Commitments Are Honored, and Investors Reap the Benefits

With the payment of Bonares and Global bonds, investors continue to bet on Argentina, placing full confidence in the government's direction for the new year. In a year that promises substantial growth, December appears to have ended on a high note.

Dear ArgenGrowther,

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. Brief Reflection

2. Data

3. Understanding What's Happening in Detail

4. Actionable Items

Brief Reflection

The country of good news keeps delivering. Week after week, we receive new positive updates. However, celebrating the sovereign bond payment as if it were a goal reveals our lingering past. Imagine the United States celebrating the repayment of a Treasury bond—absurd, right? Yet here we are, recovering from what felt like an endless party, which now must be paid for. And we're paying, dollar by dollar. So yes, it’s worth celebrating.

Moreover, the good news isn’t just financial. The economic activity is catching up, and leading indicators point to strong growth in December. Year-over-year comparisons now show significant improvements, leaving behind the recent crisis and recession that began in mid-2022. Argentina is set for robust growth in 2025, an election year with the world watching closely. The momentum is just beginning—there’s still time to join in and achieve extraordinary returns in various real economy sectors.

Challenges still lie ahead. The external context includes a weak Brazilian real and a U.S. 10-year bond yields hovering around 5%, creating global pressures. For now, Argentina seems to be playing its own game, with domestic considerations likely to dominate in 2025: taxes, export duties, deregulations, and midterm elections, to name a few. And, of course, the ultimate battle: currency controls (inflation is no longer the main issue).

Will Argentina transform into a highway for business and showcase to the world that it has changed? Are we getting closer? For now, let’s keep rooting for the "yes."

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Is Argentina's Economic Shift Positive or Negative?

Spoiler alert: green as arugula. The year starts with new bills in circulation and another week of rising Argentine assets. Despite a volatile global financial landscape, the Merval continues climbing, and bonds remain strong. The country risk? On track to reach levels around 400 basis points. Meanwhile, the Central Bank of Argentina continues purchasing foreign currency to start the year strong.

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Understanding in Detail: Dollar and the Strong Peso

Dollar and the Strong Peso

The year's first full week calmed the currency market and reinforced pre-holiday dynamics. The Central Bank of Argentina (BCRA) has been aggressively purchasing foreign currency, pivotal in shaping market expectations.

Demand for MEP dollars persists, but the BCRA’s capability for peso sterilization, fueled by extensive purchases over recent months, places an effective ceiling on the dollar, limiting upward movements.

Rumors are gaining momentum regarding a potential reduction in the crawling peg—the structured devaluation mechanism implemented throughout 2024 as a core exchange rate strategy—from 2% to 1%. This potential adjustment is contingent upon inflation trends. For the government, inflation remains a priority battlefront. The current 2% peg no longer serves as an anchor but as an inertia-driving factor, reducing to 1% a logical step to regain control.

Public Accounts Recovery

Last week, debt repayment dominated the agenda. Argentina paid USD 4.423 billion to bondholders, reinforcing its commitment to honoring obligations while strategically pursuing debt reduction. This payment was part of a broader fiscal strategy, including the Treasury’s USD 11 billion bond buyback from the BCRA.

Notably, payments weren’t exclusively external. Domestic stakeholders, including the Central Bank and the Sustainability Guarantee Fund (FGS), received USD 509 million, while local private investors were allocated USD 1.722 billion.

Looking ahead, a similar-sized repayment, primarily tied to bond maturities, is slated for midyear in July. Beyond that, payments to international organizations dominate the schedule. While the required funds are significant, ongoing dollar purchases suggest the government has the resources to manage these commitments without resorting to new debt issuance—at least for the first half of 2025. This approach aligns with a broader goal of reducing reliance on external financing, supported by declining country risk and improved credit access.

Additionally, the government secured a USD 1 billion repo agreement with five international banks, using the Bopreal bond as collateral. While the amount isn’t game-changing, banks' willingness to offer USD 2.85 billion at a SOFR +475bps (~8.8% annualized) interest rate highlights growing confidence in Argentina’s fiscal strategy.

National Public Sector

Tax reforms and expenditure reductions remain critical topics. One of the most prominent measures is the extension of the National Tourism Fund until December 31, 2027. This extension maintains a 7% tax on international air, sea, and river ticket prices. While this measure pressures consumers, it represents a continued focus on fiscal consolidation.

At the same time, the government continues to streamline public spending by closing down underperforming trust funds. Three significant closures include the Social Housing Trust Fund, the Universal Service Trust Fund (FFSU), and the PRODAF Trust Fund, bringing the total number of dissolved trust funds to 18. According to government officials, these funds were closed due to inefficient resource utilization, a lack of controls, and minimal results.

Additionally, the government has reduced approximately 36,000 jobs in the public sector, representing 7.2% of the total workforce within the current administration's first year. While some may argue this is a modest reduction, the trend appears to be just beginning. This cutback aligns with broader fiscal policies to achieve a leaner and more efficient public sector.

Significant questions remain: How will tax pressure be redistributed if the administration meets its ambitious target of reducing 90% of national taxes? Which sectors will benefit the most? Many speculate that the agricultural industry, particularly export duties (DEX), might be prioritized given its worsening margins. However, the consensus is clear—action on tax reforms cannot be delayed much longer.

Central Bank of the Republic of Argentina

Following a historic year in 2024, during which the Central Bank made substantial strides in strengthening its balance sheet and purchasing foreign currency, 2025 has started on a similarly strong footing. In the early days of the year, the Central Bank purchased over USD 500 million.

However, while gross reserves have increased through these purchases, net reserves remain under pressure due to substantial debt repayments. In 2024 alone, the Central Bank directed USD 11.342 billion toward interest payments and USD 3.439 billion toward obligations to international organizations, totaling USD 14.781 billion in outflows. While these payments have not visibly boosted net reserves, they have significantly improved Argentina's financial balance.

Rumors are also growing about potential interest rate reductions. This could further energize the domestic economy, creating a dynamic interplay between fiscal and monetary policy. As the year progresses, the Central Bank’s ability to manage foreign currency reserves while maintaining economic stability will be closely watched.

Economic Activity

The Argentine economy is gaining momentum. December’s retail sales surged by an impressive 17.7% year over year, underscoring a resurgence in consumer activity. Meanwhile, preliminary data from November paint a mixed but generally positive picture.

The industry grew by 0.4% month over month in November, while construction expanded at a robust 2.2%. However, mining activity experienced a slight decline of 0.3%. The construction sector, in particular, has faced significant challenges over the past few years. Elevated construction costs and delayed price adjustments continue to weigh on the industry, even as recovery efforts begin to take shape.

These early indicators indicate a promising start for 2025, with many expecting continued growth across multiple sectors. Still, the uneven recovery across industries highlights the need for targeted policies to support lagging areas like mining and construction.

The Streets

Optimism is in the air. A V-shaped recovery in wages has brought renewed energy to Argentina’s streets. Consumers are spending more, government approval ratings are rising, and public sentiment about the future is increasingly positive.

The start of 2025 has brought heightened expectations for wage growth, economic expansion, and improvements in living standards. This optimism is translating into higher consumption levels and a greater sense of stability among the Argentine population.

Actionables

Sovereign bond payments have thrilled the market, with investors celebrating a rally that shows no signs of slowing. Stocks and bonds are climbing steadily, country risk continues to narrow, and the dollar has remained remarkably stable.

For those seeking opportunities, hard dollar bonds remain a compelling option. The Bopreal maturing in 2026 (BPY26), with an estimated annual yield of 7% in dollars, is particularly attractive. Sovereign bonds offering yields above 10% are still available, though they are likely to diminish as country risk continues its downward trajectory, driving bond prices higher.

In the peso segment, the Central Bank’s continued foreign currency purchases enhance its sterilization capacity, making carry trade strategies increasingly viable. Current yields exceed 2% per month, with further potential upside if crawling peg adjustments boost demand for peso instruments. However, as always, this strategy requires a high-risk tolerance and assumes convergence between MEP and official rates.

CER instruments remain a highly attractive choice for investors and companies focused on cash management. With real positive rates above 6%, these instruments balance fixed-rate returns and inflation protection. A combination of fixed-rate and CER investments can provide a robust strategy for navigating Argentina’s economic landscape.

Corporations are also bullish on Argentina's future. YPF’s recent issuance of USD 1.1 billion at 8.5% annually, with demand exceeding USD 2 billion, reflects growing confidence in the nation’s prospects. Additionally, Moody’s recent upgrade of Argentina’s non-sovereign credit ceiling by four notches (Caa1 vs. Ca) signals improved conditions for corporate debt issuance.

These trends suggest that Argentina’s economy is recovering and offering significant opportunities for investors across multiple sectors.

If you’ve enjoyed this analysis, please share your thoughts, comments, and feedback. Let’s keep the conversation about Argentina’s transformation alive.

Nau Bernués
Founder, ArgenGrowth

PS: Follow me on Twitter and LinkedIn, and let's discuss the Argentine economy's challenges