The market is like a locomotive, taking everything in its path, while the streets are full of protests. Inflation is dropping, the peso is stronger than ever, and the tunnel seems endless—Argentina, never a dull moment.

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: positive while waiting for the light. The dollar continues to take a beating, the country risk is speeding up, and bonds are following suit. The government is extending peso maturities at a fixed rate while inflation slows down. The Central Bank keeps its buying streak as the economy dangles the carrot.

Understanding What's Happening in Detail 

Dollar and the Strong Peso.

The peso continues to dominate the dollar. This week, those holding pesos celebrated a strong 4.4% appreciation, bringing the gap below 20%—is it on its way to disappearing? Adding to this, the Central Bank keeps buying dollars. What was expected to be a tough quarter due to seasonality isn't happening. The government surprises again with solid purchases. Everything is firm here.

Recomposition of Public Accounts

The public accounts continue to strengthen each week. The anchor of the economic program remains strong, and the financial team is speeding ahead with every opportunity. This week, three trust funds, which had been in the spotlight this year, were dissolved. Federico Sturzenegger comments on these funds:

"Trust funds are a kind of 'box' with pre-assigned resources for a specific purpose, allowing for greater agility in contracting. They seem like noble objectives, right? Especially for emergency response; however, both concepts contain the seeds of poor administration. Let me explain:

Allocating resources for specific expenses ensures their misuse, as it prevents evaluating the benefit of one expense against another at any given moment. (Imagine an earthquake and not being able to transfer tourism funds, for example, to help the victims.)

On the other hand, spending agility is a double-edged sword; it can be efficient but also foster corruption. At the beginning of the administration, I remember Minister Francos lamenting that the trust fund he needed to combat fires in Chubut had been squandered by the Fernández-Massa administration to support Telam. Other funds supposedly assigned to infrastructure investment had disappeared and were used instead to finance soft loans to boost Sergio Massa’s electoral campaign.

The trust funds being closed by Decree 888/24 either had not been implemented or had shown serious irregularities in their functioning.

The objectives that led to the creation of these funds will continue to be promoted as determined by the National Congress in the national budget, which is the only valid source of expense authorization in sound public administration.

Today's Decree 888/24 brings us closer to a more rational and transparent management of taxpayer resources, a fundamental step towards a more orderly macroeconomic environment and a less corrupt society."

This week also brings significant relief, as changes in the IMF program save the country approximately USD 3.2 billion in loan fees, reducing Argentina’s payments by 29.1%. This brings welcome breathing room amidst strong financial commitments.

National Public Sector

Auctions

Positive net financing has returned. With $5.1 trillion in maturities and $5.9 trillion in new funds, the excess pesos head into the Treasury's account at the Central Bank. The novelty is in the new capitalizable bonds.

The government is managing to extend maturities from Letras (which only last up to 1 year) to bonds. This helps stretch out maturities, a positive move, and the peso debt curve is gaining more key points. This is another achievement for the government in its debt scheme.

There's still some premium left in short-term Letras, where the government secured pesos by paying slightly more than the secondary market (e.g., for the January letter, it paid 3.9% versus 3.75% in the market).

This auction was also unusual because it coincided with the release of inflation data the following day. Those who expected positive data and bought long Letras had a good result as inflation decelerated, and the week closed with rate compression on the long end (price increases).

If peso credit continues to grow and the government keeps the taps on monetary issuance closed, it makes sense that we’ll return to negative net financing. That is, banks will stop renewing their Lecaps and LeFi holdings to lend to the private sector (the crowding-in effect we mentioned in this edition: https://argengrowth.beehiiv.com/p/sad-data-for-a-dual-reality). This is the government’s plan to re-monetize the economy.

Economic Activity

Contrary to market trends, it seems September isn’t starting up. The tunnel is long. Early activity indicators show a mixed September, and the tunnel appears never-ending. The light is there, but when will we reach it? As we’ve mentioned, tax revenue and retail sales show discouraging data, and construction is following suit, although cement dispatches in September buck this trend. Meanwhile, Marcos Galperín tells us that e-commerce consumption continues to grow, with Mercado Libre hitting record unit sales in August.

Manufacturing grew by 1.5% in August but still shows a 6.9% year-on-year decline, reminding us of our tough moment. Mining production is revving up for the upcoming RIGI, with 2.1% year-on-year growth, although it fell 1.6% in August compared to July. Oil is still full steam ahead at +14.4% annually.

A V-shaped recovery? Private peso credit suggests it could be. If rates drop and inflation slows, credit could take off. The IPI is looking hopeful but still needs a boost. We’re at the bottom now so that a V-shaped recovery would be the best-case scenario. So far, we don’t have confirmation of any economic recovery. Most indicators raise our hopes, but for now, they leave us wanting more.

The RIGI is bringing in new business opportunities that were unthinkable a few years ago. YPF is on the verge of signing an agreement with one of the world’s largest companies to sell Vaca Muerta gas for USD 140 billion over the next 20 years, funding the LNG plant in Río Negro. New numbers for a new Argentina. This week, it was also confirmed that Rio Tinto had made a USD 2 billion investment to build a lithium processing plant in Salta.

More Economic Activity = More Inflation

Deregulations

The big news in recent weeks is that Argentina’s costs keep dropping in various ways. The government eliminated the stamping of imported products and reference values (minimum values set by customs). Stamping will be replaced by a digital system (SiDIP), and guarantees will only be required in cases of fiscal risk. This is a big benefit for small and medium-sized businesses, with more simplified imports resulting in lower costs.

Deregulation and modernization continue in medium- and long-distance road transport. Companies can now choose their schedules, routes, prices, vehicle sizes, and stops without authorization or cumbersome procedures. All transportation hubs are also required to unblock access. Airports and ports, in particular, must allow entry to any passenger transport operator and even provide spaces for shared-use platforms (Uber, Cabify, etc.). According to the Minister of Deregulation: “Additionally, companies will no longer be required to stop at terminals, meaning these terminals will have to ‘compete’ and attract buses to them (as they had become an additional revenue mechanism, as well as imposing time costs on passengers).”

The government continues its fight against intermediaries, and starting December 1st, people can freely choose their health coverage without intermediaries or triangulations. Prepaid plans financed by social security funds must register with the National Registry of Insurance Agents (RNAS) and receive contributions directly from affiliates, ensuring greater transparency and control.

Decree 891/24 simplifies the structure of the Financial Information Unit (UIF) and eliminates duplicate procedures, resulting in more resource savings for the state.

From now on, it will be prohibited to include charges unrelated to the service in utility bills or purchase invoices.

Less bureaucracy = Lower costs.

Inflation

We’ve broken the 4% floor for the CPI, with a 3.5% rate bringing us closer to the 2% crawling peg, especially considering core inflation closed at 3.3%. This also represents the lowest inflation rate since November 2021. We’ve become accustomed to living with inflation that’s incredibly high for almost any country, Argentina included. Relative prices continue to adjust, with regulated prices rising 4.5%, while food and beverages only rose 2.3%.

An interesting fact about this month’s inflation data is that, as Salvador Vitelli pointed out, the decrease was driven more by services than goods, which is somewhat counterintuitive considering the reduction in the PAIS tax.

Undoubtedly, the decline in inflation has been one of the main factors in the recovery of wages. SIPA compensation in July was already higher than in November 2023. In less than a year, despite a brutal crisis, there has been a real recovery for workers.

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Capital Markets - Actionables

Argentina, Argentina, Argentina! The rise in the value of Argentine assets doesn't stop. This week, the country risk dropped by a whopping 12%, along with rising bond prices and a Merval that seems to be aiming for all-time highs.

To top it off, we closed the week with a local holiday and an IMF announcement (mentioned above) that sent bonds soaring. It looks like Monday’s bond rally is practically guaranteed.

The appetite for Argentina was evident in YPF's issuance, where they were offered USD 1.6 billion but only took USD 420 million at a rate of 8.2%. Considering the state is a shareholder in YPF, history, and credit risk take precedence. What does this mean? Simple: sovereign bonds yield 15%-20%, while YPF is issuing at 8%. History comes with a lower interest rate. On the flip side, is there room for sovereign compression? This is partly what we mean when we say that sovereigns still have a lot of room to run.

We’ve been discussing the returns on Lecaps and this week; they rose sharply after the inflation data. So, we repeat: Lecaps continue to offer very interesting returns for those betting on a downward inflation path. With rates above 3.5% today on Lecaps and inflation approaching the crawling peg, there’s value here.

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Brief Reflection

The market sees, pays, and pays for it again. Argentine assets have recovered their value tremendously in recent months. The economic activity? We're still waiting. Is finance getting ahead of the real economy? Let’s hope so, as that would mean tremendous growth for the country and a prosperous Argentina. Do you have any doubts? The market seems to have none, accelerating at Argentine speed, so buckle up.

Bureaucracy and the state are shrinking, and the market likes it. The streets? Some don’t, but the silent majority seems to support this new way of doing politics and economics, especially in a week where the government scored another victory by preventing the rejection of the veto on the University Financing Law, arguing that the law would violate budget regulations by not specifying the funding source for the proposed salary increases and spending. We are witnessing a country with an economic program unprecedented in Argentine history (as the fiscal surplus paying off debt dictates), and many are hopeful this could be a rebirth.

Economic activity still won’t let us celebrate, and it seems disconnected. It’s tough to get started! September’s indicators suggest waiting another month to begin the growth path.

Argentina’s cost keeps dropping, with lower tariffs, less bureaucracy, and more ease for business generation. Will it be enough for entrepreneurs? For now, many are waiting on the fresh capital that’s so badly needed to return to growth. The Argentine risk premium is shrinking, meaning corporate profits should follow suit. Is the Argentine business sector ready to earn less?

Argentina needs a highway for business, not a road full of potholes. Are we getting closer? Today, we return to 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

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