The government buys cheap dollars and sells them for a profit. Meanwhile, we have the May Pact in July, a true reflection of what Argentina is. The government is betting that devaluation does not generate any added value and seeks to avoid it at all costs (even if it means recession).

Dear ArgenGrowther,

Every week, we have the primary data from the past week and delve into different aspects of our beloved Argentina to see their impact, understand what's happening, and make better decisions. The FInancial ArgenGuide is divided into four main sections:

1. Data

2. Understanding What's Happening in Detail

3. Actionable Items

4. Brief Reflection

Financial ArgenGuide:

#data

What does all this mean?

Positive or negative? Spoiler alert. Positive. The July 9 celebration with the May Pact is a victory for the government that again shakes up the board with the measures announced last Saturday. They continue to take pesos in every auction, and inflation remains in check.

Understanding What's Happening in Detail

Dollar and the Strong Peso In another week of consolidating the gap (~50%), the government announced on Saturday that it will start operating in the market. We will analyze some implications later. Initially, the Strong Peso section seemed to gain more prominence as the days passed, although the market did not yet validate it.

This week, we had Bonar's payments; initially, it does not seem that this has translated into a dollar supply, but we did see some recovery in the AL30, the flagship bond, which rose sharply on the payment day to end the week 2% higher than the previous Friday.

Rumors are increasingly strong regarding an increase in the Monetary Policy Rate; however, the government seems to be looking more at peso issuance for now and inflation. Suppose inflation continues its downward trend (especially core inflation). In that case, it will be harder to justify a rate increase, even though its effect on issuance and growth of remunerated liabilities is no longer present.

Let's get to the main course. Last week, we wondered, “What will Argentina's new monetary scheme be like? How will the pesos issued for reserve purchases be absorbed in a zero monetary issuance program? How will it grow?” The government quickly cleared up doubts and closed one of the main issuance taps of the first semester. Starting Monday, the zero issuance program will be fully consolidated, and the market will absorb issuance for currency purchases. What does this mean in plain terms? Again, we can say that the government is taking the ship's helm, which seems to have lost its way. With a substantial change of course, let's look at the implications and some explanations to bring clarity to one of the most significant economic measures taken by the government:

• To buy foreign currency, the government has to issue pesos in exchange, generating peso issuance. Since taking office, the government has bought over USD 15 billion, meaning it has issued an equal amount of pesos to purchase them.

• The second phase of the economic program announced by the government seeks zero issuance. Monetary anchor. No pesos.

• Today, several relevant issues coexist that partly explain this measure:

  • No. 1 and central, the exchange control. Without it, this measure would not be possible.

  • The government is evidently uncomfortable with the exchange rate gap, which is currently at 50%. Official 920 vs. MEP 1,420.

  • The 80/20 blend for export settlements is as follows: 80% goes through MULC (official dollar), and the remaining 20% goes through the market (MEP/CCL).

• So, what measure is to implement? Starting Monday, when the government buys USD 100 and issues (at Friday's prices) 92,000 pesos to buy the dollars, it will turn around and sell those newly purchased dollars in the market at 1,420 (let's use MEP as an example) to get back the issued pesos. This is pure arbitrage, the dream scenario, large-scale purée.

• If it bought 100 USD at 920, it doesn't need to sell all the dollars to repurchase the pesos. To repurchase the pesos, it will only need to sell 65 dollars (64.8 x 1,420 = 92,000). And the difference? The government keeps it a great deal. Thirty-five dollars profit in the blink of an eye and without monetary issuance.

• This measure aims to consolidate the second stage of the zero monetary issuance program and reduce the exchange rate gap at the same time.

• The larger the gap, the greater the government's profit. The smaller the gap, the lesser the government's profit.

• The supply of dollars in the market puts selling pressure on the exchange rate. More dollars are available with the same amount of pesos.

• We can say that the government will operate in the market and “intervene” in financial markets.

• Reserve accumulation may be affected by this measure. Where they previously bought USD 100, they now keep USD 35. However, it can also be thought that where they previously had USD 100, they will now have the equivalent of USD 135. In terms of assets for the government, it seems optimistic. If it were the state, I’d take USD 135 over USD 100 any day.

• In contrast to the previous government, which bought expensive dollars (soy dollars) and sold (to importers) cheaply, this government seeks to generate cash everywhere. Before, the state had a negative balance (sold cheaper than bought); today, it has a positive balance (sells higher than buys). Yes, exchange intervention, but with profit for the government, not loss.

In summary, issuance is stopped 100%, the exchange rate gap is attacked, and a positive exchange difference is generated, resulting in a profit for the government. Initially, the measure seems positive for the government since as long as the gap exists, it will get “free” dollars, and if the gap doesn't exist, the government will have achieved another goal (lowering the gap), bringing the end of exchange controls closer. Will the government buy enough dollars to reduce the gap? How much longer can the gap last if expectations turn into actions (sales will be actions)? Does a 1,400 dollar per peso make sense with a government that is hyper-convinced that there will be fewer and fewer pesos?

Lower Uncertainty = Lower Volatility

Lower Volatility = Greater Stability

Greater Stability = Improved Economic Expectations

Improved Economic Expectations = Lower Exchange Rate Pressure

Fewer Pesos = Lower Exchange Rate Pressure

More Dollars Offered = Lower Exchange Rate Pressure

Exchange Control

The light at the end of the tunnel begins to appear. Week by week, the government advances in different ways to normalize the exchange market. This week, the BCRA changed regulations and facilitated access to dollars for external payments. In Communication A 8059/2024, published on Monday in the Official Gazette, the Central Bank modified the requirements for prior conformity for access to the exchange market to pay interest on commercial and financial debts.

On the other hand, President Javier Milei spoke of three specific conditions to lift the exchange control:

1. ✅ Eliminate remunerated liabilities.

2. ❔ Eliminate the puts. He mentioned that it will be resolved on Wednesday. We have no further certainties for now.

3. ❌ That inflation decreases and aligns with the 2% monthly devaluation.

He also mentioned that the exchange policy does not change and that the new measures are related to deepening the economic program after closing the issuance taps due to deficits and remunerated liabilities. While the exchange control exists, the purchased dollars will be sterilized (as mentioned earlier). The President reaffirms that pesos will no longer grow, only shrink, as the country today has a fiscal surplus.

Recomposition of Public Accounts

Finally, the government announced last week that the monetary regulation letters will be Fiscal Liquidity Letters (LeFi) and will start on July 22. The government started strong at the beginning of the second stage, and the zero monetary issuance seemed to have come faster than expected.

A summary regarding monetary issuance:

• Zero issuance due to fiscal deficit. No transfers from BCRA to Treasury.

• On July 22, a long stage of remunerated liabilities ends. Zero issuance by remunerated liabilities.

• The puts issue apparently will be resolved on Wednesday. Issuance by puts would be reduced to zero.

• Starting Monday, there will be no more issuance by foreign currency purchases.

Zero monetary issuance = Lower inflation

Zero monetary issuance = Contractionary monetary policy

Zero monetary issuance = Lower exchange rate pressure

Contractionary Monetary Policy = Lower activity

Lower activity = Lower inflation

Central Bank of the Argentine Republic – BCRA

Last week, we mentioned that a new economic model is coming, and there are new graphs to look at in this new Argentina. For example, the Broad Monetary Base will no longer have remunerated liabilities, and we will closely monitor the government's deposits in the BCRA. At the same time, the BCRA will have more excellent maneuverability to move the rate without affecting monetary issuance, a pillar of this new stage. The market expects a rate hike, but the government is watching inflation. Will the government surprise again and achieve results contrary to what the market thinks?

National Public Sector

Balance of public accounts

The Treasury's cushion in the BCRA continues to grow, and so does consolidated debt. For now, the transfer of BCRA debt to the Treasury is compensated with a cushion. Will this be the government's strategy to calm the markets and not suffer in the auctions in the coming months? The government is betting strongly on a fiscal surplus. Will this be the mother of all battles every month? Depending on the number that comes out every month can generate a lot of short-term volatility. For now, they have already confirmed the fiscal surplus for June.

Again, we mention that as the Treasury's debt increases, its credit quality logically decreases while the BCRA improves. Remember that with the already contractionary fiscal policy, there is a new need for pesos that will probably generate a need for an even more enormous surplus, resulting in an even more contractionary fiscal policy. Recently, we have added a more contractionary monetary policy with zero issuance. Bold. The government bets strongly on a rapid recomposition that, if not achieved, can negatively impact economic activity. Where does it go from here? Will the dollars from the cushion be used to bet on the country's growth?

Contractionary Fiscal Policy = Lower economic activity

Contractionary Monetary Policy = Lower economic activity

CFP + CMP = Lower economic activity

Auctions

Again, the government raises pesos. In this case, they added $3.19 trillion above what was due and left out $1.67 trillion. The Treasury's account at the BCRA continues to grow. 

The "novelty" is that the TEMs aligned with what traded in secondary. No premium is paid anymore. The peso debt seems healthier; the negative dollar-linked debt continues to be taken, and the curve is normalizing. The government's excellent work in recomposing the debt, especially without the puts and without CER, is commendable.

Economic Activity

There is some good news here, and some not so much for the short term. The ever-tightening monetary and fiscal tourniquet undoubtedly doesn't help in the short term but does in the long term. On the other hand, we highlight that Telecom placed debt to 2031 at a 9.7% rate for USD 500 million; it had offers for USD 1.5 billion. The reappearance of international credit on this scale is excellent news for the country. Will we get out with credit, as the President mentioned a few months ago?

Deregulations

We inaugurated a new section. After Turzenegger's appointment, measures began to appear to remove obstacles to economic activity.

The aero-commercial deregulation is now a fact. Main points:

• More ramp operators will be allowed, and each airline will choose its service provider.

• Although contractual restrictions on airlines have been removed, ANAC (National Civil Aviation Administration) approval is still required.

• Privileges for Aerolíneas Argentinas are removed.

• Flights in Mercosur will be facilitated as if they were domestic.

• Companies will be allowed to develop autonomous aircraft and drones.

Good news also came for small taxpayers: tax withholdings on electronic collections are exempt. Retentions affecting merchants and monotributistas for card and digital payments of up to $10,528,000 per month are eliminated.

The Street

The recovery of wages against inflation seems to continue. The RIPTE rose 7.3% in May, against inflation of 4.2%. Since December, it has accumulated a real increase of almost 6%. Now, we need to see how prices adjust with the dollar roller coaster of recent weeks until the economic activity here holds up with slight real improvements after a steep fall in recent years.

Inflation

In a month with a sharp increase in regulated prices, 8.1% (despite no tariff adjustments), June inflation had a slight rebound compared to May, 4.6% vs. 4.2%. Core inflation continues its downward trend (OJF high frequency below 3% month-on-month) and food and beverages. After the measures announced these days, it would logically follow that inflation continues to decline. The war against inflation is not won, but victories are being added along the way.

Capital Markets - Actionables

Week of dollar collection for AL30 holders. The destination of those dollars seems to have gone partly to reinvestment, but no clear destination was seen.

We have been mentioning the carry trade as a possible alternative in the face of the dollar spike; after yesterday's announcements, this takes on even greater relevance. With the government pouring dollars into the market, not issuing, and a 50% gap, those willing to take on exchange rate risk could get a great result if MEP converges to the official dollar in a few months. Does the trade-off pay off? The more significant the gap, the greater the incentive to sell dollars and carry trade; the timing here is everything (only for aggressive investors willing to take on considerable exchange rate risk).

The Merval continues with high volatility, with very marked movements by sectors. We continue to watch closely what is happening in Brazil, which showed a solid real appreciation this week.

Given that BCRA’s debt has moved to the Treasury, we continue to assert that it is improving its balance sheet, lowering the risk of Bopreales. We also see an excellent opportunity to seek good hard-dollar title yields with BCRA risk.

As 2025 approaches, examining the Treasury's consolidated burdensome dollar debt will become increasingly relevant. Will there be an agreement with the IMF to extend payment terms forward? Without the IMF's burden, Argentine debt will have a different color, and the probability of rollover with a considerably lower country risk than the current one will increase significantly.

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Brief Reflection

impossible to get bored. The rules of the game change week by week, and Argentina, wouldn't understand it. We asked for actions, and we will have them. In a daring move, the government continues to play as if it had the ace of spades (the highest-value card in the traditional Argentine card game, truco) but doesn't show it. The time has come to show the cards and what's behind the words.

As the anchor of the economic program, the fiscal surplus becomes more prominent each passing week. What happens if there is no good data for one month? The government playing all-or-nothing as if there were no tomorrow shows a lot of confidence in the path being followed, but at the same time, it is very risky if the market does not validate it.

The government is in a duel with the market to see who shoots first, who liquidates before, and who takes the best gap. It seems risky without information. Is there fresh money already on the way and not communicated? Or is the government shooting itself in the foot by intervening in the market? At first glance, it seems like a bold move, but it benefits the government either by lowering the gap or by a positive exchange difference. We will see during the week how the market validates this move and if the government buys dollars to pour into the market later.

I still believe the government will do what it says and maintain the crawling peg for the coming months, reinforcing the economic program. Each week, it seems the macro adjusts and fits more with no pesos, and eventually, the exchange rate should reflect this. If this new measure works out and they resolve the puts issue on Wednesday, the end of the exchange control will be closer.

The signing of the May Pact and the provinces adhering to RIGI begin to shape a new country. I believe we are at a historic opportunity to change the paradigms of the past that led to stagnation and recurrent crises. The gain in competitiveness will not come from devaluation but from a tax reduction that will translate into real fiscal competitiveness against a globalized world in a country with great natural resources and incredible human talent (otherwise, how would we survive in such a changing country?).

Now, the pace of monetary policy has accelerated, and the lifting of the exchange control seems closer, even though the gap is at 50%. Correcting the imbalances in the exchange market is essential for the country to have healthier foundations for growth again.

Argentina needs a highway to do business, not a road full of potholes. Are we closer? Today, strongly yes.

See you next week, Vamos Argentina!

If you liked it, I invite you to write to me, comment, share this short column, and reflect on our living moments.

Nau Bernués
Founder, ArgenGrowth

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