The government remains firmly on the path to a strong peso. The market is joining in, paying for everything in blue and white, though tax revenue raises some questions. Economic activity remains in the tunnel.

Dear ArgenGrowther,

As 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. 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. Country risk keeps dropping, and bonds know it. Tax revenue shows a worrying decline in key activity proxies. The Central Bank? They’ve fired up the printing press again, surprisingly closing out a great September.

Understanding What's Happening in Detail 

Dollar and the Strong Peso.

We’ve returned to normalcy. The peso appreciated again, closing the week below 1,200, and the strong peso thesis remains intact. The Central Bank ended September with a strong purchasing balance (+USD 373M) and increased reserves by USD 450M. Moreover, the government's firepower for market intervention still has plenty of room to spare.

A side note on the record-breaking tax amnesty and dollar deposits from the private sector, which will eventually boost the Central Bank's gross reserves through reserves (if kept in banks). There's another month to deposit, and positive inflows are expected to continue after lower-than-expected withdrawals in the initial days.

October will be a more challenging month for the government regarding currency purchases and reserve increases, with “normalized” import payments and facing the first month after the reduction of the PAIS tax.

Why is the dollar still falling? Because there are no pesos. The monetary emission taps are closed with Phase 2 of the economic program in full swing. Where previously we had repos, today pesos are mainly found in LeFis and Lecaps, and that number has halved since last December (from $60b to approximately $25b). What does this mean? The excess of pesos in the economy is no longer the scarecrow it used to be, while demand for pesos continues to grow. Demand for pesos? Yes, credit reactivation is already present and growing month by month; and not just that, but lower inflation and economic reactivation (let me posit this optimistic assumption) will continue restoring peso demand, and that LeFis and Lecaps surplus will dwindle further amid increased private sector demand. There will be less and less fuel for the dollar fire, which now lacks oxygen to go anywhere. No pesos. We're heading towards exchange unification driven by greater peso demand, no monetary emission, fiscal surplus, trade surplus, and growing dollars in the economy; there is no alternative: the peso will be the strong currency.

Recomposition of Public Accounts

National Public Sector

Restoring revenue is one of the government's key challenges, and analyzing September gives us new questions and some answers. After the 10% PAIS tax cut effective September 1, it’s no longer the year's star but fell to a real interannual drop of 40.8%. We add an alert with VAT revenue at -16% YoY, a significant figure for one of the key proxies for activity and consumption. Though total revenue only dropped 3.4% in real YoY terms.

The month's star was Personal Assets Tax, with an interannual variation of 1,608.9%. This is mainly due to the REIBP (Voluntary Externalization of Argentine Capital) and the deadline for filing and paying the balance of human persons' tax returns for fiscal 2023, which in 2023 had been in June.

Tariff cuts continue. A schedule for eliminating import tariffs on tires was announced, starting with a 5% cut and ending with the remaining 15% eliminated in Q1 2025. This is a relief, but a 16% Mercosur tariff remains untouchable. The government also reduces tariffs on appliances and various production inputs, totaling 89 products, including consumer goods, industrial supplies, and machinery.

According to the government, the initiative aims to foster competition and benefit both industry and consumers. It will certainly help in the fight against inflation.

The reduction of taxes is becoming clearer, but how will it be replaced? Or won't it be replaced, and the state will continue to shrink?

It's another week of state spending cuts. This time, it was Argentine Railways Capital Humano (DECAHF), with 1,388 employees laid off and 38 managerial positions eliminated. The Executive claims this will save the state $42 billion annually. We add the Argentine Transport Institute and the National Costume Museum to this. This week, universities were on the table, and funding transfers to universities have been falling for years. Will universities have to account for their spending?

The State also reclaimed assets this week, annulling all agreements granting lands from the Nahuel Huapi National Park to Mapuche groups. The government asserts sovereignty within the national territory to improve the National Accounts.

Economic Activity

We're still in the tunnel, waiting for the light. Contradictory signals prevent us from declaring a recovery. Besides the sharp YoY fall in VAT, we also have to note a dramatic investment drop in August by 25.8%, according to Ferreres Consulting. Year-to-date, the cumulative decline is 21.5%.

Imports seem to be bouncing back in the much-anticipated V shape. Could this be a leading indicator of economic recovery?

Although the outlook remains challenging, Econviews's activity light system, showing more green than red, still gives us hope.

How do we see economic activity on a week-by-week basis? It isn't easy, but not too much. It feels like we're not getting out of the hole, but at least we're not sinking further (too much). If growth didn't occur in August, it won’t be by much; the same is true for September. The light is near but remains elusive.

Higher Economic Activity = Higher Inflation

Deregulations

Another week of deregulations in health, with the confirmation that Law 16.463 on Medicines establishes provincial jurisdiction for importing, using, and selling medicines in each province. In simpler terms? Governors don’t need national authorization to import any medication.

The medication cost in Argentina has doubled compared to the US since 2016. The Ministry of Deregulation aims to reduce medication prices.

Less bureaucracy = Lower costs.

The Street

People mobilized for universities less forcefully than in previous protests; it seems people support public education but not for political purposes. Audit and accountability? It is logical for any state-dependent organization. Meanwhile, the government won a political victory with broad social support for single-paper ballots: greater transparency and lower costs for upcoming elections.

More than half of Argentines are poor, according to INDEC data for the first...

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Capital Markets - Actionables

The bond locomotive keeps rolling and seems to have a long way ahead. This week, equities joined in, and peso-denominated instruments didn't lag either. Toto Caputo also confirmed that the government is negotiating repos.

We insist: LeCaps continue to offer very attractive returns for those expecting a downward inflation path, with high-frequency data from September hinting at a decrease in inflation. The market kept paying here this week. With a rate above 3.5% today in LeCaps and inflation nearing the crawling peg, there's value here. At the same time, worthwhile returns are still available as coverage for those seeking CER protection.

Given the context of the tax amnesty, part of the market was calling for the government to issue dollar-denominated notes for cheap financing. Still, the Minister of Economy said they won’t do it. The government wants those dollars to finance the private sector, develop the capital market, and promote more investment and quality job creation. Pampa Energía is a case in point, financing locally for four years at 5.75%, a rate even lower than what they could get on the external market. "This is precisely what we want. The aim of the tax amnesty is not revenue collection, but rather economic reactivation and private investment."

The Minister was clear: The government is stepping aside to implement an expansive policy and let the market act on its own. Has endogenous reactivation already begun?

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Brief Reflection

It's another week of restoring public accounts, record tax amnesty, and less bureaucracy in the state. The government remains on a firm course, and the market likes it. Week after week, investors pay more, though they still want proof before continuing to pay. The reality is that Argentine assets are getting more expensive week by week.

The reality seems disconnected and is slow to pick up. There’s no certainty that we are growing, though it seems the worst of the crisis is over. At least, month by month (for now, at least), wages are recovering, bringing some relief to many households. These households deposited $12.8 billion in 45 days and withdrew "just" $154 million on the first withdrawal day—a figure below expectations, bringing further hope for financial system reactivation.

Geopolitics are stirring, and Argentina is looking to China as a strong strategic trading partner despite the government's previous rhetoric. Selling to the Chinese giant is a pragmatic move as Argentina looks for buyers, primarily for its regional economies.

The Argentine cost continues declining with fewer tariffs, less bureaucracy, and greater business facilitation. But is that enough for entrepreneurs? For now, there’s a lot of waiting among those with the fresh capital so badly needed to grow again. The Argentine risk premium is shrinking; therefore, business profits should also shrink. Are Argentine business owners ready to earn less?

Argentina needs a highway for doing business, not a street full of potholes—are we closer to that? Today, we’re back to a resounding 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

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