A week full of investment announcements that could bring fresh dollars to a country struggling to stay afloat. Will they arrive before it drowns? The government keeps accelerating, while the market remains skeptical; both sides remain at odds in a week marked by external turbulence and government comments during a private meeting.

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 amidst the external storm. It's hard to argue it wasn't a positive week when the largest investment in history was announced, and the RIGI is beginning to play a strong role. When will we see its impact? Argentina needs fresh dollars, and the market knows it.

Understanding What's Happening in Detail 

Dollar and the Strong Peso. It was a week with the dollar practically neutral but with significant movement in between. After the government met with the main market ALyCs, the dollar dropped sharply, only to recover the loss over the next two days. Our giant neighbor Brazil puts additional pressure on us with a devaluation exceeding 18% this year. Adding to this is a roughly 30% drop in soy prices since the government took office, creating an explosive mix for the peso. Beyond local implications, the world plays a role, too. How does it play in this case? So far, with crosswinds, the decline in commodity prices undoubtedly works against us, as does the loss of value in emerging market currencies. A global recession would create a very complex scenario for emerging from our recession. However, we might add that the US Federal Reserve could start a cycle of lowering interest rates, which could be favorable for potentially returning to the debt markets.

Lower interest rates in the US = Higher probability of better conditions for issuing debt

Greater uncertainty = Greater volatility

Greater volatility = Less stability

Greater devaluation in emerging markets = More pressure on the exchange rate

Fewer dollars = More pressure on the exchange rate

Fewer dollars offered = More pressure on the exchange rate

On the other hand, the gap remains stable with little government intervention (considering an intervention of more than USD 1.5 billion was rumored), hitting a two-month low. Estimates indicate an intervention of approximately USD 250 million. Given the strong seasonal component and a very cold winter, the feeling is that the government is very satisfied with what has been achieved.

Remember that this quarter is seasonally “bad” for reserve accumulation. It’s not because of various government measures that dollars stopped being bought and reserves accumulated, but rather due to something that happens annually to varying degrees. The government expects to lose about USD 3 billion in reserves in the year's third quarter. Many fatalists are circling, claiming the process of reserve accumulation is over, and the government is finished; putting things in their proper seasonality and perspective is important.

Recomposition of Public Accounts 

In phase 2 of the government’s economic plan, reserve accumulation is not a priority, especially given the seasonal component of this moment. Zero monetary emissions are a priority. Although there are many questions about how the plan will be implemented, the government has shown strong conviction. However, the surplus and the reconfiguration of state revenues still have many unanswered questions.

For now, various organizations and funds that were a source of government expenses are being closed. The Fiduciary Fund for the Recovery of Sheep Activity (FRAO) was closed this week. To put numbers into perspective, this fund managed 3 billion pesos per year, and even though it operated for 20 years, no sector improvements could be verified.

On another note, the IDB confirmed the approval of USD 647.5 million in financing, with USD 2.195 billion remaining for the rest of the year. This provides breathing room for a country in dire need of fresh dollars. Could these be the first fresh dollars from a series of positive announcements? From using gold and bonds as collateral to investments through RIGI, with tax amnesty in the mix, we might have months of dollar inflows that bolster reserves. Amidst such uncertainty, the government announced it already has the money for sovereign debt payments until July 2026 (yes, 2026). It tells the market it doesn’t need to seek debt until at least 2026, much more time than the market imagines.

Central Bank of the Argentine Republic - BCRA

Reserves. Gross reserves fell by USD 2.6 billion in July, almost entirely explained by the payment of bonds worth USD 2.5 billion. Given these two data points, we can say that in a “bad” month for reserve accumulation, the result is quite "good." Especially when we see that import payments are practically normalized, we will continue closely monitoring one of the main indicators of strengthening public accounts and “tranquility” for lifting currency controls.

National Public Sector 

Revenue. State revenues seem to have hit a floor in March/April and continue to recover month by month. July's revenue shows a real monthly increase of 4.6% and recovers annually after June's brutal 13.5% drop, with July’s revenue only falling “just” 8% in real terms. Once again, the stars of growth have been the PAIS tax and export duties (DEX).

Economic Activity 

Retail sales continue to fall, making us doubt the economy's recovery and whether there is any light at the end of the tunnel, with a -1.6% monthly and -15.7% year-on-year drop in July, indicating retail sales have not yet hit bottom.

On the flip side, we see investment announcements. RIGI is taking off, and the largest investment in history was announced in Río Negro: Petronas, together with YPF, will invest USD 30 billion (yes, more than the country's current gross reserves) to build a liquefied natural gas (LNG) plant. IMPRESSIVE. To be developed in the Gulf of San Matías, this project will be key to the country's energy matrix. It will position Patagonia as a fundamental player in the global LNG export market.

Just a few weeks after the Bases Law was approved, five projects worth USD 39 billion have already been confirmed. Madness. Will we ever move from expectations to investments? We keep chasing the carrot, now with names and figures:

• YPF-Petronas USD 30 billion

• BHP/Lundin (copper) USD 5 billion

• BHP/Lundin (copper) USD 3 billion

• TGS (pipeline) USD 700 million

• Sidersa (metallurgy) USD 300 million

The country’s future is energy, and the trade balance knows it. Exports grew 29%, and imports fell 54%, marking the best trade balance over two decades.

A good chart from the consultancy firm Economía y Energía dissects the result. This is just the beginning. The energy trade surplus is expected to be around USD 5 billion this year and rise to USD 7.3 billion next year.

In addition, indicators are beginning to show signs of ending the recession. While it still needs confirmation, green shoots started appearing in the year's second quarter. The Composite Coincident Activity Index, ICA-ARG, showed a monthly variation of 0.8% in June, accumulating its third consecutive increase.

Inflation

The government expects inflation in September to start with a 0 or 1. Are they optimistic, crazy, or both? Monthly CPI metrics already show convergence of general inflation towards core inflation and towards the crawling peg. Will the exchange rate appreciation end here, and will we start seeing inflation below the crawling peg?

This inflation decrease helps wages more easily outpace inflation and continue recovering.

Capital Markets - Actionables

The market remains skeptical. The announced investments and good news seem to fall on deaf ears. While much of the volatility is Argentina's own doing, the world didn’t help this week, and the US stock market had its worst daily performance since the pandemic. The rate hike in Japan seems to have been the trigger, though the US unemployment data reignited fears of a recession. This recessionary outlook in the US, the world's locomotive, significantly impacts all markets.

Argentine stocks continue to suffer amidst global volatility, and the exit from risky assets puts Argentine assets in a better entry scenario for those who want to invest in the country and bet on the government's success in the coming years.

The Lecaps curve increasingly prices in lower inflation, so if this scenario plays out, buying long now will pay off well. But if the government’s scenario doesn’t materialize, a very low fixed rate could be confirmed. Here, the scenario is analyzed week by week.

Bonds recovered after the government communicated it had the money for interest and amortization payments until January 2026. However, they caught up in the global risk-off sentiment and fell on Thursday and Friday. With a government committed to paying its obligations and the capacity to do so until at least January 2026, at these prices, it might be attractive to go medium-term for extraordinary returns, assuming high risk in a complex world.

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Brief Reflection 

This is a week of good news, with the RIGI already attracting significant investments. We continue to wonder: Will long-term measures help us get through the short term when we’re barely staying afloat? We need to survive in the short term for these investments to become a reality, and for now, that's what most of the country is doing—surviving.

On the financial side, the government continues delivering good news and buying time. Along with the elimination of repos and puts, peso maturities are becoming longer, and there’s a strong cushion at the BCRA to face potential setbacks. Reserve accumulation has a seasonal component but not much more; the government is very comfortable with the numbers and continues making a difference by buying cheap and selling high.

Argentina's future seems grand and energetic. The BCRA president stated that the energy balance will turn positive in August, following the seasonal deficit in June-July, and will be USD +400M in September. This seems to be the beginning of what is expected for the country in the coming years. Will the prediction of another “field” pulling with equal-caliber exports by 2030 come true? An eternity in Argentine time. First, the investments must arrive and materialize. It's already being said that much of what YPF-Petronas announced will be validated next year (I'm skeptical about this for now). How expensive is the dollar if everything being said is true?

In the meantime, we’ll have a tax amnesty, which, according to reports, is doing better than expected by the government. This will bring extraordinary revenues for the government to continue consolidating the fiscal path and recomposing public accounts.

Provinces adhering to the RIGI are beginning to shape a new country. We are facing a historic opportunity to change the past paradigms that led to stagnation and recurring crises. The gain in competitiveness will not come from a devaluation but from a tax reduction that will translate into real fiscal competitiveness in a globalized world in a country with great natural resources and incredible human talent (how else could we survive in such a changing country?). Now, monetary policy has accelerated, and lifting the currency controls seems closer, although the gap is at 40%. Correcting the foreign exchange market imbalances is essential for the country to have healthier foundations for growth. 

Argentina needs a highway for doing business, not a pothole-filled street. Are we getting closer? Today, we continue to believe so.

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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