Goodbye Spread, Hello European Union

Argentina’s financial landscape is shifting dramatically. The convergence of the MEP rate with the official exchange rate is a milestone—achieved for now. With the spread gone, attention shifts to new challenges. A trade agreement with the European Union (EU) opens opportunities, marking geopolitics as a key priority. Meanwhile, the PAIS tax fades away, signaling another step in fiscal realignments.

Dear ArgenGrowther,

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. Brief Reflection

2. Data

3. Understanding What's Happening in Detail

4. Actionable Items

Brief Reflection: Leadership in Action

This week, Argentina paused in the markets but pushed forward with macroeconomic adjustments. The Central Bank lowered interest rates again, demonstrating its control over monetary policy and staying ahead of the curve. Recent currency appreciation has allowed these rate cuts while the dollar remains stable.

With the exchange rate spread now at zero, questions arise:

• Will we see a relaxation of exchange controls to fuel the dollar?

• Or is Argentina moving toward a negative spread, setting itself apart globally?

Long-term policies also made headlines. The Mercosur summit formalized a free trade agreement with the European Union, promising job creation, expanded trade, and international prosperity. Meanwhile, China approved Argentine wheat imports, presenting major opportunities for the agriculture sector.

Additionally, Ignacio Abuchdid, president of Grupo IEB, highlighted a threat effect of the rise in publicly traded assets. Grupo IEB estimates this to be USD 236 billion from energy companies alone, including USD 18 billion. This wealth effect—a direct increase in national and individual wealth—can boost consumption, investment, and economic stability. It’s a virtuous cycle just beginning.

The government aims to reduce national taxes to just five, lowering Argentina's living costs. This is merely a proposal, and there's a long road ahead before it becomes a reality. Argentina needs a highway for doing business, not a pothole-filled road. Are we getting closer? Today, we cautiously say "yes."

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Data Highlights

Is Argentina's Economic Shift Positive or Negative?

Spoiler alert: It’s positive but with caution. The Merval is at nominal historical highs, bonds are peaking, and country risk remains steady. The Central Bank continues its consistent currency purchases, signaling stability.

Detailed Analysis: Argentina’s Economy in Focus

Exchange Rate: The Peso’s Surprising Strength

Argentina’s exchange rate spread has hit an unprecedented milestone: zero. The MEP (Mercado Electrónico de Pagos) rate has dropped below ARS 1,050, a figure unimaginable a year ago. Meanwhile, the wholesale spread hovers at just 3.5%, reflecting a rapid adjustment in the country’s financial markets.

What’s driving this change? Eliminating the AIS tax has been a game-changer, eliminating key distortions that fueled the spread. However, the question remains: Will Argentina take the bold step towards a negative spread, as predicted in recent weeks? Such a move could redefine global perceptions of Argentina’s financial system, positioning it as uniquely dynamic and unpredictable.

For businesses and investors, this shift is monumental. A stable or narrowing spread simplifies forecasting and reduces risks associated with currency fluctuations. This newfound stability provides fertile ground for economic planning and investment, signaling a shift toward greater predictability in Argentina’s financial environment.

Public Accounts Recomposition: A Leaner Government

The government is making significant strides in fiscal discipline, extending cost-cutting measures to state-controlled entities. A prime example is YPF, where luxury perks for executives are being curtailed. The company’s decision to sell off personal-use aircraft for USD 30 million underscores a commitment to austerity.

Beyond optics, these measures highlight a broader strategy: reducing inefficiencies and redirecting resources toward critical sectors. The government aims to maintain fiscal sustainability without compromising essential services by streamlining public expenditures.

In parallel, the National Tax Revenue data tells a compelling story. November saw a +4.3% real revenue increase, marking a turning point after five consecutive months of year-over-year declines. Excluding extraordinary revenues from tax amnesties and special regimes, growth remains positive at +0.8%.

However, indicators such as IVA (Value-Added Tax) collections and debit-credit transactions suggest caution. IVA data reveals a slight slowdown in economic activity, while debit-credit usage dropped by 1.7%, hinting at potential challenges ahead.

Despite these concerns, fuel and export duty revenues showed robust growth, offsetting weaknesses in other areas. As the PAIS tax revenue dwindles—contributing USD 17.3 billion over five years—Argentina faces the critical task of finding alternative revenue sources to fill this gap. This is especially relevant for 2024, where the tax’s absence represents a shortfall equivalent to three GDP points.

On the spending side, the government continues to shrink the public sector’s footprint. By year-end, public sector expenditure is expected to drop to 33.5% of GDP, a remarkable 7% reduction from late 2023. While still higher than the early 2000s level of 25% GDP, this trend signals a commitment to long-term fiscal sustainability.

Central Bank: A Calculated Approach to Monetary Policy

The Central Bank of the Argentine Republic (BCRA) has taken decisive action, reducing the TNA (Tasa Nominal Anual) rate from 35% to 32% and active repo rates from 40% to 36%. This move reflects growing confidence in Argentina’s inflation trajectory and the government’s ability to manage macroeconomic stability.

Interestingly, these rate adjustments have not affected the foreign exchange market. The dollar has shown minimal movement, reinforcing the perception that Argentina’s monetary authorities are effectively ahead of the curve.

The implications for businesses and investors are clear: Lower borrowing costs and improved access to credit could stimulate investment and economic growth. However, vigilance remains essential, as the global economic environment remains unpredictable.

Economic Activity: A Mixed Bag of Performance

Argentina’s economic sectors are experiencing varied fortunes. The construction industry, a key barometer of domestic investment, continues to struggle. It recorded a 24.5% year-over-year decline in October and a 4% monthly drop. These figures underscore deep-seated challenges in a sector vital for infrastructure development and job creation.

The industrial sector paints a slightly less bleak picture, with a -2% year-over-year decline and a -0.8% monthly contraction. While these numbers indicate stagnation, they are less severe compared to construction.

Conversely, the mining sector stands out as a beacon of resilience. It posted +3.6% year-over-year growth, although monthly performance dipped by -1%. Retail sales also show promise, with a +3.9% monthly growth offsetting a -1.7 % year-over-year decline.

One of the most exciting developments is the Gasoducto Perito Moreno expansion, which will begin under the RIGI (Regimen de Iniciativa de Gestión e Infraestructura). This USD 500 million project marks Argentina’s first public infrastructure initiative driven by private investment. Enhancing gas transport capacity is expected to save USD 567 million annually, underscoring the potential of public-private partnerships to drive economic growth.

Deregulation: Cutting Costs and Reducing Bureaucracy

The government continues to tackle inefficiencies with bold deregulation measures. Recent actions include requiring foreigners to pay for healthcare and education and implementing stricter border controls.

Decree 1077/24, signed by President Javier Milei and Minister Luis Caputo, repeals industrial park subsidies established under previous administrations. This move is part of a broader strategy to eliminate discretionary government spending, which has often been a breeding ground for corruption.

Federico Sturzenegger, Minister of Deregulation, emphasized the need for consistency and fairness in national policies. He criticized past practices of selectively allocating resources to certain provinces without clear criteria, calling them a misuse of taxpayer funds.

This commitment to transparency and efficiency aims to reduce Argentina’s bureaucratic burden, lower business costs, and enhance the country’s competitiveness on the global stage.

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Merval and Bonds Reach New Highs

This week saw the Merval index and bonds hit record highs, while country risk indicators and longer-term sovereign bonds experienced slight declines. After a period of rapid gains, the market paused, offering stability.

Peso Rates Align with Policy Adjustments

The Central Bank’s Monetary Policy Rate adjustment realigned fixed peso rates, with increases later in the week keeping TEMs (Effective Monthly Rates) relatively steady. Thanks to the declining MEP rate, investors engaged in carry trades reaped benefits.

Vista’s Bond Issuance: A Highlight

Vista raised USD 600 million with a 10-year bond at a 7.625% interest rate, showcasing continued confidence in Argentina’s corporate debt market.

Opportunities Ahead

With sovereign bonds offering attractive returns and new issuances like Vista’s emerging, now is the time to stay vigilant for profitable opportunities across both sovereign and corporate debt markets.

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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