Dear ArgenGrowther,

You went on a two-week vacation with dollars, and your purchasing power in pesos has diminished again; the dynamic of the last few months remains firm. This new short week was not as stable as the previous one, with a lot of movement in country risk and very good financial numbers.

Financial ArgenGuide: Long Live the Peso

Data:

• USD MEP: -1.5%

• Country Risk: 1306; -9.52%

• AL30: +3.55%

• BCRA (Central Bank of Argentina):

  • Purchased foreign currency amounting to USD 1.032 million.

  • Increased Reserves by USD 1.618 million in the last week. Currently at USD 28,763 million.

• March 2024 Revenue: 7,725,459 million; +230.6% year-over-year.

  • VAT: +267%

  • PAIS Tax: +1552%

Now, what does all this mean?

Positive or negative? Spoiler alert: without a doubt, the abrupt drop in country risk is very positive for the country; however, the drop in revenue in real terms is not.

Dollar. Is it time to change the title of this section to The Strong Peso? The peso's appreciation seems to have no ceiling in a context where the early corn and soybean harvest begins to enter. During the second quarter of the year, we will have the strong liquidation of agro-dollars, suggesting that the strong peso dynamics will continue (the dollar is no longer talked about).

As we have been mentioning, the strong peso still has a lot of room to continue appreciating if we look at it in historical terms. To the usual agricultural exports, it seems that we should start adding dollars from the Oil & Gas industry, which would imply an additional income of dollars that would put more pressure on the appreciation of the peso.

More exports = Stronger peso

It is worth remembering that the dynamics of imports are still far from being normal, so we still have a question to be unveiled in the coming months on how they will impact and if they will be able to counteract the abundance of dollars that are coming. The currency runs have been left far behind, and today we begin to see where the dollar was in 2016/2017/2018 in real terms.

The scenarios are not comparable given the destroyed wages; however, it seems that we have left behind the "high" exchange rate of the last years to go to an equilibrium exchange rate that oscillates between what was the average Multilateral Real Exchange Rate 16/17/18 (low) and 21/22/23 (high). We still have a way to go to find peso stabilization, fundamentally the liberalization of exchange controls, and the adjustment of relative prices to have less volatility, so we will probably see 2024 with uncertainty in this aspect. Despite the difficult context we live in, the government seems to have been able to anchor expectations, and the market believes in a devaluation without an exchange rate jump and quite in line with the 2% crawling peg.

Devaluation without exchange rate jump = Greater predictability

Greater predictability = Improvement in economic expectations

BCRA Reconstitution. Full steam ahead, in just 3 days the BCRA managed to buy more than a thousand million dollars and recompose reserves by more than sixteen hundred. Without Bopreal tenders in the last two weeks, we will probably have a new tender next week.

Greater dollar purchase = Greater monetary issuance.

On the other hand, there are strong maturities at the end of the month (TV24 and TDA24), so we will have an active month in terms of tenders and possibilities by the economic team to continue setting the pace in terms of rates and recomposition of BCRA liabilities.

The strong recomposition of the BCRA balance sheet plus the surplus context of fiscal accounts, which seem to have come to stay, is beginning to be seen in the Country Risk (-9.5% this week); one of the main variables monitored by the government because in 2025 the government will probably have to seek financing in the international debt markets.

Lower Country Risk = Lower interest bonds rates

Lower interest bonds rates = Cheaper financing

Lower activity = Lower revenue. Although we see that revenue rose 230% year-over-year, when evaluated in real terms (inflation-adjusted), we see a drop of approximately 15% (approximate because the inflation data for March is not final, estimated at 11%), against a February with a year-over-year drop of 9% in real terms. Evaluating the first quarter of the year, we reach an approximate real year-over-year contraction of 10%. Much of this drop in revenue is explained by the great drop in economic activity we are experiencing.

From the revenue, very interesting data emerge; for example: the PAIS tax, one of the most recent, accounted for 9% of the revenue (strongly aided by the Bopreal tenders) and increased by 320% year-over-year; another significant increase occurred in Export Rights (DEX) with 62.5%, and it is worth noting that both taxes are not shareable with provinces. We can also observe that taxes related to employment were reduced by 21% year-over-year, which could be due to both a decrease in workers' incomes and a reduction in total employment. Associated with this last point, we have the profit tax revenue falling by a real 39%. VAT, one of the main taxes in the country and a symbol of economic activity, fell by 14% in real terms.

To put it into perspective, the fall in VAT revenue is only comparable to the beginning of the 2020 quarantine.

Lower revenue = Lower income

Lower income = Greater difficulty in achieving a fiscal surplus

Capital Markets - Actionables

The constant rise in hard-dollar sovereigns leaves less room for maneuvering and more limited returns, although they remain extraordinary (we continue in some bonds with yields above 20%). The stars of the last weeks, however, have been on the peso side. Investing in carry trades has paid off strongly.

The January Lecap, which had come out with an effective monthly rate (EMR) of 5.5%, is now below 5%. The market seems to price in inflation that will continue to fall and, at the same time, seeks to fix a rate (buying a bond that yields a certain rate and keeping it fixed by holding until maturity) in anticipation of a possible next rate cut by the BCRA.

I believe opportunities in sovereigns continue, as well as the opportunities for doing carry trade (a riskier alternative), closely monitoring the government and its actions with the peso.

As long as the government continues to show good numbers, the decline in Country Risk will continue its course, and the compression of rates in hard-dollar bonds will continue.

Rate compression = Price increase

Brief Reflection

A week marked by a substantial drop in Country Risk, reflecting the effective work the government has been doing to sanitize public accounts.

Expert Outlook: With the onset of the agro-dollar liquidation, we're facing a new scenario with a very strong dollar flow, likely aiding the government in further increasing international reserves. Now, the flip side of dollar purchasing will be monetary issuance and the sterilization mechanisms the government employs to continue its fight against inflation. This dynamic will play a significant part in the battle against the peso's appreciation.

On the political front, it seems the government is nearing preliminary agreements to address the new Omnibus law in view of the upcoming May Pact, which is much closer now. While political aspects have been secondary to economic direction as shown by the government so far, they are fundamental for the country to find its growth path without noise that allows for long-term planning and projection.

Given the disinflation occurring in the Argentine economy, the question remains whether the government can continue to demonstrate its expertise in a market that is increasingly understanding the economic direction and expectations. Undoubtedly, it's now more challenging to stay ahead as the market anticipates a rate cut in line with previous actions.

Argentina needs a highway for doing business, not a street full of potholes. Are we getting closer? Today, yes.

See you next week, Vamos Argentina!

Nau Bernués
Founder, ArgenGrowth

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