Dear ArgenGrowther,

A week marked by the return of Lecaps and the trade balance surplus.

Financial ArgenGuide: Surplus and Recession

Data:

• USD MEP: +0.83%

• Country Risk: 1432; -10.67%

• AL30: +10.04%

• BCRA (Central Bank of Argentina):

  • Purchased foreign currency amounting to USD 505 million.

  • Reduced Reserves by USD 168 million in the last week. Currently at USD 28.035 million.

• Placement of BOPREAL Series 3 (BPY26): USD 89 million.

• Gross Domestic Product (GDP):

  • 2023: -1.6%.

• February Trade Balance: USD 1,438 million.

  • Exports: USD 5,531 million (+5.6% year-over-year).

  • Imports: USD 4,093 million (-18.6% year-over-year).

• Tender Auction: expirations for $0.54 trillion were presented, and $1.32 trillion were taken in:

  • Lecap (S31E5): 5.5% monthly effective rate; $545.488 billion.

  • CER (TZX25): -17.1%; $505.866 billion.

  • CER (TG25): -23.4%; $272.927 billion.

Now, what does all this mean?

Positive or negative? Spoiler alert: It was an excellent week for the government and the country. Again, the great tender auction, added to a trade balance surplus, generates a firm anchoring of expectations, which is critical to what will come. Additionally, as usual, the BCRA continues to buy reserves.

Dollar. It was a week with little volatility in the FX (exchange rate) and almost no gap (discounting PAIS tax) but with significant movements in future exchange rate perspectives. The rate cut seems to be installed, and the market increasingly believes in the 2% crawling peg. The futures markets set a devaluation expectation in line with the 2% proposed by the economic team.

As mentioned, there is growing confidence that the government will achieve a virtuous path in finance, as we see how the market adjusted its expectations: the implied rates of dollar futures adjusted downwards for the contracts from Jun/Jul onwards, now between 4.7% and 5.5% monthly.

Lower implied rates in futures = Lower devaluation prospects

Destruction and Shred of pesos = Reduction of the monetary base. Again, it was a very poor week for the placement of Bopreal, contrasting with the spectacular tender auction of Lecaps and CER. On the Bopreal side, a meager USD 89 million.

With the return of Lecaps, an instrument for calculating break-even inflation by money is back, what does this mean? Unlike the REM, much money is at stake because it is invested at that rate. What did the market “by money” dictate? That the thesis of economic disinflation is real, validating a Monthly Effective Rate (MER) of 5.5%, when inflation today is running at a high single-digit (March weekly) and at low double digits if we look at February inflation. This MER of the Lecap will be capitalized monthly until the paper's maturity.

To put it into perspective, the Lecap (5.5% MER) came out below the Badlar (5.9% MER) and well below the PASES (6.67% MER). It is fundamental to normalize the BCRA's balance sheet that the passes migrate to longer debt instruments, one of the government's objectives with the Lecaps will surely go this way. To achieve this goal, it is first necessary to recompose the peso rate curve, and this is just the first step.

Lower rate on remunerated liabilities = Reduction of monetary emission

Lower monetary emission = Smaller monetary base

It can be observed that the BCRA's Monetary Base (MB) and Remunerated Liabilities (RL) continue to fall in real terms, approximately -9.5% the MB and -0.9% the RL in the first 15 days of the month. As we have been saying, the cleanup of the BCRA's Balance continues.

If we add the new issuance of CER titles at a negative rate, we see that the government continues to take advantage of the market context to dilute and extend terms.

Financing at Negative Rates = “Cheap” Money for the Government

Those extra pesos will be used to purchase dollars from the BCRA to pay sovereign maturities in July of this year, approximately USD 920 million. The total maturity for July 2024 is USD 2,660, with approximately USD 1,700 million held by private parties. This means they purchased 54% of the private maturities.

Dollar purchase announcement for debt maturity payment = Improved expectations about payment capacity

What does this tell us? The placement rates validate a scenario of disinflation and rate reduction. The market believes in the government's expertise in the economic team to normalize the economy.

At the same time, we will have a tailwind since the US appears to be entering a rate-cutting cycle. This will be critical when Argentina must return to international debt markets next year. For now, the Fed continues to project three rate cuts in 2024 in its Dot Plot.

BCRA Reconstitution. According to Delphos, net reserves are USD -1,852 million, and liquid reserves are USD -6,100 million. Given the dynamics of account cleaning, the BCRA is likely to reach net reserves close to zero in the coming days.

Reserve Accumulation = Less pressure on the exchange rate

At the same time, we are entering the most robust liquidation stage in the agricultural sector; consequently, the streak of reserve accumulation and controlled FX is likely to continue.

The BCRA's goal and monetary policy plan are zero monetary financing to the National Treasury for 2024. This is key and shows the BCRA's inBCRA's sense.

Zero temporary advances to the treasury = Greater independence of the BCRA

Pesos were issued to accumulate foreign currency. However, it should be noted that since December 10, with inflation of over 70%, the base grew less than 10%. In real terms, this implies a fall of approximately 28%.

Since Milei took office, the BCRA has purchased USD 10.900 million and accumulated approximately USD 5.400 million in reserves. The difference arises from the issuance of Bopreal and payments to International Organizations (IOs). BCRA'sA'sbt with IOs has been reduced by USD 2.199 million since November 28, 2023.

Remember, by lowering the rate, the BCRA is simultaneously cleaning its balance sheet, not only diluting its liabilities in real terms but also giving the impression that it is ahead of the curve, considering future inflation, and at the helm.

Financial system reconstitution = Greater confidence

Greater confidence = Inflow of money into the financial system

Contractionary Fiscal Policy + Expansionary Monetary Policy = ¿? The government is fiercely fighting against the fiscal deficit and cutting all possible state expenses with a contractionary solid budgetary policy. However, the flip side of this contractionary fiscal policy is an expansionary monetary policy. This week, we saw another measure in this last sense: from April, banks will be able to reduce reserves in exchange for lending to SMEs.

Contractionary Fiscal Policy = Lower economic activity

Starting in April 2024, the Minimum SME Quota will become a simplified incentive scheme to "promote credit” assistance" based on reducing reserves.

Lower interest rate = Expansionary monetary policy

Reduction of reserves = Expansionary monetary policy

Expansionary monetary policy = Increase in economic activity

What is the result in the economy of a contractionary fiscal policy and an expansionary monetary policy? Uncertain. It will depend on the magnitudes of the contraction and expansion mentioned. At the same time, future expectations will also strongly influence the outcome of what happens with economic activity and lead to sustained growth.

Contractionary Fiscal Policy + Expansionary Monetary Policy = ¿?

Energy firmly pushes the trade balance. After many years, twin surpluses seem to have returned, confirmed by the positive trade balance in February. Surpluses in fiscal and trade were achieved in the first two months of the year.

Much of this improvement in the trade balance is explained by the energy sector (USD 971 million of USD 2.222 million in the first two months). Is this the beginning of an Argentina that exports energy and can start to take advantage of its plentiful natural resources?

Capital Markets - Actionables

Another week with the country’s risk declining, but this time significantly, leads us to a significant rise in the sovereign bond curve. Let's briefly put into perspective what's been happening with bond yields: at the end of October, the AL30 yielded 56%; 40% upon the new government's assumption; today 25%. The significant drop in yield poses the question: is there still room for rate compression and to earn some yield from capital appreciation? In our view, yes. There's still a margin for the country’s risk of continuing to decline, especially when the government's willingness to pay is coupled with the capacity to pay following the announcement of the dollar purchase to face the July maturities.

Lower Yields = Higher Bond Prices

With the dollar stable and more significant movement in peso instruments, short-term opportunities may arise to be leveraged, closely monitoring the government and its actions with the peso. Lecaps bring a new instrument into the equation for managing working capital and the possibility of carrying out carry trades. At the same time, repos and short-term mutual funds (FCI) are good alternatives to accrue a rate that doesn't penalize us too much against inflation.

Brief Reflection

Last week, we mentioned that it was both surprising and unsurprising at the same time the work from the Ministry of Economy and the Central Bank of Argentina (BCRA), and this past week has once again made me tip my hat to the economic team's handling of this context of uncertainty and crisis.

Expert Outlook: Following a sharp rate cut and a stable dollar despite this reduction, the government issued Lecaps at a rate lower than the market expected (cheap financing again). This could translate into a more robust disinflation scenario than anticipated in the Market Expectations Survey (REM).

The twin surpluses bolster the payment capacity and generate the positive expectations the government needs to move the country forward.

An emerging piece of data from February seems to show that the economy did not fall compared to February in a seasonally adjusted manner (GDP growth in February vs. January), still too preliminary to be taken into account, but it seems like we are beginning to see the light at the end of the tunnel, especially given the financial context. Why is this so important? Because the financial often precedes the real, if this path is followed, we would see a V-shaped recovery, and the country would move onto a growth path in the coming months.

For this to happen, political noises must diminish so that the government can govern without many obstacles, given the chosen economic direction.

Argentina needs a highway for doing business, not a street full of potholes. Are we getting closer? Today, yes.

See you next week, Vamos Argentina!

Nau Bernués
Founder, ArgenGrowth

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