Do We Say Goodbye to the Financial Gap Without the PAIS Tax? Economic activity data consistently shows growth across multiple sectors in Argentina. The Ministry of Deregulation empowers citizens by eliminating bureaucratic hurdles, leading to a surge in debureaucratization requests.

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. Data

2. Understanding What's Happening in Detail

3. Actionable Items

4. Brief Reflection

Financial ArgenGuide:

#data

Understanding What’s Happening in Detail

Dollar and the Strong Peso

Is the Week Positive or Negative? Spoiler alert: another positive week. Highlights include the Merval Index reaching nominal all-time highs, bonds climbing steadily, and country risk declining further. The Central Bank’s strategy remains consistent—foreign currency purchases continue as reserves accumulate.

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In-Depth Analysis: The Dollar and Argentina’s Strong Peso

The PAIS Tax: A Farewell to Market Distortions
This week, they marked a turning point by removing the PAIS tax’s 95% import prepayment requirement. ARCA’s resolution effectively eliminates this obligation, aligning with the BCRA’s rules for accessing the foreign exchange market (30-day window) and the PAIS Tax expiration (December 22, 2024). Importers no longer need to factor this tax into their MULC (foreign exchange market) transactions, effectively erasing the artificial floor imposed by the official dollar plus the PAIS tax.

The Implications of Policy Change
This change significantly narrows the exchange rate gap, a key issue for importers, exporters, and savers. What once seemed like a dystopian financial scenario is moving toward greater stability. Could this signal the beginning of a unified exchange rate system in Argentina?

Dollar Inflation and Wage Dynamics
The ongoing recovery in dollar-denominated wages, coupled with Argentina's dollar inflation over the past year, has brought increased scrutiny to the tourism and services accounts. October’s balance reflected a USD -744 million deficit, expected to deepen during peak holiday months. This month also saw a surge in the current account deficit due to early dollar transfers for January bond payments. However, much of this was offset by foreign currency loans secured by private companies.

Government Initiatives: Easing Exchange Controls Further

The government continues to relax currency regulations, introducing the following measures:

• Extension of Deadlines:
  The settlement period for foreign currency earnings from agricultural products like wheat, corn, and soybean oil has been extended from 15 to 30 days.

• Export and Import Payment Flexibility:
  Export earnings and refunds for import payments can now be settled within 20 business days, up from the previous limit of 15 business days.

• Extended Prepayment Settlement Periods:
  Advance payments for export goods now have a settlement window of 20 business days, expanded from the previous 5-day limit.

• Simplified MULC Access:
  The MULC access period has been reduced from 90 days to 30 days for import services under S24 (personal, cultural, and recreational services). This applies to services accrued from November 29, 2024.

The Challenge of Attracting Foreign Investment
Despite these reforms, foreign direct investment (FDI) remains sluggish. In Q2, FDI fell 56% year-on-year, amounting to just USD 2.385 billion—its lowest level since the pandemic. Genuine investment inflows are critical for sustainable growth and development, underscoring the importance of further reforms.

External Dynamics: Brazil’s Economic Pressure

Brazil’s currency, the Real, has hit record lows, trading at six reals per dollar. The market reacted poorly to Brazil’s fiscal adjustment proposal, which favored tax increases over expenditure cuts. While Brazil faces a significant budgetary deficit of 8%-9% of GDP, Argentina remains focused on its path. Investment flows into Argentina have strengthened the peso, with the Central Bank accumulating reserves. The likelihood of exchange rate convergence between the MEP and official dollar rates continues to increase, reflecting improved economic conditions.

Public Account Adjustments

Weekly updates underscore the government's adherence to fiscal discipline. Closing five underperforming trust funds was a significant step toward enhancing transparency and efficiency in public finance management. These measures align with the broader budgetary strategy to reduce inefficiencies and optimize resource allocation.

Argentine Central Bank: An Update

After an impressive 42-day streak of foreign currency purchases, the Central Bank experienced a brief pause. However, total foreign currency purchases over the last four months have reached USD 3.7 billion.

Despite this achievement, net reserves remain negative due to significant outflows:

1. USD 4.3 billion was sold to the Treasury for debt repayments (IMF and bonds).

2. USD 1.056 billion was transferred to the Bank of New York for January 2025 bond payments.

3. Additional IMF and international organization payments totaling nearly USD 2 billion since August.

While gross reserves have grown, driven by increased deposits following the recent tax amnesty, challenges persist in achieving a positive net reserve position.

National Public Sector Outlook

The government has reaffirmed its commitment to avoiding new debt issuance or refinancing efforts for the USD 11.8 billion maturing 2025. The likelihood of renegotiating IMF terms increases weekly, which could significantly reduce financial stress. With rising tax revenues and steady economic growth, Argentina is on track to maintain a positive financial surplus in 2025.

Tenders

This week, the Treasury secured more funding than required, awarding ARS 5.81 trillion. Of this, ARS 1.59 trillion was deposited into the Treasury’s account at the Central Bank. Interest rates offered a slight premium compared to secondary market levels, indicating a robust demand for these instruments.

Economic Activity: Signs of Growth Across Sectors

As discussed in previous editions, October's activity indicators show promising results:

• Agriculture Booming:
  Over 33,500 trucks delivered 1 million tons of wheat to Rosario in November, an 83.5% increase compared to November 2023 and 10.2% above the five-year average. Additionally, soybean milling achieved a record high for October, reflecting robust performance in the agricultural sector.

• Mining Momentum:
  Mining is showing strong potential and is positioning itself as a key driver of Argentina’s economic growth in the coming years.

Small and medium enterprises (SMEs) can expect support through the RIGI Program soon. This initiative will incentivize productive investments, defined by thresholds of USD 150,000 for micro-enterprises, USD 600,000 for small businesses, USD 3.5 million for medium-sized tier-1 companies, USD 9 million for tier-2 companies, and USD 30 million for larger enterprises.

Key Benefits of the RIGI Program

• Accelerated Depreciation: Reducing the depreciation periods for assets in income tax calculations.

• Faster VAT Refunds: Shortening wait times from six months to three months.

• Export Tax Exemptions: SMEs exporting incremental industrial goods will benefit from reduced export duties (specific tariff positions to be determined).

• Livestock Valuation: Deferral of livestock valuation until the actual sale, with interim income tax payments based on fiscal valuation.

• Irrigation and Hail Protection Investments: Investments in irrigation systems and hail protection nets will qualify for accelerated depreciation and early VAT refunds.

• Reduced VAT on Agricultural Energy: The VAT rate for energy used in agricultural irrigation will drop from 27% to 10.5%.

Deregulation: Empowering Citizens and Businesses

This week, the government expanded deregulation efforts across sectors, including hydrocarbons, navigation, and consumer appliances. The highlight? Citizens can now use a digital portal to report unnecessary or burdensome regulations. This initiative allows individuals and businesses to pinpoint areas where government intervention directly hinders productivity.

Key Deregulation Highlights

1. Hydrocarbons:
The hydrocarbons market has gained more freedoms, although not entirely. The government has introduced measures to balance market liberalization with domestic supply security:

• Domestic Supply Priority: Before exporting, producers must guarantee sufficient volumes, quality, and reasonable prices to meet internal demand.

• Export Exceptions: The Energy Secretariat may block exports in domestic supply shortages, inaccurate data, anti-competitive practices, or other disruptions.

• Alternative Solutions for Exporters: If an export is blocked, companies can import equivalent hydrocarbons or suspend export rights during the affected period.

These measures are detailed in Decree 1057/2024, which aims to balance market freedom with domestic security.

2. Navigation Sector:
Modifications to the Navigation Regime (REGINAVE) simplify safety certifications and reduce costs. Key changes include:

• Private engineers can now certify smaller vessels, while private classification societies can use larger ships, fostering competition and lowering user costs.

• Safety devices approved by classification societies are now accepted, significantly reducing equipment costs.

• Nautical license issuance has been decentralized, allowing licenses to be granted by nautical federations. Licenses are valid for 10 years. Recreational boats can now engage in commercial activities, encouraging market development.

3. Consumer Appliances:
Streamlined regulations are expected to lower manufacturing and import costs, potentially reducing retail prices.

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Actionable: What Investors Need to Know

• Merval Index Performance:
  The Merval continues to hit nominal highs, reflecting investor confidence in Argentina’s equities market.

• Bond Opportunities:
  Argentina’s bonds are showing sustained growth—the continued improvement in public accounts and potential agreements with international organizations make Argentina bonds an attractive option. Reductions in country risk could further enhance their appeal, especially compared to Brazil’s current challenges.

• Fixed-Rate vs. Inflation-Indexed Instruments:
  Fixed-rate instruments have seen slight corrections, maintaining effective monthly rates between 2.5% and 3%. Inflation-indexed instruments (CER) remain a compelling alternative for hedging against price increases.

Key Takeaway: Argentina's improving economic conditions provide a fertile ground for strategic investments. Both equities and bonds offer significant opportunities for those willing to navigate the country's evolving financial landscape.

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Brief Reflection: Momentum Builds as Challenges Persist

Argentina is seeing consistent progress on multiple fronts. The removal of the PAIS tax has cleared a significant obstacle, further aligning exchange rates and boosting competitiveness. The phrase “he who sells first sells best” still applies, underscoring the importance of seizing market opportunities early.

The RIGI Program for SMEs introduces a long-term perspective, fostering productive investments and economic dynamism. While the country still grapples with high costs and overregulation, steps are being taken to create a more business-friendly environment. The government inches closer each week to building an economic "highway" for growth rather than a "pothole-filled road."

It is necessary to highlight that the Argentine cost continues to drop week by week, but the disorder was so great that it seems as if we haven’t even started. Undoubtedly, eliminating the PAIS tax will help to continue improving this competitiveness. What other taxes will follow? Argentina needs a highway for doing business, not a road full of potholes. Are we getting closer? Today, a constant yes seems more likely.

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 challenges facing the Argentine economy.