Argentina became a safe haven on a Monday when the world seemed to be ending. No, it's not a joke. It was the best week in months for Argentine assets and the government, which continues to capitalize on RIGI, the "chainsaw," tax cuts, and the economy's apparent reaction.

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: Vamos Argentina! What a week to be Argentine. It's impossible to get bored. We don’t have enough space to summarize everything happening in this glorious country in a week. It was a great week for Argentine stocks. After a long time, the Central Bank bought foreign currency, and new investments were announced. All this amid a generalized global chaos reinforces the path the country is on.

Understanding What's Happening in Detail 

Dollar and the Strong Peso. The strong peso is more alive than ever. In a week of extreme volatility, the peso withstood external pressures, and when the storm calmed, it appreciated. The 2% exchange rate appreciation during the week amid the tax amnesty, Personal Assets payments, and announced investments seems here to stay. We’re not alone; this week, the Real also helped by appreciating around 3%. If the global context allows, the government will face less pressure to achieve its goal of convergence between the MEP dollar and the official rate.

Lower devaluation in emerging markets = Less pressure on the exchange rate

More dollars offered = Less pressure on the exchange rate

From this space, we believe that the most likely scenario until the end of the year is a peso appreciation against the dollar. In the meantime, accumulating foreign currency will be volatile, especially in these seasonally weak months. However, the Central Bank managed to buy USD 86 million this week, which is a good sign.

Keep a close eye on commodity prices, which are still falling and mean fewer dollars for the country.

Recomposition of Public Accounts

It was another busy week in Argentina, as always. There was a small step towards lifting the currency controls, with the elimination of the requirement to register in the “Foreign Exchange Information Registry for Exporters and Importers of Goods,” where authorization from the Central Bank was needed to access the foreign exchange market if not registered. Also, the daily amount requiring prior notice for foreign exchange operations was raised from USD 10,000 to USD 100,000.

On the other hand, this week, we saw official announcements in the Official Gazette regarding the closure of INADI, the dissolution of the National Entity for Control and Management of the Navigable Waterway (ECOVINA), and the elimination of export duties on the dairy, beef, and pork sectors. Additionally, the SUBE card will no longer be the only means of transportation payment, and driver's licenses will no longer have an expiration date. The cherry on top is anti-ghost employee and anti-bribery regulations published by the executive. From now on, to work in the state, one must pass an exam and meet certain requirements, and officials will no longer be able to "shelve" files. The government seems to be achieving its goals of a smaller state and lower taxes.

More chainsaw = Fewer taxes?

Debt

In search of fresh dollars, the government is negotiating with Banco Santander for a repo operation(https://economipedia.com/definiciones/repo.html). Securing financing and extending deadlines is crucial for the country to avoid disruptions with next year’s debt commitments. This deal would be for only USD 1 billion, and it seems to be the first step toward re-entering the debt market. The amount is very small. The interest rate would be SOFR +550bps(https://www.global-rates.com/en/interest-rates/sofr/), currently making the estimated rate around 10.84%, with a maturity in 2027.

Foreign currency public debt maturing in 2025 amounts to almost USD 24 billion, including debt from international organizations and provincial governments.

Economic Activity

Green shoots at last? July seems to mark a starting point, with several sectors recovering more than June. The light is approaching, and green is gaining much more ground in June's monthly data than red.

We see a strong revival in construction, an industry with significant spillover effects. If macroeconomic stability is consolidated, the return on mortgage loans could strongly boost this activity in the coming months. The Construya index continues to fall year-over-year (-16.5%) but is in its fourth consecutive month of improvement, rising 35.1% from the bottom and showing +12.1% monthly. Cement dispatches marked a +7.4% monthly increase in July, following a +25.9% rise in June.

Linked to the construction sector, the real estate sector begins to pick up momentum, showing a +36% monthly increase in July. After years of decline, we may see a strong change in dynamics here. Additionally, the automotive sector saw a strong rebound with a +38.7% increase. Vehicle sales were probably boosted by a blue dollar that woke up in July after months of stagnation.

Fishing and mining are beginning to add their grains of sand. A strong rebound in fishing activity marked a +35.5% y/y increase according to the INDEC’s Industrial Fishing Production Index (IPI pesquero), and the index of the seasonally adjusted series shows a 21.6% growth compared to the previous month.

A special mention for mining production, which, although it accumulated an 8.2% increase in the first half of the year and a 3.3% y/y increase in June, the best is yet to come. This week, Salta was the jewel of RIGI, with investments of USD 9 billion being discussed, with lithium as the star. So far:

• First Quantum: USD 4 billion, copper.

• POSCO: USD 2 billion, lithium.

• Ganfeng: USD 1 billion, lithium.

• Eramet: USD 800 million, lithium.

Leading economic activity tax indicators validate all this, and they also show a strong monthly rebound. Was July the starting point for economic activity, or just an oasis in the desert? June’s industrial production data still raises doubts, showing a -1.6 % monthly drop. We’ll have another strong forward indicator when July’s data is released.

To close the section, let's talk about what the president believes will drive the country out of the depths: credit. All indicators point to a growing trend here, and it will probably become even more relevant when we achieve inflationary, monetary, and exchange rate stability. From the abyss not seen since the hyperinflation of '89, loans to the private sector are growing monthly, specifically in the last three months, by 32% in real terms.

The Street

While we wait for the activity to pick up, the government maintains good approval levels, and the end of transportation subsidies in the Buenos Aires Metropolitan Area (AMBA) was announced for September.

Capital Markets - Actionables

A Turning Point for Argentina? A strong storm hit the world on Monday, with the Japanese stock market experiencing one of its worst days in history and volatility at pandemic levels. Argentina? Given the circumstances, it is holding up quite well.

The bad US employment data last week, combined with the interest rate hike in Japan, caused panic in the markets and triggered a global risk-off. However, for now, it seems that it was short-lived, and markets recovered, with the VIX (index that measures market volatility) dropping sharply after Black Monday. The weakness of the markets in these scenarios triggers warning signs, and safeguarding capital amid these turbulences becomes highly relevant. The much-awaited interest rate cut in the US seems closer than ever, already largely priced in by the market. This would be good news for Argentina, allowing a lower rate of return to the debt markets.

The government’s plan seems to be taking effect, and Argentina had a great week in most of its assets amid global turmoil. The Merval had its best week in months, surprising many. What is not surprising is the strength of the peso. The Argentine peso appreciated, the gap narrowed, and the government managed to buy dollars in a week when the country risk also fell and bonds rose. It was a perfect week.

The Lecaps curve was slightly hit after the IPC data from Buenos Aires, which was higher than the previous month and above 5%. This was a surprise, especially considering that the Minister of Economy, Luis Caputo, had indicated that July’s inflation would be below June’s 4.2%. We will probably see some movement here, but there is value for those managing their treasury and seeking alternatives to Money Market Investment Funds.

The market seems to start believing a bit more in the government, and if this is validated, we will see a strong recovery in the value of Argentine assets. Bonds continue to offer extraordinary returns (above 20% annually in dollars), assuming very high risk (let's not forget this is Argentina).

A point to consider: if the tax amnesty is effective and Argentines turn to buying assets in the capital market, a significant flow could drive up prices.

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Brief Reflection

Argentina as a safe haven—no one saw that coming. Jokes aside, the response of Argentine assets to the global panic was excellent. Historically, Argentina has been known for amplifying global market movements (high beta), and this was not reflected in such a way on Monday. Are we witnessing a new Argentina? Almost no one would dare to claim this; history is against us, and it seems too early to say. Beacon of the West…

Looking at the hole we’re in, high-frequency data from July shows a nascent improvement in most economic sectors. A green shoot doesn’t mean that something decent will grow later, but the recovery path seems to strengthen and gain momentum daily. As inflation continues to decline and public accounts are rebuilt, the exit from the hole is closer. With the economy recovering (let’s assume that), the monetary exchange issue becomes the thorn in the side and the fundamental aspect to resolve to accelerate the recovery of economic activity.

The good news from RIGI continues, and weeks of announcements are ahead. These are very important announcements that won’t feed us in the short term. Will we be eating carrots until then?

Meanwhile, the government scored several victories in this busy week. The market’s response to Black Monday and its aftermath gave it the much-needed boost it longed, yearned, and prayed for. Was any news leaked? Does the repo with Santander set the path, and the market is anticipating it? Meanwhile, the chainsaw doesn’t stop, the state keeps shrinking, and if that wasn’t enough, the reductions in export duties and taxes are becoming increasingly noticeable. Is the economy starting to believe the story and paying to see it? How expensive is the dollar if everything they say is true?

Competitiveness gains won’t come from devaluation but from tax cuts, translating into real fiscal competitiveness in a globalized world, in a country with vast natural resources and incredible human talent (how else would we survive in this ever-changing country?). Now, the lifting of currency controls seems closer. Correcting the foreign exchange market imbalances is essential so the country has healthier fundamentals to grow again.

Argentina needs a highway to do business, not a pothole-filled street—are we closer? Today, a resounding 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 Argentine economy's challenges.