Another week of good news for Argentina’s economy. The fiscal anchor remains firm, delivering a financial surplus without the country facing default. Inflation and the dollar are no longer issues in Argentina. When was the last time we could project beyond six months without economic turmoil? Here’s a look into how Argentina’s economic recovery is shaping up and the factors driving this transformation.

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

Argentina’s Economic Outlook: Positive or Negative?

Spoiler: Tre men dous. Argentina’s Merval is hitting historic nominal highs, bonds are peaking, and country risk is decreasing. Inflation is declining, and the Central Bank actively purchases foreign currency weekly.

Understanding What's Happening in Detail

In-Depth Analysis: Dollar, Strong Peso, and Economic Strategy

The market has moved past interest rate cuts, and the strong peso drives the dollar below 1,100. The contest appears over, with a clear winner. But of the three economic anchors, one is reportedly losing its efficacy. Central Bank Vice President Vladimir Werning has fueled speculation of a crawling peg reduction, noting that as inflation expectations align with the program’s programmed devaluation, the crawling peg no longer anchors but becomes more inertial. Will

Does January bring a crawling peg reduction once the PAIS tax expires?

President Javier Milei has indicated that the crawling peg could decrease to 1% if inflation remains stable. A full market release will follow if inflation stays at this level for three months. However, we're cautious, as Minister of Economy Luis "Toto" Caputo stresses that removing the exchange control depends on conditions, not time. “We want to be 100% sure this won’t cause economic issues.”

The Central Bank’s ongoing foreign currency purchases exceed USD 1 billion monthly. Is Argentina’s currency gap disappearing? Currently below 10%, the gap may soon close, though soybean prices and the Brazilian Real continue to challenge Argentina’s currency.

Restoration of Argentina’s Public Accounts

The Ministry of Deregulation and the government’s primary fiscal anchor work together to maintain a budgetary surplus. The recent dissolution of the National Water Works Sanitation Entity (ENOHSA) exemplifies how consolidating tasks saves the state money.

National Public Sector
The fiscal anchor remains intact, with government spending dropping by 23.2% yearly and revenues by 8.6%. Records for consecutive surplus months continue accumulating, with financial surpluses and debt reduction adding up to 0.5% of GDP. This year’s economic turnaround is remarkable – from a deficit of $454 billion in 2023 (now 1.33 trillion adjusted for inflation) to a $523,398 million surplus. This $1.85 trillion difference represents a fundamental shift.

The government continues trimming public spending, sparing only the Universal Child Allowance (AUH). The AUH grew 27%, while overall real spending dropped 29%. Support for younger citizens remains strong, even in a challenging year. However, capital transfers to provinces have nearly disappeared (down 97%), and current transfers decreased by 68%.

Retirees and pensioners contain

ue bearing much of the cuts, representing a 24% reduction. Will older citizens gain recognition in Argentina’s future economy? As we approach 2025, we wonder if a state without investment is sustainable. Real direct investment represents 15% of spending cuts, but if public-private partnerships succeed, the answer may be yes. Tariff adjustments account for 10%, while social programs and wages contribute 11% and 8%, respectively.

Paradigm Shift in Argentina’s Economy
Fiscal surplus without a default is rare. Adapting to this new Argentina is crucial for sound decision-making. The landscape has changed, and so have its players. The initial phase of the tax reform is complete, marking another win for the government as dollar deposits reach levels unseen since Argentina’s convertibility era.

Economic Growth: Indicators, Recovery, and Activity

Argentina’s economy is growing rapidly. October’s data confirm this trend; the previously predicted growth is now a reality. The SME Industrial Production Index (IPIP) rose 4% in October, nearly reaching November 2023. Utilization rates also increased from 60.6% in September to 62.3% in October.

RIGI (Revenue-Generating Investment) Initiatives
RIGI is impacting, with funds directed toward projects like a billion-dollar mining investment in San Juan. The agricultural sector is picking up, and more industries are benefiting. For instance, the sunflower industry saw export volumes for oil and byproducts reach levels not seen in two decades.

A recent presidential decree established future asset mortgages, allowing financing for new or unfinished projects. This paradigm shift could help revive Argentina’s struggling real estate sector.

Deregulation and the Economy

Deregulation and day-to-day life are increasingly intertwined. The government announced measures to facilitate international purchases, raising the courier limit from USD 1,000 to USD 3,000 and eliminating import duties on purchases under USD 400 (only VAT applies). This should reduce costs, enhance domestic competition, and directly benefit consumers.

Postal and courier services deregulation is underway under decree 1005/24, making the sector accessible to any entity without an authorization process. Individuals can also operate in urban messaging without documentation or proof of vehicle ownership. The move enables full digitalization of telegrams and certified documents, extending remote digital signature benefits to the postal business. Minister of Deregulation said, “Removing vehicle verification in urban messaging allows any actor to operate as a delivery point and courier, supporting e-commerce development and creating additional income opportunities.”

The government is also pushing for cultural neutrality. The Ministry of Human Capital is reorganizing public buildings to ensure political neutrality and respect for diverse viewpoints.

Inflation and Wage Recovery in Argentina

Monthly wage gains outpace inflation, relieving households after a challenging year. September’s 4.7% wage increase nearly reached November 2023 levels. This wage recovery impacts poverty directly. According to UTDT nowcasting, poverty is estimated at 49% for May-October, with extreme poverty dropping to 15.2%.

Inflation Trends

October inflation hit a low of 2.7%, the lowest since November 2021, nearing the 2% crawling peg rate. With three-digit annual inflation (107% so far this year) seemingly fading, the 2% crawling peg rate may soon become an anchor.

Core inflation stands at 2.9%, goods at 2.1%, seasonal items at 1.4%, regulated prices at 2.7%, and services at 4.3%. Notably, a record number of basic products saw price drops.

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Actionable for Investors and Decision-Makers

Where to Begin? Repeating last week’s approach could be beneficial:
The country risk is falling, with the lagging indicator confirming public account recovery. The government is celebrating a sharp drop to 769 points (from 850 last week), sparking rumors of public debt refinancing. The virtuous circle appears to gain momentum, with the market snapping up Argentine assets, from stocks to hard dollars. The market seems aware that extraordinary returns may soon disappear, rushing to buy and pushing the Merval to nominal highs.

Weekly Driver? Beyond routine positive news – inflation down, currency gap narrowing, Central Bank reserves increasing – President Milei is making headlines in the U.S., and Elon Musk is drawing attention on Twitter (X).

Geopolitical Perspective
With Trump’s win and President Milei’s relationship with his administration, Trump’s Secretary of State, Marco Rubio, highlighted the importance of U.S. support for Milei’s IMF debt restructuring efforts. Easing Argentina’s $44 billion IMF debt could provide crucial economic relief, as stated in his comments:

Are Argentine sovereign bonds a buy? The market is adjusting with inflation and long-term rates nearing 2.4% for peso-denominated assets. CER bonds remain attractive, but for how long?

With monthly rates below 3% and the 2% crawling peg seemingly high, where should we put our pesos? Locking in long-term rates at 2.5% may seem attractive but has risks; inflation coverage plus 6%/7% may be more appealing.

Is Argentina Still a Buy?

Goldman Sachs views Argentina as the only regional country with a fiscal surplus and a healthy debt-to-GDP ratio, indicating further opportunities for return. As always, Argentina’s risks are not for the faint-hearted.

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Brief Reflection: Argentina’s Economic Momentum in 2024

Argentina’s economic landscape is filled with promising developments week after week. As Argentines, we’re naturally excited – seeing our country in the global spotlight still feels surreal. Who would have believed this economic transformation was possible just a few years ago?

There’s still a long road ahead, but expectations, perspectives, and the much-desired economic reality seem to improve each week. Gone are the days of a 50% currency gap, a country risk score over 1,200, and endless economic contraction. Today, wages are recovering, economic activity is growing, inflation is on the decline, and the exchange rate gap is gradually closing. And the dollar? It’s in the news only because the strong peso is beating it.

Challenges Remain: Poverty and Economic Anchors

Let’s not forget, however, that poverty remains at 50% – the economic challenges are far from over. Once a significant achievement for the government, the currency anchor appears to be reaching its limit. This development places the government squarely in the market’s focus, closely scrutinizing each move. Yet, the current exchange rate landscape is vastly different from a year ago. In a climate where pesos are scarce, the lower bound has become more important than the upper bound, indicating a shift in how the market views devaluation risks.

Despite the exchange controls, the market no longer anticipates a devaluation, and it's watching next year’s currency flows to gauge where the convergence between the MEP and official rates might settle. The prevailing question is the fate of the crawling peg and, beyond that, what the dollar’s trajectory will look like post-exchange market liberalization. Can the strong peso sustain its position, or will Argentina’s national currency face new challenges? While a negative exchange rate spread remains a possibility, this is Argentina, and with exchange controls, any scenario is plausible.

Increasing Competitiveness Through Import Liberalization

The government is working to enhance Argentina’s competitiveness by liberalizing imports, demonstrating an awareness of the critical need to lower costs. However, the "Argentine cost" – the high domestic production expenses – is a multi-faceted issue, requiring a non-linear path for reduction. While export liberalization is also progressing, not every sector has experienced its benefits yet. President Javier Milei’s recent announcement regarding a potential free trade agreement with the United States is a notable example of this forward momentum. He stated, “The elected government feels much more comfortable working with me than with other governments, which has commercial and financial implications.” A trade agreement with the world’s largest economy would have immense implications for Argentina, not fully explored here. Yet, as Donald Trump and Elon Musk – two of the world’s most influential figures – closely watch Argentina, the country stands at an international crossroads.

Will Argentina’s Financial Gains Translate to Real Sector Benefits?

The revaluation of Argentine assets continues, sparking the question of whether financial gains will start impacting the real sector. As Argentina’s risk premium decreases, corporate profits should naturally follow, potentially attracting new entrepreneurs eager to compete with tighter margins. The question is whether Argentina’s traditional business community will adapt to a country with fewer associated risks or if new players will step up.

For Argentina to thrive, it needs a business environment that resembles a smooth highway rather than a pothole-ridden road. With recent improvements, Argentina appears to be heading in that direction. Today, the answer to whether Argentina can sustain this economic growth is optimistic—almost certainly yes.

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Nau Bernués
Founder, ArgenGrowth

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