It's another week when Argentine assets rise, the peso strengthens, and new deregulations and fewer bureaucracies are announced. The scene is repeated everywhere: the Legislative branch heads one way, the Executive another. Even inflation repeats values close to 4% and doesn't ease up.

Dear ArgenGrowther,

As every week, we present the key data from the past week and delve into various aspects of our beloved Argentina to assess their impact, understand what's happening, and make better decisions. The newsletter 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: Very positive! The market's on fire, with the Merval and bonds continuing to rise and the country's risk decreasing, though it remains at very high levels. This week's seasonal reserve sales were through the roof.

Understanding What's Happening in Detail 

Dollar and the Strong Peso. There have been no changes in the introduction. It has been another week of appreciation for the strong peso and counting… The downward pressure following the reduction of the PAIS tax (import exchange rate) is felt, and the peso ended the week with a 1.4% appreciation. The gap keeps narrowing, and the sentiment remains: the strong peso is here to stay.

Today, we repeat: Market vs. Government. The sentiments are becoming a reality; as of now, the government is winning by a landslide, and with each passing week, the odds of the MEP converging to the official rate increase. A government that appears strong and a market starting to buy into it suggests this. At the same time, we believe the country’s competitiveness gains will come from reduced taxes, not from devaluation.

Recomposition of Public Accounts

The reduction of the PAIS tax was also felt in the Central Bank’s sales, and the week ended with strong sales, with the Central Bank giving up USD 338 million, marking the seasonality of the moment.

National Public Sector

This week, the focus was on Congress, where the government scored a victory on pension reform. The veto remains, and public spending "doesn't increase." The fiscal surplus gets some breathing room.

Fiscal surplus = Contractionary fiscal policy

Contractionary fiscal policy = Lower economic activity

Auctions

A “big” maturity of $7 trillion was refinanced without much trouble. However, the government had to pay a slight premium compared to the securities trading in the secondary market. Since the cut-off rate was above what was being traded, the bonds corrected their value by an average of -0.2%, aligning with what the government had validated. The “bad” inflation result also didn’t help the bonds perform well this week.

In two weeks, the government will face another similar maturity of $7 trillion, but the government isn’t worried. Let’s remember they have the Central Bank’s peso cushion. At the same time, we’ll see if banks continue lending to the government or start shifting towards the private sector, given the growing demand. This could mean that refinancing the total maturities might not be entirely successful, but it would be due to a “positive” development, with banks acting like banks.

Economic Activity

With the dollar’s surge in July, some sectors rebounded strongly, but it’s still too early to claim a full turnaround. Construction saw a strong growth of 8% compared to June but continues with horrible year-over-year figures, at -20.4%. A similar trend was observed in manufacturing, with a 6.9% rebound but a year-over-year drop of “only” -5.4%.

There are new developments with the RIGI every week. Of the USD 300 million investment announced by Sidersa, one-third will come from BID Invest financing. The company said, “It has been 50 years since a steel plant has been built from scratch in the country.”

The projects on the RIGI’s agenda could transform the country into the largest lithium producer in South America. With almost 50 projects in the pipeline, could we eventually surpass Chile?

Higher Economic Activity = Higher Inflation

Deregulations

Progress continues on several fronts; this week, the government announced it would regulate the essentiality of commercial air service. This aims to ensure a minimum service for the population in a sector that has caused many passenger inconveniences for years.

Here's one that caused a stir: municipalities will no longer be allowed to include taxes in essential service bills like electricity and gas. The measure, formalized through Resolution 267/2024, aims to ensure that bills only reflect the cost of the contracted service, with no additional charges. This issue has been heavily criticized for years, with municipalities imposing non-service-related charges on essential service bills. Now, the regulation requires that bills only detail the costs related to the service provided. If not complied with, the Consumer Defense Law will come into play. This measure will take effect in 30 days, giving municipalities and companies time to adjust.

Continuing with the National Service of Agrifood Health and Quality (SENASA), it now allows the free choice of national and international laboratories for registration procedures to carry out the necessary analytical tests. This measure seeks to simplify and speed up processes and provide greater flexibility to agrifood producers. This does not mean that laboratories should not meet technical requirements and ensure the quality and traceability of results. According to the government, SENASA continues to modernize and reduce bureaucracy in its procedures, facilitating product registration and removing obstacles that hinder trade flow.

Benefit to Cyclists. The government removed barriers to bicycle imports, which will eventually result in lower prices. The Secretariat of Industry and Commerce announced eliminating technical regulations for importing bicycles, tires, and tubes. Eliminating these technical regulations will allow importers to access lower-priced products and offer a greater variety of models. The government continues implementing measures in line with deregulation processes, improving competitiveness and lowering prices.

On the other hand, new regulations were also announced in the health sector. From implementing electronic prescriptions to promoting generic drugs, the government shows it is making firm progress across all economic sectors.

The Street

According to INDEC, the employment rate for the year's first quarter was lower than last year’s. The street continues to hold on, awaiting recovery in an uncertain and politically volatile context. Moreover, inflation is not easing, but the dollar is. It's tough for those comfortably earning in dollars in previous years in Argentina, which was severely lagging in prices.

Inflation

The inflation data came out, and it wasn’t good. The CPI can’t break the 4% mark, and core inflation is back above 4%, a level not seen since April. The inflation delay is evident, and zero monetary issuance has not impacted prices, nor have the tariff reductions on imports regulated by the government. We’ll see if, in September, with the decrease in the PAIS tax, there will be an improvement in this area or if the tax reduction will translate into prices over time. For now, in one of the main battlefronts set by the government, after avoiding hyperinflation, it seems that reducing it to 2% will take longer than the government anticipated.

The dirty work continues on relative prices, but more must be done. The pressure on core inflation to correct price distortions also seems to have a long way to go.

Do you like my work? Do you want to support me so I can continue creating content?

Capital Markets - Actionables

The party continues in Argentina. Argentine assets have been moving tremendously quickly and in a fun direction for those who bought in recent weeks. The Merval is back at its Milei-era highs, and the market seems to be buying into what it’s seeing from the government these past weeks.

With a world that could play a bit more in our favor, Argentina seems to have much to offer. We see much value in sovereign bonds if the government continues consolidating the numbers and recovering public accounts. Given that they still offer very high returns, if the country's risk continues its downward trend, we will see extraordinary results in sovereign bonds.

On the peso side, with more stubborn inflation, CER bonds compressed and took on a different value as Lecaps had been the stars. This week, specifically, there was a compression in CER bond yields (price increase), and the opposite was true in bonds, yield increase and price drop.

If we trust and believe the government will do well, peso and dollar bonds remain an opportunity. Always remember that Argentine assets are risky and not for the faint of heart.

Follow me on Twitter

Brief Reflection

The political noise continues and will continue. There are two policies: the Legislative one, which no one knows where it's going or what could happen, and the Executive one, which has a clear plan and program. In these two sides of the same coin, we see a Legislative branch that wants to keep applying old practices and an Executive branch that doesn’t compromise its government program for anything. The fiscal surplus is untouchable, for nothing and no one (not even the retirees are spared). This week was a victory for the government, as Congress failed to overturn the presidential veto on pension reform. Is the fiscal surplus safe?

This Sunday, we will likely have new measures, as President Javier Milei will present the 2025 Budget in Congress. This is unprecedented, as this is usually done by the Minister of Economy. Remember that the 2023 Budget is still in effect; you wouldn’t understand Argentina.

On the market side, the government continues accumulating small victories, with the Merval and bonds each week giving a vote of confidence in the economic direction.

As we affirm each week, we continue to believe that the gain in competitiveness will not come from a devaluation but from a tax reduction that will translate into real fiscal competitiveness in a globalized world in a country with great natural resources and incredible human talent (how else would we survive in this ever-changing country?). Today, they move the goalpost for fresh money but give us a feast of deregulation and less bureaucracy. Will it be enough to get started? Argentina's risk premium is shrinking, so corporate profits should follow. Will Argentine businesses be ready to earn less? 

Argentina needs a highway to do business, not a street full of potholes. Are we getting closer? Today, we say 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

PS: Follow me on Twitter and LinkedIn, and let's talk about the challenges facing the Argentine economy.