The chainsaw continues to set the agenda and anchor the economic program. With another fiscal surplus, the government continues to gain ground in cutting back, leading to a leaner state. In a more favorable international context, Argentine assets continue to gain value.

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: Positive, though let’s look at the details closer. While the data indicates that the week was positive in several aspects, some parts of the economic program need closer inspection.

Understanding What's Happening in Detail 

Dollar and the Strong Peso. Another week of consolidation for the peso, with less volatility and external help. The Brazilian real dropping below 5.50 is a small relief for the strong peso. Simultaneously, the Central Bank of Argentina (BCRA) had another week of currency purchases as energy imports eased up, and there might be some speculation about the reduction of the “país” tax. This could temporarily decrease the demand for foreign currency, only to see a spike later. With September approaching, the government promises to reduce the “país” tax from 17.5% to 7.5%. Will this be effective from September 1st or September 30th? The inherent uncertainty of the country, where planning is always a challenge.

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

Less demand for dollars = Less pressure on the exchange rate

We believe the government will win the battle against the market, and the likelihood of the peso appreciating against the dollar by year-end is higher. However, the futures curve had its first positive session in several weeks, especially for contracts maturing at the end of the year and early 2025. Keep a close watch on the price of agricultural commodities, as a failure to recover could result in significantly lower dollar inflows for the country.

Recomposition of Public Accounts

The chainsaw doesn’t stop, though the accumulation of reserves has slowed. Meanwhile, the fiscal surplus continued to set the pace in July. However, the payment of the Bonares led to a financial deficit (as expected), breaking the streak of fiscal and financial surpluses.

Central Bank of the Argentine Republic - BCRA

The Central Bank continues to rebuild its balance sheet, but in the coming months, it won’t do so as quickly as it did earlier this year. Many uncertainties remain about how the path will consolidate in the coming months, especially concerning the eventual lifting of currency controls, with a Central Bank still having negative net reserves.

Let’s explain something that’s becoming more relevant now: the definition of Broad Monetary Base (BMB). First, why is it appropriate? In Phase 2 of the economic program and the new monetary framework defined by the BCRA, the aim is to limit the BMB to $47.7 trillion. When repos were in place, the BMB was defined as the Monetary Base (MB) + Remunerated Liabilities; now, there are no repos. Given the new context, the BMB could be defined as Monetary Base + LEFIs + Peso Deposits of the Treasury at the BCRA, which currently stands at almost $47.7 trillion (see figure from 1816). What does this mean? The MB could increase if banks cancel their LEFIs or the Treasury's cash buffer at the Central Bank decreases. As of August 7th, the MB was $23.1 trillion, the Treasury’s peso deposits at the BCRA were $16.0 trillion, and LEFIs held by banks totaled $8.3 trillion, amounting to $47.5 trillion.

This week, the President commented on the exit from currency controls: "When the conventional monetary base matches the broad monetary base, it means the excess money has been eliminated." In simpler terms? It seems that currency controls are here to stay for a while, given that MB = $23 trillion and BMB = $47.7 trillion. The MB reaching the BMB is far off. The goalposts keep moving, with new conditions for lifting currency controls. Additionally, the President mentioned that growth can happen with currency controls—possibly suggesting that these controls may last longer than anyone expected.

At the same time, the ratio of Broad Monetary Base to gross international reserves, as a proxy for the exchange rate, has taken on a very different tone following the government’s recent changes with LELIQs, repos, and zero monetary issuance.

National Public Sector 

Another positive fiscal outcome for the government. With a primary surplus of $900 billion and a financial result of -$600 billion, it accumulates a surplus of approximately 1.4% of GDP and a financial surplus of 0.4% of GDP. Year-on-year, revenues increased sharply by 245.5%, while expenditures rose “only” by 177.5%. Additionally, the government is considering dissolving forty more state agencies in the coming months, impacting 20,000 public sector jobs. Will the government continue to surprise with fiscal numbers? The chainsaw seems sharp for now.

More chainsaw = Fewer taxes?

We can see where the chainsaw is cutting with the primary spending data from July. In real terms (discounting inflation), the brutal public spending cuts only spared INNSJP’s benefits (perhaps to offset pension cuts?) and the Universal Child Allowance. Subsidies for both transportation and energy are also beginning to decline significantly. Due to their relative importance, pensions remain the most significant component of this year's public spending cuts, accounting for 27% of the total, followed by Direct Real Investment at 15% and energy subsidies at 12%.

Debt and Auctions

In Wednesday’s auction, the government decided to leave all tranches deserted except for the letter maturing in June next year, reflecting a strong extension of maturities. The Effective Monthly Rate of 3.95% could be very attractive if the disinflationary path is validated. In this instance, the surplus from the auction, though modest compared to others, will be used to purchase $330 billion in bonds from the BCRA.

On the other hand, Minister Caputo, speaking about sovereign debt in dollars, stated: “There’s no doubt that we will have the dollars to pay the principal. We won’t even need to refinance. The January payment is guaranteed, and the July payment will be made with the surplus. We’ll only discuss the next payment in January 2026.” Reading between the lines of the government's communications, it seems that fresh financing is further off than expected, and the government will seek it with a lower risk premium and a “healthier” BCRA.

Economic Activity

Last week, we mentioned that things were looking up, but there are data points concerning the industry. The utilization of installed capacity is near pandemic levels, with room for improvement—though the question remains, for how many? The crisis will undoubtedly claim more victims.

Another week, another investment announcement. This time, Eduardo Elsztain, president of IRSA, announced USD 2 trillion in investments in 10 mega real estate projects, noting that he considers the context favorable for investment.

On the regulatory front, there was another step this week toward the possibility of capital entry into clubs through Sports Public Limited Companies (SADs). The executive branch has given the AFA one year to adapt its statutes and has regulated the conditions under which clubs can transform into SADs. Key points to highlight:

• No imposition is made. The clubs and their members will determine if any corporate changes occur and choose the corporate form they wish to operate.

• Capital can be incorporated into a single club branch. For instance, a club competing in multiple sports disciplines could choose to integrate capital only into its football division.

• The participation and association scheme is chosen by the members if deemed appropriate.

• If the statutes contradict the law, clubs will have one year to adapt.

• No federation can prohibit or discriminate against a team based on its corporate form.

The Street

Consumption shows a sharp year-on-year decline, dropping 16.1% in July, reflecting the severe crisis households face in the country.

If wages continue to outpace inflation, the government will gain more “resilience” amid the crisis. Three consecutive months of real wage gains bring relief to households. In June, real wages rose by 1.6%. Compared to November last year, all indicators are down: RIPTE -7.5%, SIPA -4.7%, private wages -4.7%, and public sector wages are down sharply by -18.9%. The basic basket? Down by -1%. These are the dynamics:

There’s still a long way to go for real wage recovery, as shown in the following graph. If the virtuous circle proposed by the government holds, this process could be as rapid as it has been since the end of last year. Remember that the MEP/blue dollar is practically at the same levels as last year's end, with wages rising monthly in pesos.

Inflation

Core inflation has been more resistant to decline in recent months. Relative prices are still adjusting, but there’s more to be done. The market believes the government will be effective in its fight against inflation, as reflected in the market prices of securities. The implicit breakeven inflation measured by Lecaps and Bonceres is below what the REM forecasts (which has consistently been off since Milei took office).

Capital Markets - Actionables

A bit of calm after last week’s volatility. External markets helped, and there was a further drop in country risk and a rise in bonds and stocks.

Globally, nothing seemed to happen. Markets rose, the VIX returned to normal, and, interestingly, gold hit historic highs. The path to lower rates in the United States seems closer, and this could be an interesting time to lock in rates for slightly longer periods rather than staying short.

Locally, continuing to bet on the country’s recovery could yield rewards in a Merval far from recovering what it has lost over the years. The government continues to generate the peso curve for cash management, and Wednesday's auction left an interesting 3.95% monthly rate until June next year. We insist that inflation drops; there could be a lot of value here. We can also see value in hedging against inflation with CER instruments, which yield positive returns after the first half of the year, where it was almost impossible to protect against inflation.

As we say every week, investing in sovereign hard-dollar bonds could lead to extraordinary returns for those who believe in the government and are willing to take on one of the world’s greatest risks.

The market seems to believe in the government a little more each time, although there are moments of doubt. If this continues, we will see a strong recovery in the value of Argentine assets.

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Brief Reflection

The international context was calmer, which helped prevent too many shocks this week. A week with some breathing space in international markets translated into higher values for Argentine assets overall.

Inflation data continues to validate the downward path, but core inflation figures have shown three consecutive months at similar levels. Can the government beat inflation inertia? For now, the government’s goal of achieving single-digit inflation in September seems challenging, given the tariffs that remain to be released and relative prices still needing adjustment. The market doesn’t seem to validate this goal for September yet.

Last week, we mentioned that the RIGI announcements won’t bring immediate relief, and the main course will be delayed. Well, add a couple more months at least because, according to the government, currency controls are here to stay. The fact that President Javier Milei said that growth could occur with currency controls might indicate that they are not as uncomfortable with the exchange rate restrictions and prioritize the stability that these controls provide over the potential economic growth that lifting them would generate. For now, wages continue to recover, and the government’s support appears unshakable, giving them more validation to continue their economic program, where the chainsaw doesn’t stop.

Competitiveness gains will not 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 (otherwise, how would we survive in such a changing country?). The goalposts have moved, and the lifting of currency controls seems further away. Correcting imbalances in the foreign exchange market is crucial so that the country has healthier fundamentals to return to growth. But for now, the government prioritizes the stability that these controls provide.

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

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