Dear ArgenGrowther,

If the mountain won't go to Muhammad, then Muhammad must go to the mountain. And so, in one week, the government moved a mountain of pesos from the BCRA to the Treasury. Inflation continues to decline, and the economy is not recovering

Financial ArgenGuide:

Data:

• USD MEP: 1071.12; +3.42%

• Country Risk: 1263; -0.71%

• AL30: 58.55; +0.58%

• BCRA (Central Bank of Argentina):

  • Purchased foreign currency amounting to USD 750 million.

  • Increased Reserves by USD 438 million in the last week. Currently at USD 28.798 million.

• Bonds Auctions: expirations presented for $3.07 trillion, $11.7 trillion awarded; $18.0 trillion offered.:

  • Lecap (S14J4): $3.5 Trillion.

  • Lecap (S01L4): $2.5 Trillion.

  • Lecap (S26L4): $2.0 Trillion.

  • Lecap (S30G4): $2.0 Trillion

  • Boncer (TZXM5): $0.3 trillion

  • Boncer (TZXM6): $0.5 trillion

  • Boncer (TZXM7): $0.3 trillion

  • Linked (TZV25): $0.5 trillion

  • Surplus: $8.63 trillion

  • Bopreal: USD 34 million.

• National Public Sector April 2024:

  • Primary: +264.952 million; 0.7% of GDP

  • Financial: +17.409 million; 0.2% of GDP

• Inflation April 2024:

  • CPI: 8.8%

  • Core: 6.3%

• Rate:

  • Lower REPO from 50% ANR to 40% ANR

Now, what does all this mean?

Positive or negative? Spoiler alert: PO-SI-TI-VE. An enormous Treasury tender with a Central Bank rate cut realigns the macro and the peso curve. Pending debt in economic activity, the furious red remains, negative.

Dollar and Strong Peso. The new rate cut boosted the dollar, rising 3.42%, recovering last week's losses. Be aware that the enormous Treasury tender leaves us with fewer pesos, and with the dollars from the harvest starting to appear, no significant movements are expected here.

Today, we have a reality with fewer and fewer critics what seemed utopian when implemented, the 2% crawling peg is very close to the monetary policy rate (TPM) (truly unthinkable when the TPM was at 110% ANR, 9% monthly) and wholesale inflation is just around the corner, closing April at 3.4% monthly. We have been talking week after week about how the crawling peg is untouchable, and no devaluation jump is foreseen. Will we see a government flipping the table and adjusting the crawling peg downward? It's challenging but not impossible. Or are we getting closer to lifting the currency controls? It is a more realistic scenario, although the government mentioned repeatedly that they will not rush. For now, people are talking about the "three ducks": 2% devaluation, 2% rate, 2% inflation.

Lower rates= Higher pressure on the exchange rate

Higher pressure on the exchange rate = Little to no impact (for now)

Recomposition of Public Accounts. The BCRA is going full throttle, lowering the rate when ¿nobody? expected it, and the Treasury started to relax after overreacting to the inherited situation (according to the President). Do we take it out of reverse and put it in first?

Tariffs. Pragmatism, it seems that tariff increases continue to be postponed, notwithstanding the difficult economic situation faced by most of the population.

Postponing tariff increases = Continuation of energy subsidies

Continuation of energy subsidies = Higher public spending until tariffs increase

Revenue. We mentioned that the only two taxes that grew in real terms are export duties (DEX) and PAIS. For a sustainable path in fiscal accounts, it will be essential to reconfigure the relative weight of each tax, given that the PAIS tax should not exist in an economy without controls and is becoming increasingly significant. It accounted for 21% of the primary fiscal surplus in January, 43% in February, 103% in March, and 181% in April. Being a non-shareable tax, it is easier to eliminate. Still, its increasing relative weight over time leaves the question of where those revenues will come from for the government, which today more than explains the surplus.

Surplus in the National Public Sector (SPN). Here is a word that tells us a lot and a little simultaneously. The National Public Sector recorded its fourth consecutive month of financial surplus for the first time since 2008.

The reduction in primary spending explains a large part of the surplus, with social benefits taking most of the adjustment by relative weight. On the other hand, Capital Expenditure had a real year-on-year variation of -78%. But is a state that does not invest what it collects sustainable?

After the first few months with the unstoppable chainsaw, will postponing tariff increases be an example of what will mark the fiscal path from now on? Fiscal surplus is non-negotiable, without taking eyes off the real economy and the streets, but removing the handbrake imposed until now with a highly contractive budgetary policy.

Fiscal Surplus = Contractive Fiscal Policy

Contractive Fiscal Policy = Lower economic activity

BCRA. Full throttle to disappear remunerated liabilities and prevent anyone from escaping the blender. The rate was lowered from 80% to 40% in about a month. Is "no rate" still present in the BCRA but disappearing in MECON?

Rates. We mentioned that the Central Bank would have a new opportunity to keep marking territory this week, and it did not disappoint. The new rate cut from 50% to 40% ANR continues to show a very proactive economic team that is keeping a close eye on inflation, and the dilution is part of the economic policy for the BCRA's balance sheet cleanup.

Lower interest rate = Lower money creation

Lower money creation = Lower inflation expectations

Lower inflation expectations = Lower inflation

Lower inflation = Lower interest rate

Without a doubt, issuance was one of the first and foremost points to be addressed by this government. At the same time, remunerated liabilities were and still are one of the main obstacles in the country's macro, with the rate cut addressing both points simultaneously.

We mentioned that one of the government's objectives in lowering the rate was eliminating remunerated liabilities from the Central Bank's balance sheet and transferring the debt to the Treasury through tenders. This week, the coordination between BCRA and MECON was more than clear. They offered the Treasury the equivalent of half the stock of passes in Thursday's tender. IM-PRES-SIVE. More details on a historic tender to come.

Following monetary issuance, the rate cut also implies a significant saving for the government due to lower interest payments. This was one of the economic team's leading, if not the biggest, successes, as lowering the rate resulted in less interest paid, less issuance, and a cleanup of the BCRA's balance sheet. The estimated savings in interest (due to the lower interest rate) is 40 trillion pesos that did not need to be issued, allowing for better control of the monetary base through sterilization mechanisms (it would have been impossible to sterilize an additional 40 trillion pesos). The main explanation for the economic base expansion of 3.8 trillion pesos today is the purchase of foreign currency.

With this week's tender and rate cut, the quasi-fiscal deficit is on its way to extinction. One of the heaviest inherited burdens will probably go down in history in the following Treasury tenders. If the debt migration from BCRA to the Treasury is successful, only dollar-denominated obligations will remain on the Central Bank's balance sheet.

One of the most critical points in migrating the debt from passes (BCRA) to notes (Lecaps, MECON) is that it drastically changes the debt maturity profile, moving from 1 day to a minimum of 25 days.

Longer debt maturities = Greater maneuverability for the government

Greater maneuverability for the government = Lower volatility

Additionally, by lowering the rate, a monetary policy beneficial to economic activity is generated, while at the same time, we have a contractive fiscal policy. What is the result of these policies?

Lower interest rate = Expansive monetary policy

Expansive monetary policy = Increase in economic activity

Contractive Fiscal Policy + Expansive Monetary Policy = ?

Tenders. A before and after. Last week was marked by the Bopreal, this week the Lecaps, and how… a tender for the history books. There are many implications, let's break it down:

• Before, BCRA paid; now, MECON. Why do we say this, and what does it mean? Because the debt previously held by the BCRA through passes is now held by the Treasury through notes.

• MECON paid a premium. Why do we say they paid a premium? Because for the short-term notes, a minimum Effective Monthly Rate (TEM) higher than what BCRA pays and what was operating in the secondary market (though for slightly longer terms) was tendered.

• There will be a bi-weekly tender program. This will provide liquidity to the fixed rate market and allow "building" the curve. This allows the peso debt market to be rebuilt and maturities to be extended.

• 8.7 trillion pesos to reduce the monetary base. Yes, 8,700,000,000,000 pesos allocated to reducing the monetary base: 7.63 will go to the Treasury account at the BCRA, and the remaining 1.07 will go to purchase Treasury securities in the BCRA's portfolio. The BCRA balance sheet continues to be cleaned up.

• 10 trillion pesos in Lecaps were issued. With TEMs of 3.8% for August, the lowest, up to 4.2% for the shortest. Adjudications were prorated due to high interest in the high TEMs; 6.2 trillion were left out. Where will those 6.2 trillion go?

• Financing continues cheaply via CER, 1.1 trillion in TZXM5/6/7, with the surprise being a positive real rate on the longest bond, rates of -13%, -0.4%, and 1.8% (respectively).

• Negative rates also on dollar-linked, 0.53 trillion at an ANR of -3%.

Why do we say it is a historic tender? It is probably the first in a series of tenders that will mark the migration of Passes to Lecaps, lightening the BCRA's remunerated liabilities and starting to make the currency controls exit viable. Without remunerated liabilities, there is no endogenous monetary issuance, and the macro begins to be organized (actually, this started a while ago); offers were received for half the stock of Passes; an 8.7 trillion surplus was allocated to reducing the monetary base; they had the "luxury" of rejecting 6.3 trillion. Let's repeat IM-PRES-SIVE, the joint work of the economic team BCRA-MECON. The strong caveat is expectations. I believe this peso migration will be possible only if confidence in the government is maintained.

Debt. While the financial surplus helps in a highly complicated context for Argentina, the reality is that the absolute number is very low when looking at the country's debt commitments in the coming years. Maintaining the virtuous path of public accounts is essential so that the country's risk decreases. Argentina can roll (change short-term payment commitments for longer ones, something standard and usual in the financial world) its debt to avoid pressure in the coming years. For easier understanding: 2024, USD 9.500M; 2025, USD 16.900M; 2026, USD 17.600M; 2027, USD 21.500M. A total of USD 65.500 Million in just four years.

Salvador Vitelli clarifies the chart: BOPREAL already netted what would be used for tax payments; Sovereign Bonds only contemplate estimated private holdings; it is only hard-dollar debt.

Economic activity. The flip side of the financial. The furious red continues, the SME activity destroyed, painful numbers. The SME industry fell 18.3% year-on-year in April, with the first quarter ending with a brutal annual drop of 19%. Looking at it by sectors, the most affected in April were "Paper and Printing" with -32.3% y/y, "Metal, machinery, equipment, and transportation material" with -23.7% y/y, and "Chemicals and plastics" with -21.6% y/y. The small light at the end of the tunnel shows that the seasonally adjusted monthly production rebounded by 3.1%.

When we look at installed capacity, we get an unpleasant surprise: we are at pandemic levels. With 53.4% in March, can it go lower?

Economic Recovery. We continue with the question: will recovery come with credit, as the President said? We hope that the premise that the financial sector leads the real one will be fulfilled because there has already been a significant recovery in dollar loans to the private sector. At the same time, there is a clear recovery in dollar deposits. Will we see high-speed developments as in recent months in everything related to the financial sector?

Important entities started strong with credit; for example, Banco Nación announced loans for agricultural producers in pesos at 33% ANR and in dollars at 2.5% ANR.

Lower Rate = Greater incentive to take credit

Greater incentive to take credit = More credit?

More credit = More economic activity

The street. Quiet, the feeling is that the readjustment of the various economic variables is still awaited in a very tough time. While waiting, some "good" numbers are still showing: inflation decreasing and the BCRA cleaning up its balance sheet.

Inflation and Relative Prices. "Good number" in April, signaling a clear deceleration of inflation, with a CPI of 8.8%, the core running at 6.3%, and wholesale at 3.4%. May numbers continue to indicate a decreasing trend.

At the same time, relative prices continue to be adjusted, a process that will likely take many months to correct.

We must not forget that one of the main aids the government has to lower inflation is the recession the country is immersed in.

Lower activity = Lower inflation

Capital Markets - Actionables

NO RATE continues, especially in the BCRA. Will we get a reward for the MECON Lecaps tender? What do we do with pesos while the dollar oscillates between 1,000 and 1,100?

For now, one of the main points of the debt migration from BCRA to Treasury will be the change in money market mutual funds, where t+0 (immediate settlement) will probably cease to be the market star and give way to t+1 (settlement in 24 hours, primarily investing in treasury assets). This situation was already evidenced by outflows (egresses) from t+0 and inflows (entries) to t+1, which will likely be accentuated in the coming weeks. The pesos we have been investing in t+0 for years without thinking will be managed with a much higher percentage of t+1.

A regulatory change may interest those seeking yields or financing in dollars. To adapt the negotiation of promissory notes, the CNV Board approved the regulation implementing the possibility that instruments issued in dollars for payment in that currency (effective payment in foreign currency) quote.

Sovereign hard-dollar bonds continue to lateralize (slightly increasing the YTM), and we maintain a positive outlook with extraordinary returns compared to peers.

Argentine stocks remain strong, with an extraordinary run for those who took the risk of investing in Argentine equities. While it seems time for a break, missing the train can result in a "high toll."

No one talks about the carry trade with this rate cut anymore. However, for those willing to take the exchange rate risk, entering during small dollar spikes can be an alternative (with considerable exchange rate risk). With short Lecaps above 4% and long ones (2025) still compressing, those who fixed rates (bought a bond yielding a specific rate and kept it until maturity) weeks ago will have captured a good part of the rise. Now is the time to evaluate what to do with pesos and reduce duration to lower risk. The peso curve is getting more points and looking healthier, with several more points on the curve next week.

As long as the government continues to show good numbers, the country's risk reduction will eventually resume, and the hard-dollar bond rates will continue to compress.

Rate compression = Price increase

Brief Reflection

A week that will go down in Argentine financial history. The debt migration from BCRA to the Treasury is unprecedented and feels like the first step of a short walk.

Expert Outlook: The tender opens the game to a new Argentina where banks will have to seek yields outside the BCRA, and with the latest rate cut, also on the credit side... their margins have shrunk.

The descending inflation path is necessary and fundamental but insufficient to exit the crisis. The market's reasonable expectations about the economic direction continue to help, but for now, they are mainly those expectations. Real movement is necessary, and with no news from the political side on the legislative front (the debate continues in committees on the Law of Foundations and the fiscal package projects), investments, laws, and pro-real economy regulations are delayed. The world still watches expectantly from afar at the Argentine experiment.

I leave you with my reflection each week: Are we heading to a normal country where business profits shrink because extraordinary returns are not necessary to repay the risk of being in Argentina? Will entrepreneurs 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, strongly yes.

See you next week, Vamos Argentina!

Nau Bernués
Founder, ArgenGrowth

PS: Follow me on Twitter and LinkedIn.

PS2: As a newborn community, we want to hear your thoughts!

PS3: Enjoyed this edition? Share it on Twitter and LinkedIn!