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Is Argentina Deflating?
A week with everything. A green Monday like we haven't seen in years, colorful tender, more purchases by the BCRA, reserves above 30b, public accounts data, and more.
Nau Bernués
April 29, 2024
Dear ArgenGrowther,
A week with everything. A green Monday like we haven't seen in years, colorful tender, more purchases by the BCRA, reserves above 30b, public accounts data, and more.
Financial ArgenGuide: Is Argentina Deflating?
Data:
USD MEP: 1034.04; +0.72%
Country Risk: 1210; -0.49%
AL30: 58.17; +1.32%
BCRA (Central Bank of Argentina):
Purchased foreign currency amounting to USD 654 million.
Increased Reserves by USD 291 million in the last week. Currently at USD 30,137 million.
Bonds Auctions: expirations presented for $2.77 trillion were taken at $2.73 trillion in:
Lecap (S29N4): 4.4% TEM; $1.1 Trillion.
Lecap (S31M5): 4.1% TEM; $0.61 Trillion.
CER (TZXM26): -2.95%; $0.54 Trillion.
Dollar Linked (TZV25): -1.02%; $0.39 Trillion.
Bopreal: USD 113 million.
Rates:
Repo: Decrease from 70% TNA to 60% TNA
Fixed Terms: Banco Nación 50%; Banco Galicia 51%; BBVA 47%
Public Accounts March 2024: March $277 Billion (b).
Primary result of $625b.
Debt interest -$348b.
First quarter +0.2% of GDP.
Now, what does all this mean?
Positive or negative? Spoiler alert: we have everything. The dollars that don't arrive, the successful bid (but not like the previous ones), and a fiscal and financial surplus that leaves us with many doubts.
Dollar and Strong Peso. The rate cut spurred the dollar towards the end of the week, and it remains to be seen if it consolidates at these values (3% above the last weeks) next week or if the dollars from the harvest starts coming in and the peso continues to show strength. We see a drastic change in expectations, where a 2%/3% movement in a couple of weeks seems a lot when before the dollar moved that much in a day. This reinforces the premise that the crawling peg at 2% is untouchable, and no sudden exchange rate jump is foreseen in the short term.
No currency jump = Greater predictability
Greater predictability = Improvement in economic expectations
After the BCRA's new rate cut, the future dollars also adjusted downwards, and we see an increasingly significant convergence in the 2% crawl. The market believes the government and doesn't seek much coverage at these future dollar prices; we already see all the implicit rates below 4.5%.
Last week, we mentioned that if there are no changes in the current exchange system, we will have intense downward pressure on the gap and the Contado Con Liquidación (CCL) in the coming months. However, the agricultural liquidation is delayed mainly due to the rains and one of the lowest harvest progress in recent years, which we saw in the previous weeks a lower volume in the purchase-sale of dollars than expected.
Remember that the soybean and corn harvest is expected to exceed USD 25,000 million, a considerable number for the market today.
Greater sales by CCL = Greater dollar supply by CCL
Greater dollar supply by CCL = Greater pressure on the appreciation of the exchange rate
Recomposition of Public Accounts. We see disparate numbers between the Nation and the BCRA, probably because the financial precedes the real (hopefully so).
Surplus in the National Public Sector (SPN). Here is a word that tells us much and tiny at the same time. The National Public Sector registered three consecutive months of financial surplus to dimension, which occurred for the first time since 2008. At the same time, this result allows for meeting the quarterly fiscal target of the IMF.
Is this surplus achieved with vital adjustments, and is it sustainable? And the impact of the PAIS tax leaves many future questions.
The adjustment of primary spending is truly brutal and unprecedented if we see in interannual terms there are some items with staggering drops: public works -86% i.a.; transfers to provinces -75% i.a. Now, the important thing is to evaluate where the adjustment and the impact on the result are taking place, let's see the main points: retirements and pensions due to their relative importance contributed 33% of the total adjustment; subsidy cuts 12%; social plan cuts 10%; and the reduction in capital expenses (public works) 22%. Where is the blender happening? Are these adjustments sustainable over time? Another point to highlight is that this result is measured based on cash criteria and not on an accrued basis; what does this mean? If unpaid or postponed expenses are not considered, the most concrete example is seen in the energy sector for unmade disbursements of USD 2,200 million. All these considerations are relevant to analyzing the behind-the-scenes of the surplus and not bias the analysis to a "positive" word.
We still need to analyze the other side: how did revenues behave? Both sides are relevant on the path to fiscal sustainability, and the relative weight that the PAIS tax has come to have generates much uncertainty about how these revenues will be replaced in a scenario where there is no more gap, and the PAIS tax ceases to exist. As can be seen in the graph, the primary surplus of March is more than explained by the collection of the PAIS tax. This is especially relevant when there is an actual drop in all incomes associated with economic activity.
Let's go with some graphics to help us understand what we've discussed.
BCRA. We continue with the same dynamic; the engine has slowed slightly, but the adjustment has not. New foreign currency purchases by the BCRA continue accumulating reserves and sanitizing the Central Bank with a new rate cut. This week, the USD 30,000 million in gross reserves were surpassed again, however, the net reserves, explained by the government in the following graph, remain negative when considering Bopreal and deposits for debt payments.
Bonds Auctions. The government will seek to provide an outlet through BOPREAL for the trapped dividends of companies. Giving incentives to this instrument is fundamental for the government's plans, with the latest tenders having minimal volume and absorbing a small amount of pesos. To understand the dimension of what Bopreal has been up to now, USD 8,000 million have been placed, implying an accumulated absorption of 6.6 trillion pesos and a tax collection of $451,000 million.
This week's tender was not as dazzlingly successful for the government as the previous ones. The dynamics of the tender began on Monday with the BCRA buying secondary CER titles (TZXD5) and consequently issuing 1.35 trillion pesos, which it later managed to absorb via the tender. This meant an indirect coverage by the BCRA of approximately 50% of the tender.
Let's go through the parts given the different aspects of this tender:
A renewal (rollover) of 98% of what was expiring was achieved. This is the first time a 100% rollover has not been achieved. However, the margin is low, and this point is positive.
A premium had to be paid, which is a negative point. What do we mean by premium?
Boncer by curve should have come out at about -8% and came out at -2.95%. This means that the government paid about 5% more in rate than the bond was trading at in the secondary market to be able to take the amount of pesos it wanted.
Dollar-linked by curve should have come out at about -11.5% and came out at -1.02%. In this case, the government had to pay 10% more in rate than it was trading at in secondary.
Lecaps, the same. Rates that came out above what the market expected.
We can see in the following graph how the Lecaps were compressing rates until the tender, where they then rose slightly.
The BCRA continues to be at the helm with a new rate cut from 70% TNA to 60% TNA. Given the brutal drop in inflation, it is the logical path to follow, and we find that despite the rate cut, we now have an increasingly less negative real interest rate.
Lower interest rate = Less monetary emission
Less monetary emission = Less inflationary pressure
Foreign Trade. In March, the percentage of paid imports rose to 61%, implying that USD 1.7 billion was unpaid. The cumulative for the first quarter is USD 7.5 billion of unpaid debt. As we have been discussing, it is crucial to organize foreign trade to have a fundamental dimension of where the country stands regarding USD purchases and accumulation.
Economic Activity. The EMAE indicates a slight drop of 0.2% seasonally adjusted from February to January in economic activity and a year-on-year of -3.2%. The first two months showed a year-on-year of -3.6%. Looking at the finer numbers, there is a significant rebound in agriculture, which had a strong rebound from previous years and rose 9% year-on-year. The -0.2% monthly for February is the sixth consecutive month and might indicate that we are touching or about to touch the floor of the recession. However, March activity indicators remain very negative.
We have been discussing the possibility that part of the economic recovery comes from the credit side, and this week, mortgage credits reappeared. It is excellent news that banks have begun to seek more genuine business and credit returns to the center stage; Argentina's private sector loans represent approximately 4% of GDP, and there is no country in South America with lower credit penetration.
Lower inflation = Greater stability
Greater stability = More credit
More credit = More economic activity
The street. The street indicator had a very relevant mobilization with Public Education as the background this week. We will see if the government can defuse the activated bomb in this respect and if there are other mobilizations at one of the most challenging times in Argentine history. At the same time, the government is working against the clock to pass the base law and secure a political victory that has been long delayed.
As a counterpoint to the mobilization and measure of the street, it seems that according to SIPA, wages are beginning to see their recovery in real terms, with inflation already running at a low single-digit. In contrast, wages continue to adjust month by month.
Taxes. One of the first packages of measures by the government appears to incentivize a particular sector, in this case, the automotive industry, which represents 10% of industrial production and employs more than 75,000 people. The main guidelines for tax benefits are eliminating some taxes on imported inputs and some export tariffs.
Less taxes = More economic activity
Less taxes = Less income for the State
Inflation and Relative Prices. At this rate, we will soon eliminate this section. Total destruction of inflation in record time: practically all private inflation measurements improve week by week, so we will wait for the official data to confirm it. It remains to be seen how inflation will behave with the removal of subsidies for energy and transport, and the biggest question from my point of view (allow me to be very optimistic for a second) is the dynamics that inflation will have in a thriving and growing economy.
Capital Markets - Actionables
The international outlook remains complex and is fundamental to keep on the radar. Among many geopolitical issues, Japan is making headlines with a yen devaluation beyond the usual logic of recent years. Could this be another additional headwind?
Despite this context and the prevailing uncertainty in Argentina, we continue with a positive outlook on hard-dollar sovereigns, with extraordinary returns if measured against comparables. A graph that shows that the world sees a decrease in risk in Argentina through CDS (Credit Default Swaps).
The momentum for carry seems to be ending with increasingly lower rates and a dollar that was a bit more volatile in recent weeks. Whoever was able to set a rate (buy a bond that yields a specific rate and keep it fixed until maturity) weeks ago will have captured a good part of the rise, and now will be a new moment to evaluate what to do with the pesos. The peso curve is already getting more points in its setup and is starting to take on a healthier color.
I believe opportunities continue for the sovereigns, and some Negotiable Obligations (ON) are beginning to look attractive.
As long as the government continues to show good numbers, the decrease in Country Risk will continue its course, and rates will continue to compress in hard-dollar bonds.
Rate compression = Price increase
Brief Reflection
It was a week with much movement that had everything.
Expert Outlook: On the side of the BCRA, there is a clear intention to stay ahead of the curve and not negotiate to release the helm, but it seemed to have had a slip with the tender. The Central, in its presentation in Washington, showed the inflation expectation for April at less than 6%; it speaks very clearly to the market and the market's response. Unlike previous administrations, we see a proactive and not reactive team to the numbers; this is essential to align expectations and show the way. At the same time, we see an economic team with several battles won, but the war is not over, and the market knows it.
I believe political noise strongly leaked into the government's ship for the first time with the mass march. As we have been saying week by week, it is fundamental that the economic and political actors of the country be minimally aligned to project a growth path. The political noise was noticed, and the voting of the base law was just around the corner. Will we again have uncertainty arising from politics? (From the Chamber of Deputies, the half sanction would come out).
The fiscal surplus leaves us with many questions. The ball can be kicked forward with a delayed budgetary package, but not indefinitely. It will be the fight against inflation, the primary battle of the first months of government that seems to be bearing fruit, allowing shouting the match's first goal and calming the waters.
As for economic activity, this question comes to mind recurrently: Are we going to a normal country where corporate profits shrink since extraordinary returns are not necessary to repay the risk of being in Argentina? Will businesspeople rise to the occasion and reduce their margins?
Argentina needs a highway for doing business, not a street full of potholes. Are we getting closer? Today, it seems so.
See you next week, Vamos Argentina!
Nau Bernués
Founder, ArgenGrowth