More Growth, Less Poverty

Every week, in the land of good news and twin surpluses, something new surprises us. Poverty falling below 40% clearly indicates that the numbers can be improved quickly. This government’s historical adjustment also accompanies an unprecedented recovery. Will the upcoming growth be just as groundbreaking?

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. Brief Reflection

2. Data

3. Understanding What's Happening in Detail

4. Actionable Items

Brief Reflection: Leadership in Action

This past week’s data strongly supports that the government’s chosen path has been effective in swiftly reversing the country’s recession, ongoing since 2022. Ignoring these numbers is impossible: in less than a year, economic activity has surpassed November’s levels, poverty has decreased, and wages have risen. Add surpluses, a reduced exchange gap, and a healthier trade balance, and you have an achievement unthinkable to 99.9999% of Argentines. Data confirms that nearly everything is improving. This is an absolute success for the government and its economic team. Argentina’s prosperity seems inevitable—the numbers support this optimism.

However, the program’s success brings new challenges. While dollar wages have recovered significantly, dollar inflation remains persistent, and the strong peso seems to be here to stay. The country now faces the question: can it adapt its productive matrix to a strong currency? Devaluation doesn’t seem to be an option for this government. Those who adapt quickly to this new economic landscape will have the advantage.

The energy sector marks a turning point—not just in Oil & Gas but also in nuclear energy. This week, President Javier Milei announced a nuclear program that could place Argentina at the forefront of clean energy production with export potential.

Although tax pressures remain high and labor reform has a long way to go, progress is visible, and the virtuous cycle continues. Argentina needs a highway for business, not a road filled with potholes. Are we getting closer? For now, the answer seems to be a resounding yes.

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Is Argentina's Economic Shift Positive or Negative?

Spoiler alert: The positive is here to stay. The Merval finally eased after hitting historic highs in real terms, bonds remain at their peak, country risk continues to fall, inflation is declining, and poverty rates are improving. The Central Bank? It’s the same story every week, purchasing foreign currency. And growth? Moving full speed ahead.

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Understanding in Detail: Dollar and the Strong Peso

Now we can truly say the dollar is back in play. With a weekly rise of over 6% and a gap of approximately 10%, the dollar is experiencing some long-absent volatility.

Let’s put this into perspective: a year ago, the exchange rate gap was 50%, down from 200%. With the government’s zero monetary emission policy, there’s ample liquidity to sterilize. The takeaway? The administration appears comfortable maintaining a 10% gap to manage the country’s brutal dollar inflation. With growing firepower from continuous central bank reserve purchases, the dynamics point to the same results—firm government control and relentless execution of its economic program.

The government’s zero monetary emission policy has acted as a liquidity anchor, significantly reducing the supply of pesos in circulation. This strategy lowers the probability of currency runs like those witnessed in 2022 or 2023. What’s changing the game? Today, the Central Bank is profiting by selling dollars purchased at lower prices—a reversal from past practices. As we highlighted at the policy’s inception: buying at 1,000 and selling at 1,100 is a lucrative strategy, turning sterilization into a financial boon.

External Factors Influencing the Dollar:

• Brazil’s Reserve Sales: The Central Bank of Brazil has been selling reserves aggressively to counteract devaluation pressures.

• Hawkish Fed Policies: Prolonged high interest rates from the U.S. Federal Reserve are fueling market volatility.

• Commodity Prices: Soybean prices, adjusted for U.S. inflation, have dropped to their lowest levels since 2006.

Internal Pressures Adding to the Mix:

• Carry Trade Closures: Companies winding down their 2024 positions are dollarizing their portfolios to secure profits and ensure a stable year-end.

• Vacation Demand: Strong real and favorable Brazilian prices have sparked significant demand for dollars, adding pressure to Argentina’s currency market.

Understanding these dynamics sheds light on the dollar’s recent volatility and highlights the complex interplay of global and local factors influencing Argentina’s financial landscape.

Exchange Controls

This week, access to the foreign exchange market (MULC) was further eased. New measures allow companies to access the MULC without prior approval to settle compensatory interest accrued starting January 1, 2025, on financial debts with related parties. Access was also granted for debt repayment in foreign currency issued by financial trusts with public offerings, provided the amount was converted to pesos through the MULC during primary issuance.

The government has described these measures as part of a gradual normalization process for exchange policies initiated in December 2023. While no deadlines have been set, objectives are clear, signaling an eventual lifting of restrictions. For now, however, exchange controls remain firmly in place.

Public Accounts Recovery

The PAIS tax has officially expired without renewal—a surprising move in a country where temporary taxes often become permanent. Over its five-year lifespan, the tax generated USD 17.3 billion. The challenge is finding new revenue sources or reducing expenses to maintain fiscal stability.

Public sector employment restructuring has been a cornerstone of this administration’s efforts to create a more efficient state. Over the first 11 months, 34,829 public sector jobs have been eliminated—a 7% reduction—helping achieve a 25% real decrease in primary expenditures compared to November last year.

National Public Sector

November marked yet another month of fiscal surplus, maintaining a solid fiscal anchor. The primary fiscal result showed a surplus of ARS 1.381 trillion, marking the eleventh consecutive month of positive results. The financial surplus was ARS 357 billion. By year-end, the primary surplus is expected to reach approximately 2.1% of GDP, while the overall fiscal surplus is estimated at 0.65%.

When comparing these numbers to previous years, the shift in direction is evident. In January-November 2023, Argentina had a fiscal deficit of 3.1% of GDP. By 2024, this had transformed into a fiscal surplus of 0.6% of GDP—an impressive adjustment of 3.7%.

Economic Activity

Argentina’s macroeconomic stability and economic activity recovery have been remarkable. The EMAE data confirms this: October recorded monthly growth of +0.6% and is expected to be the last negative year-over-year figure. Activity levels are already +0.5% above November 2023 and +2.3% compared to December 2023.

Revised EMAE data indicates that by August 2024, activity levels matched November 2023. Quarterly growth surged by 3.9% (Q3 vs. Q2), the highest since Q2 2010, excluding pandemic recoveries. By next quarter, Argentina will officially exit its recession.

Agricultural Sector

The agricultural sector contributed significantly to this recovery. After a drought-stricken 2023, crops like wheat have seen a historic rebound. However, challenges persist. Unfavorable international prices and high dollar inflation impact producers. Soybean purchasing power is at its lowest in 25 years, and taxes add further strain. While 2025 weather conditions appear favorable, global prices and domestic inflation remain hurdles.

Energy and Infrastructure

Energy companies ($YPF, $VIST, $PAM) have launched VMOS S.A., a joint venture for the Vaca Muerta Sur project. This USD 3 billion investment includes a 437 km pipeline and storage facilities, strengthening the sector. YPF and Shell’s 20-year gas export deal, valued at USD 140 billion, showcases Argentina’s energy potential.

The Inter-American Development Bank (IDB) is supporting private sector growth with new funding initiatives. This week, it announced USD 110 million for Metrotel to expand fiber optic infrastructure and USD 14.2 million for Promedon to enhance innovation and export medical products.

Trade Balance

The trade surplus remains robust, supported by a 31.6% rise in exports and a 4.3% decline in imports. Year-to-date, the trade balance stands at USD +17.198 billion, a sharp contrast to the USD 7.943 billion deficit in 2023.

In 2024, the energy sector has contributed USD 5.223 billion more than in 2023, totaling USD 4.806 billion so far. Most of this growth (USD 4.735 billion) comes from higher export volumes, with just USD 489 million due to price changes. Import reductions added savings of USD 2.946 billion in volumes and USD 843 million in prices.

The energy sector remains crucial in boosting Argentina’s trade surplus and reducing reliance on imports.

Deregulations

This week, the RUTA (Unique Registry for Automotive Transport) was repealed through Delegated Decree 1109/24. The RUTA required transporters to obtain additional certifications, which in 2023 amounted to 150,000 applications, cost ARS 500 million, and caused delays of up to 70 days. With this requirement eliminated, logistics processes are expected to improve significantly, reducing vehicle downtime and increasing productivity.

On the Street

The most surprising news this week is the substantial drop in poverty. Quarterly estimates indicate poverty has fallen below 40% for the first time in years. Inflation, the most regressive tax, is under control, and wage recovery has delivered unprecedented improvements. Extreme poverty, now below 10%, has also seen significant reductions.

This poverty reduction is largely due to seven consecutive months of wage growth outpacing inflation. With inflation now under 3% and wages rising above 4%, Argentina is likely to see even lower poverty levels in 2025.

Unemployment has fallen from 7.6% in the previous quarter to 6.9%, showcasing Argentina’s ongoing recovery. The country’s macroeconomic consolidation, spearheaded by the economic team, is yielding results in multiple areas: economic stability, social improvements, and financial indicators all show positive trends. While the reduction in unemployment and poverty is commendable, poverty levels remain a significant challenge, reminding us that the road ahead is long and we’re only halfway through the journey.

Public support for the government is also growing in response to these achievements. The Consumer Confidence Index has risen by +2.3%, and the administration’s approval rating has reached its highest level since coming into power. These metrics reflect a growing sense of optimism and trust in the current economic policies, as Argentina moves towards a brighter future.

Inflation

Wholesale inflation data for November showed positive results, staying below the 2% crawling peg. The IPIM (Internal Prices to the Manufacturing Industry) reported a 1.4% increase, with a 1.2% decline in imported goods compared to the previous month. Controlled inflation continues to support the government’s economic program.

Actionables

The Merval's Merval's weekly winning streak finally ended, but bonds continue their unstoppable climb. Country risk keeps falling, and with January’s interest and amortization payments around the corner, this trend seems set to continue.

Putting the historic Merval rally into perspective: this week, adjusted for inflation, it hit a real all-time high before pulling back amid external headwinds, ending the week in the red.

The Lecaps/Boncaps curve steepened further, potentially signaling a rotation from shorter to longer maturities or CER instruments. The potential decline in crawling peg rates and inflation drives demand for long-term investments or real positive returns, making CER instruments (+8% to +10%) increasingly attractive.

Argentina’s sovereign bonds continue to deliver daily interest, offering a compelling option for those willing to take on Argentine risk and bet on the positive trajectory. However, they remain unsuitable for the faint-hearted.

Across the border, Brazil presents an intriguing case. The Brazilian Central Bank is selling reserves to stabilize the Real amidst a historically high exchange rate. While Brazil has greater firepower and foreign capital inflows, its volatility is significant. Observing from the sidelines seems prudent as the market navigates this uncertain path.

If you’ve enjoyed this analysis, please share your thoughts, comments, and feedback. Let’s keep the conversation about Argentina’s transformation alive.

Nau Bernués
Founder, ArgenGrowth

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