The tug-of-war over the dollar is on everyone’s lips, but fresh dollars are on no one’s. The government accelerates, but the market distrusts. While wages recover, the industry is destroyed. Disassociated, the government and the market set the pace week by week in a contest that seems to have no resolution in sight.

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. This week marks a small triumph for the government over the market in this ongoing weekly struggle (it couldn’t be otherwise in Argentina). Deregulations are starting to pick up pace; when will we see their impact? Meanwhile, it’s the second consecutive month with wages outpacing inflation, providing some relief. Would you like to see any additional data? Let me know which ones.

Understanding What's Happening in Detail 

Dollar and the Strong Peso A week with some calm in the dollar, in the tug-of-war between the government and the market. The reduction of the “country tax” announced by the government is getting closer, and the government’s bet on the convergence of parallel dollars with the official one is more valid than ever. Today, the importer dollar stands at around $1,100 compared to a MEP/CCL of $1,320, putting the importer gap at around 20%. Will the MEP decrease if the country tax is lowered? Logic would say yes, but this is Argentina.

Currency Controls 

Week by week, we see fewer regulations in the exchange market, which is an excellent sign. This week:

• Payment terms for imports were relaxed.

• The amount exempt from being liquidated for service exports was increased from USD 12,000 annually to USD 24,000. It’s worth noting that this measure was implemented after a user on the social network X (Twitter) asked President Javier Milei through a post to review this limit. Two days later, the announcement was made. The government is responding to explicit requests from people through social networks, and we are in a new era.

• Restrictions to access MEP and CCL dollars were removed for those who accessed the ATP during the pandemic or received state subsidies.

In line with what the President has stated, only the convergence of inflation to 2% remains to lift the currency controls completely. I also believe the government is waiting to strengthen reserves and resolve the debt issue with the IMF to lift the controls in a more controlled context.

Less uncertainty = Less volatility

Less volatility = Greater stability

Greater stability = Improved economic expectations

Improved economic expectations = Less pressure on the exchange rate

More dollars = Less pressure on the exchange rate

More dollars offered = Less pressure on the exchange rate

Recomposition of Public Accounts 

Central Bank of the Argentine Republic - BCRA 

Swaps are no longer in place, and monetary control moves to a new stage with new measurements. The Central Bank provided specifications through a communiqué, setting a target for the Broad Monetary Base (BMB) that should not exceed $47.7 trillion (9.1% of GDP) in the long term, the value it had as of April 30, 2024. With the elimination of swaps, the BMB is equivalent to $21 trillion. It will gradually increase according to the BCRA's monetary programming models, anticipating continued remonetization throughout the second half 2024.

National Public Sector 

LEFIs are already operational, and the government accumulates pesos in the BCRA. With measures impacting revenue this week and the reduction of the country tax on the horizon, doubts about the sustainability of the fiscal surplus are on everyone's mind.

Contractionary Fiscal Policy = Lower economic activity

Contractionary Monetary Policy = Lower economic activity

Contractionary Fiscal Policy + Contractionary Monetary Policy = Lower economic activity

Auctions 

The last auction indicates that the government no longer acquires cheap money as before, and the surplus pesos are not as abundant. They obtained $4.43 trillion with offers for $4.72 trillion. Again, the amount taken exceeded the maturities, so the Treasury account at the BCRA continues to grow, this time adding $3.76 trillion.

The rates on CER-adjusted bonds are no longer negative, and the rates on Lecaps validated an Effective Monthly Rate of 4.20% for November and 4.5% for March. If inflation decreases, there is a very interesting positive real rate here.

Economic Activity 

Industrial production seems to have not hit bottom yet. According to the IPI-OJF, it fell 11.2% year-on-year, and the seasonally adjusted monthly measurement fell 0.4%. The ocean’s bottom is deep. The strongest annual declines were in machinery and equipment, non-metallic minerals, and basic metals.

Deregulations 

There is significant movement here. We have two key parts: warrants and what the president mentioned on Sunday at the 2024 Rural Exhibition. 

Let’s talk about warrants. What are they? A warrant is a document certifying a producer's ownership of a certain good. This instrument converts a physical product into a financial instrument. The financial instrument can then be used as collateral to obtain credit, thus reducing financial costs.

Here’s a practical example for a grain producer. Suppose a grain producer has a large quantity of soybeans stored, waiting for the right time to sell, but needs financing to prepare for the next harvest. This producer can use warrants as follows:

• Warrantization of Soybeans: The producer issues a warrant on their stored soybeans. This warrant certifies the ownership of the soybeans, converting them into a financial instrument.

• Obtaining Credit: Using the warrant as collateral, the producer approaches a financial institution and can get a loan. This loan provides the necessary capital to invest in seeds, fertilizers, and machinery for the next planting season.

• Financial Flexibility and Mobility: While the soybeans remain stored and warranted, the producer is not obligated to sell them immediately. They can wait for more favorable market prices, maximizing flexibility and alternatives.

• Deregulation and Agility: Thanks to the liberalization of the warrant market, the producer can issue this instrument electronically and trade it without restrictions on open platforms, using electronic signatures. There’s no need to go through complicated bureaucratic processes or rely on a limited number of authorized companies.

• Certification and Trust: If the bank or creditor requests, a certifying company can verify the existence and quality of the stored soybeans, ensuring that the collateral is valid. For the product to be successful, this process must be simple and low-cost, avoiding high commissions and unnecessary paperwork.

Benefits for the Producer

• Quick Access to Financing: The producer obtains the necessary capital without selling their product immediately.

• Better Financial Planning: They can better plan their future investments and operations without worrying about a lack of liquidity.

• Maximizing Income: By waiting for the right moment to sell the soybeans, the producer can achieve better prices and higher income.

In conclusion, this example shows how warrants can transform the financial management of grain producers. They allow them to access credit quickly and efficiently, increase their flexibility, optimize their income, and improve their competitiveness in the market. The deregulation and simplification of this financial instrument are key to boosting the agricultural sector and other productive sectors.

Regulatory Changes of the Decree The warrant activity is completely deregulated, allowing its free issuance. Previously, it could only be issued by one of the ten authorized companies. Now, any product can be warranted, expanding its application possibilities in sectors like industry, mining, viticulture, energy, and beyond agriculture.

To accelerate this deregulation, warrants can be issued electronically and traded without restrictions on open platforms, using electronic signatures, and without state supervision. These measures aim to enhance the financial possibilities of economic activity, facilitating the expansion of private sector loans and improving the valuation of used goods and inventories in the production process (by using them as collateral).

Considerations for warrants to be effective and achieve their goal of boosting economic activity:

• Agreement of the Parties: The parties agree on the product used as collateral. Easy and simple.

• Avoid Bureaucracy: Neither banks nor other entities must bureaucratize this instrument.

• Legal Simplicity: Only a lawyer is needed to draft a simple document.

• No Need for SGRs: Reciprocal Guarantee Societies (SGRs) are useful but unnecessary for warrants. Physical products (grains, cows, cheeses, wines) are the collateral in this case.

• Certification: The bank or creditor can request a certifier to verify the collateral, but this cost must be low.

• Avoiding Unnecessary Procedures: Multiple forms, mortgages, notaries, and commissions are unnecessary. The offered collateral is quick, liquid, and efficient.

In summary, warrants are an extraordinary instrument that can transform financing in various productive sectors. The deregulation and simplification of their use will allow producers to access credit more efficiently and competitively. This measure, the result of collaboration between the Ministry of Economy and the Ministry of Deregulation and State Transformation, is another step within the agenda of economic freedom and state debureaucratization promoted by the government.

The Government’s Weekend Communication….This Sunday, in the inauguration speech of the 2024 Rural Exhibition, the President announced new measures that will be formalized in the coming days:

• Debureaucratization of Grain Trade: All animal producers (cattle, dairy, poultry, pork, etc.) will be able to trade and move grains without needing to re-register in the Unique Registry of the Agro-food Chain (RUCA). Simply having the National Sanitary Registry of Agricultural Producers (RENSPA) granted by SENASA will register them and allow them to obtain transport permits for grain movement.

• Elimination of Export Duties (DEX - retentions) for cows in categories A, B, C, D, and E.

• Reduction of tariffs from 12% to 2% for sprinkler and drip irrigation equipment.

• Elimination of 25% of DEX for animal proteins (beef, pork, chicken, poultry, etc.), considering the industrialization of grain, thus returning profitability to the producer.

• Total and permanent elimination of DEX for the dairy sector, aiming to ensure predictability and promote competitiveness throughout the dairy chain.

• Additionally, he listed other proposals to be included in the SME Law project that the National Government is working on with all sectors associated with production and trade. In the Law Project, it will be proposed:

  • An accelerated depreciation regime for capital goods in agriculture.

  • Modification in the accounting management of livestock. Currently, Income Tax must be paid annually for fattening, but with the proposed reform, It would be paid at the time of sale.

  • Development of an Irrigation Regime with fiscal coupon benefits in marginal areas in relation to an exemption from Export Duties guaranteed with stability over time (15 years, direct to the producer) in marginal areas.

  • Accelerated depreciation of genetically valuable bulls. Currently, buying a bull is considered a five-year investment for fiscal balance.

  • Gobierno Nacional está trabajando con todos los sectores asociados a la producción y el comercio.

And that’s not all. For entrepreneurs, the government regulates the possibility of having three collaborators without incurring hidden labor relationships. A fundamental aspect is to end the trial industry so that more entrepreneurs can develop their activities and generate employment.

The Street 

According to INDEC, wages increased in real terms in May for the second consecutive month by 4.1%. The real recovery of wages is crucial for moving forward, especially considering years of real wage losses.

On the other hand, supermarket sales also grew monthly by 3.9%, though they suffered a year-on-year drop of 9.7%. This indicator represents consumption well, one of the main indicators of economic activity.

Capital Markets - Actionables

At the rhythm of the dollar. It's another week when the market looks to the dollar for references, and with less volatility than last week, it still doesn’t find stability. The government is shaping the curve of peso-denominated bonds. The Lecaps rates can be very attractive for those who trust the government, especially for companies' efficient cash management.

In the government auction, we had some “reward” in the March bond; well done for those who went long. The CER curve has positive yields, but disinflation is becoming more real weekly, making the analysis between CER and fixed rate very relevant. Also, considering that the LEFIs are already in effect, the transfer to investors of the non-payment of Gross Income Tax can already be seen in the higher yield offered by fixed-term deposits and securities compared to a few weeks ago.

The Lecaps curve does not yet validate the rates paid by the government and is below the auction.

The hit to bonds seems to have ended, and the week saw a slight rise in parities and a drop in country risk. Again, for those who believe in the government and trust that it will be able to fulfill what it preaches, there are extraordinary return opportunities in the hard-dollar bond curve, with yields above 20% annually in dollars. Remember, investing in Argentina is, for now, taking a very high risk.

Follow me on Twitter

Brief Reflection 

The government begins to support its economic program with various regulations that relieve more and more sectors of the economy. Reducing withholdings and taxes will undoubtedly relieve many industries, but it also means less revenue for the Treasury. Will the long-term measures help us get through the short term when we’re in deep water? 

The surplus as an anchor for the economic program raises more questions. Will the closure of various government agencies, the reduction of the state workforce, and other government cuts be enough to compensate for the lower revenues? If the chainsaw is sharp, the government will have enough fuel for the economic program and the tax cuts, but today, there are still many doubts about the sustainability of the fiscal surplus.

In the duel with the market, the government seems to be winning the tug-of-war, but we are far from seeing a result. The gap has been further reduced, but this doesn’t seem enough, country risk is almost neutral, and stocks are down. We still believe that the government prefers a lower gap in the short term and trusts that country risk will decrease as it continues to show good fiscal numbers and support confidence with secured upcoming payments. The balance seems tilted for the government to continue making widespread purées. 

With the BCRA on the way to recovery and no more peso issuance, inflation seems to be under control. Week by week, we see the path of disinflation continue. This is a significant achievement by the government so far, providing breathing room to continue supporting the economic plan. Now, the doubts are whether the Central Bank has enough dollars to continue on this path or where the dollars will come from to pay the debt. The question remains.

The signing of the May pact and the provinces adhering to RIGI are beginning to shape a new country. I believe we are facing a historic opportunity to change the paradigms of the past that led to stagnation and recurrent crises. The gain in competitiveness will not come from devaluation but from a reduction in taxes, translating into real fiscal competitiveness in a globalized world in a country with vast natural resources and incredible human talent (otherwise, how would we survive in this ever-changing country?). They have accelerated monetary policy, and lifting the currency controls seems closer, although the gap is at 40%. Correcting imbalances in the exchange market is crucial for the country to have healthier foundations for growth.

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

PS: Follow me on Twitter and LinkedIn, and let's talk about the Argentine economy's challenges.