The government ends the repos through MRBs with interest borne by the Treasury instead of continuing to liquidate them via auctions as much of the market expected. Meanwhile, volatility remains present despite the approval of the Bases Law, Fiscal Package, Earnings, and declining inflation. Economic activity? Well, thank you.

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. Blank space (no spoilers today). The press conference left much to be desired and much market volatility to say that the week was positive. However, without a doubt, for the government, everything that happened in Congress is positive. The times ahead seem longer to meet the objectives, and the results at the speed of light seem to have ended.

Understanding What's Happening in Detail

Dollar and the Strong Peso

After the shortest week of the year, the dollar gained strength in a week with much movement and expectations. The government continues to communicate that there is no planned devaluation and that the crawling peg remains. We are still far from previous values.

To reinforce the exchange rate and anchor expectations, the government announced the second stage of the economic program: zero monetary issuance. What does this mean? The government will seek to maintain the monetary base as it is. The government is telling the market that no more pesos will be circulating, meaning the dollar will not have fuel for its fire. Week after week, something we've been affirming becomes effective and translates to the second stage of the economic program as zero monetary issuance.

Less uncertainty = Less volatility

Less volatility = More stability

More stability = Improved economic expectations

Improved economic expectations = Less pressure on the exchange rate

Everything sounds nice, but the dollar keeps rising, you might say, and yes, that's correct. It's tough (if not impossible) to know what the free dollar will be tomorrow. Still, we can analyze the circumstances and data and estimate what could happen to the currency in the medium/long term, and that's where the government is speaking to us. Did the press conference improve or worsen expectations? For now, it is reducing the medium/long-term fuel, and as both the President and the Minister of Economy stated, they are not worried about the current dollar surge. Note, the gap is not what it used to be (it went from being explained only by the country tax to over 40%), and given what was stated in the press conference (we will see this later), it seems we have restrictions for a while.

At the same time, we have moved into the third quarter of the year, which, for seasonal reasons, is the most complex for reserve accumulation and foreign exchange purchases. June already marks this with a foreign exchange sale by the Central Bank of USD 82 million (accumulated purchases in the year amount to USD 14,450 million). The government estimates that approximately USD 3 billion will be sold in this quarter, to be replenished in the fourth. Everything is according to plan, but how will the market see it?

The implied rate curve of dollar futures suggests that the market is anxious and wants short-term facts.

Public Account Recomposition

In Friday's press conference, the government announced that the economic program has completed its first stage. After eliminating the fiscal deficit (it is extreme to assert it has already been eliminated), we move to the second stage of zero monetary issuance. The anchor of the surplus as a fundamental piece of the economic program remains, and now it will present new challenges. To move to this stage, the government first had to deal with significant remunerated liabilities (RLs) that today represent less than one monetary base. Since 12/07/23, we have seen an 18% decrease in RLs, 62% real, and an 81% increase in the Monetary Base (MB) with a 16% real decrease; the RL/MB equation results in enabling other objectives (we assume the purpose of eliminating RLs is met).

Remember that a contractionary fiscal policy is now added to a contractionary monetary policy. If we add a positive real rate, we have a combo that could significantly impact economic activity. How do we get out? Will the dollars come out from under the mattress to bet on the country?

Contractionary Fiscal Policy = Less economic activity

Contractionary Monetary Policy = Less economic activity

Contractionary FP + Contractionary MP = Less economic activity

Central Bank of the Argentine Republic - BCRA

After over 20 years, remunerated liabilities (repos, Leliqs, Lebacs, etc.) have (or do not have) an expiration date. The government has started talking to banks about replacing repos with Monetary Regulation Bills (MRB).

Before diving into other topics, let's briefly explain the MRBs. MRBs are instruments issued by the Central Bank. Their main objective is to regulate the amount of money in circulation and consequently control inflation and parity against the dollar.

The Central Bank will determine the interest rate, but the cost of the rate will fall on the Treasury. Similar to how repos were migrated to Lecaps, the details of how the interests will be allocated and how they will affect the financial result are unknown. This point is fundamental since the government will not have to issue to pay the interest and can adjust the rate upwards if deemed necessary without modifying the stock of pesos. Remember that this new stage will aim for zero issuance. Although it is the same when analyzed at the aggregate government level, it substantially changes the room for maneuver whether they are in the BCRA or the Treasury. There are still many questions about its practical application and how it will affect the rest of the economic variables. Still, the feeling is that the government designed this system to be able to transfer a positive real rate for the pesos to the market without an associated cost in the BCRA impacting the stock of pesos.

In summary, they will be issued by the BCRA. They will have a variable coupon following the Monetary Policy Rate (MPR), which the Treasury assumes and impacts the nation's public accounts. The MRBs will be acquired mainly by banks. The reference rate should become that of Lecaps and not the MPR.

Zero monetary issuance = Less Inflation

Zero monetary issuance = Contractionary monetary policy

Contractionary Monetary Policy = Less activity

Less activity = Less Inflation

FOREX Restrictions

We inaugurate a section, as it seems they are here to stay.

This week, there was good news for automakers as the restriction on access to foreign exchange was relaxed from 180 to 120 days. That's where the good news ends: the Friday press conference left more questions than answers about the timing of lifting the restriction. 

Variables and indicators are being watched, but although we are getting closer to the exit, the light at the end of the tunnel never seems to arrive. The market is anxious to operate without obstacles, and this week, it was noticeable: a spicy dollar, a moving Merval, and a country risk that does not ease despite the government's legislative victory of the week. 

Yes, it seems that we will continue until the end of the year with the 2% crawling peg and the 80%-20% blend for exporters. The government continues to anchor expectations about the dollar and the associated regulations at every opportunity.

Last week, we discussed putting as a fundamental point to lift the restriction. In Friday's press conference, the Minister of Economy and the BCRA President communicated that they would resolve this issue with banks without breaking contracts. This is fundamental to restoring credibility and legal certainty associated with being in the country.

Since this second stage of the economic program is zero monetary issuance, puts are a significant obstacle in the way, as if banks exercise them, they force the BCRA to issue (More details about the puts here). The amount remains very relevant not to act.

National Public Sector

Balance of public accounts

Given the appearance of MRBs, public accounts now require additional consideration. In previous editions, we saw how revenue left us with some future questions and that spending adjustment seemed unsustainable in some aspects (and with margin in others).

We have a double effect to consider for the coming months: the already announced reduction of the PAIS tax from 17.5% to 7.5% and the interest burden of the new MRBs, which falls on the Treasury. Where will the funds come from to cover the PAIS tax reduction and the additional interest expense of the MRBs?

Fixed Income Auctions

The government continues to signal that it seeks to generate a positive real rate and took $6.0 trillion in the September Lecap (the only one with a minimum rate) at 4.25 MPR and $2.2 trillion in the December one at 4.5% MPR, again leaving out a mountain of pesos. Then, on Friday, we saw a part explaining why more repos were not migrated through this scheme. Some dollar-linked coverage begins to materialize, with the government taking $0.2 trillion at a rate of -8.79%.

The auction surplus of $2.7 trillion, in relation to maturities, is used to buy dollars to pay the upcoming debt maturities in July.

The Lecap S12L4 explains that there are maturities for $1.05 trillion in the next auction on July 10. With so few maturities, there is another window to obtain positive net financing.

Economic Activity

The first quarter of the year confirms the depth of the crisis, with a -5.1% year-on-year drop in economic activity and a -2.6% compared to the previous quarter. The EMAE of April seems to show a small light, but it is still tough to see, with a -0.1% monthly and -1.7% y.o.y.

In May, it seems that the rebound was not there for the industry; according to the index prepared by Orlando Ferreres, May was worse than April. Hard. Now for CAME, in May, we see a 5.3% month-on-month seasonally adjusted growth for SME manufacturing activity (we ignore the -19% year-on-year not to drown ourselves).

According to JP Morgan's high-frequency indicators, the reds cease to be furious and are more orange and yellow, indicating a slight rebound in activity.

Inflation

The government confirmed that it will not adjust tariffs in July, giving some respite to the population hit by the crisis. This will also impact the economy's disinflation, and we are getting closer to reaching the much-desired 2% core that matches the crawling peg. With the core running at 0.4% weekly, the end of dollar inflation at the aggregate level seems nearer.

The Street

According to INDEC, unemployment rose from 5.7% to 7.7% in the first quarter of the year, which seems very low compared to previous crises (probably because social assignments play a powerful role in the EAP).

With the approval of the fiscal chapter, much of the street gets some relief, especially for those monotributistas who, after being relegated, can now bill $68 million annually. This is a great relief for a good part of the population that has long demanded an update on the limits. At the same time, most indicators show a real wage improvement again in May.

Capital Markets - Actionables

Amid volatility, the search for coverage begins to be reflected in dollar-linked securities, which had a very good week. The market is looking for facts and liberalization of the restriction, and the government responds without dates.

For those who believe in the government and want to bet on the carry, selling at these values and being short on the gap can lead to an extraordinary profit with high exchange risk. Does the trade-off pay? The higher the gap, the greater the incentive to sell dollars and carry trade; timing here is everything.

The Merval continues with much volatility, and the approval of the Bases Law seems already priced in. Given the new stage beginning, it may be interesting to position medium/long-term (remember, investing in Argentine stocks is not for the faint-hearted). Grupo IEB synthesizes it very well in this traffic light, and one of the country's leading financial groups sees good signals for Merval in the medium term. They also summarize it very well with one word in their weekly report: anxiety.

The amortization and interest payment statement for Bonares has already been released so that we will have fresh money in the market next week. Getting ahead and positioning in bonds with this drop can be an opportunity if you seek to reinvest the money after the payment. Suppose the fiscal surplus is not negotiated, and good investment news and fresh money are obtained (without urgency for bonds). Eventually, country risk will adjust, and bonds will see it reflected in a lower yield and better price.

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Brief Reflection

We see that the government is making progress, but at the same time, the market is overcome by anxiety, leading us not to be able to affirm with certainty that we saw a positive week. Especially after a press conference that gives a taste of little. Was the path marked? Yes. Are there doubts? Too many.

Zero monetary issuance as part of the economic program will help anchor expectations further, but can expectations be eaten? Reaffirming a new contractionary economic policy toward activity makes me wonder if the tourniquet to activity has any safeguard they are not communicating. Remember that one of the government's pillars is the fiscal surplus, a contractionary fiscal policy toward activity. We are still in intensive care, fresh funds do not appear, and the rebound seems not to either.

A victory already priced in. After arduous months and back and forth, the government finally managed to pass both the Bases Law and the fiscal package in the House. The President has already stated that new laws and a new stage of deregulation are coming, bureaucratic seems in this first instance, leading the country to pave its way for doing business without so many potholes on the road.

We mentioned that we had to follow our giant brother Brazil closely, and this week, this mention gained strength again. The devaluation of the Real does not stop and puts even more pressure on the Argentine peso and our country's competitiveness.

Although we are getting closer to lifting the restriction week by week, the agony seems never-ending. Correcting the foreign exchange market imbalances is essential so the country has healthier fundamentals to grow again.

Argentina needs a highway to do business, not a street full of potholes. Are we closer? Today, I want to believe 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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