keep negative real interest rates—to encourage consumption and enforce monetary policy—will result in fast and important collateral damage. We can hardly assume that people will accept negative returns for long. In Argentina, we have tried it (and called it “financial repression”) with the only result of our financial system destruction. A negative real interest rate is useless for both the depositor and for the financial system destroying the latter, sooner or later.
Negative interest rates also cause important distributive problems. Assets price rises so assets owners record substantial profits. But small depositors get frustrated with lack of returns. This might be another reason why so many people in developed countries are irritated.
We can now deal with the challenge of financial systems in emerging market economies. And which is the challenge? Financial institutions’ capital and savings intermediation services because in our countries returns are not zero, they are positive. For instance, today a YPF bond yields a profit of 6.8%. This means that YPF investment returns exceed that figure.
So, I wonder, why the financial sector does not succeed in investing the capital that yields -0.20% from developing countries in companies and projects with higher-return countries. For example, if we could channel the nearly 16 billion dollars invested at a negative interest rate through 5% annual return investments, net global profits would be 816 billion dollars, about Indonesia’s GDP. In other words, we roughly lose the amount of Indonesia’s GDP every year by inefficiently allocating that capital which represents a very small fraction of total capital. The loss is surely higher.
To gain an insight of this issue, we formulate two hypotheses. The first one is that risks in emerging countries do not yet justify capital transfers despite higher returns. If that were the case, the key agenda would be in capital recipient countries and would seek for achieving a trustworthy and predictable macroeconomic framework with institutionalized and clear property rights. In fact, in light of this availability of funds, the setting of a reliable framework turns to be of utmost importance. If we achieved such framework, the world would be willing to finance facilities, housing and investments nearly for free. The world has never offered such opportunity before.
The challenge for the banking system is to generate the appropriate mechanisms to mitigate these risks and provide global investing with confidence. This implies the need to experience with multiple lending instruments, risk covers, diversification and securitization structures to mitigate risks in the best way.
However, as I have said before, there is another hypothesis to explain this phenomenon. The “regulatory excess” that deepened with Lehman’s crisis may have produced a “stunted” financial sector, so to speak, that cannot allocate capital more efficiently by law. For instance, Spanish banks impose huge capital requirements upon Argentina’s financial institutions due to European regulations.
But the same problem exists in developed economies. Real estate assets do not have a negative or zero return (if so, house prices would be prohibitive), so it is clear that there is an operating problem—even within developed countries— that makes returns unable to be settled.
This poses a debate and a challenge for the global regulators of the financial sector. Yet, some incipient actions are being noticed in that direction. The regulatory framework of the last eight years, which used to be “how can we strengthen banks to reduce their risks?” is turning into “how can we make banks profitable so that they remain doing their work?” This is at present a clear dilemma for monetary authorities: to find the ideal formula to ensure necessary return levels for the financial activity to remain beneficial, together with an adequate reduction of associated risks.
At the beginning, I said that Germany, the country that will chair the G20 summit next year, has brought the topic “investment in Africa” to the fore. In my view, this interest—at least in some respect—comes to tackle the problem I present here. A problem of allocation of capital. Negative interest rates in central countries and urgent capital needs (I mean, high returns) in emerging economies.
If what I state here is true, we will surely experience pressure to deregulate financial systems and the beginning of a new capital flows cycle as those witnessed in the 70s (which resulted in a debt crisis), in the 90s (which resulted in the Russian default) or in 2000 (which resulted in the collapse of Lehman Brothers).
Thus, the way in which the world will solve this problem is central, not only for the world political stability and economic system but mainly for the inhabitants’ welfare.
I think that given the intense experience the world has gone through, we will successfully face these challenges and have a fairer, richer and more homogenous world in the 30 or 40 years to come.
In a world where technological changes are inevitable, cheap capital means an unprecedented opportunity for our countries. It will be a world in which macroeconomic stability and respect for law will pay more than ever. In addition, it will be a world with a challenge for financial regulators who should make sure that the ghosts of the past would not prevent building the country’s future.
For Argentina, this is a key discussion since it reinforces the need to draw up a macroeconomic stability agenda and—given our need to invest mainly in infrastructure—makes us consider orderly and sustainable mechanisms for this capital transfer.
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November 8th, 2015