The agricultural sector is driving activity, and the twin surpluses hark back to a past of strong growth. Meanwhile, the government keeps making a mix that the market doesn't buy. The strong peso appreciates while the market isn't convinced by the measures, bonds fall, and country risk rises.

Dear ArgenGrowther,

Every week, we have the primary data from the past week and delve into different aspects of our beloved Argentina to see their impact, understand what's happening, and make better decisions. The FInancial ArgenGuide 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 answer: Positive in negativity. The government somewhat manages to contain the gap but pays its cost with a bond drop. It continues to score points with a sixth consecutive month of financial surplus, honoring its debt commitments, something unprecedented in Argentine history. We see the first monthly growth of the Milei era and the first year-on-year growth. It was a week of strong currency sales during a seasonally negative period for this aspect.

Understanding What's Happening in Detail

Dollar and the Strong Peso The measures implemented last weekend started to have an impact. We had a Monday where the rush to the peso was noticeable, then the dollar rebounded slightly, ending with a 6% drop in the MEP and a reduction in the gap from 50% to approximately 40%. Although the market does not yet fully endorse this new measure, it feels like the government is betting everything on the high dollar value, and the MEP is ultimately converging with the official rate. We have a record volume in the AL30, the main bond for buying and selling dollars.

In a week when the Central Bank ended up selling dollars in a seasonally negative quarter for currency purchases, the announced measure now has more of an expectation factor than reality.

Less uncertainty = Less volatility

Less volatility = More stability

More stability = Improvement in economic expectations

Improvement in economic expectations = Less pressure on the exchange rate

Fewer pesos = Less pressure on the exchange rate

More dollars offered = Less pressure on the exchange rate

Recomposition of Public Accounts 

The Fiscal Liquidity Letters (LeFi) hit the field tomorrow, July 22nd, and the second phase of the government gains strength with the resolution of most of the puts last week. At the same time, the government sends signals to the market by depositing in the Bank of New York all the interest on Global and Bonares bonds maturing in January 2025, using part of the pesos from the surplus accumulated in the first part of the year (accumulated to May $2.3 trillion).

Central Bank of the Argentine Republic - BCRA 

Reserves 

The topic of the week was gold. Argentina had its gold reserves in the country until a few days ago when the government decided to move them abroad. What does this mean, and what are its implications? First, the gold was in the country to protect it from embargoes and lawsuits abroad, such as the PBI coupon or YPF. Second, having the gold in the country protects it but generates no returns. Third, being abroad, it can be subject to embargoes but can also be used as collateral and generate returns. Also, as an alternative, it can be sold to get cash dollars. Without a doubt, it is logical to have gold abroad under normal conditions and in a normal country; it is more useful for the BCRA and is a common practice in most developed countries.

According to the government, this gold can be used as collateral to secure financing if needed for the amortization payment of the Global and Bonares bonds in January 2025. Although it is an approach to the international credit market, it is far from ideal.

Currency Controls 

The light at the end of the tunnel is approaching. The government resolved most of the puts and defused one of the pending bombs for lifting the currency controls. With a 78% acceptance rate, the government could advance one of the major hurdles. Now, 3.7 trillion pesos remain as potential issuance, manageable. To resolve this issue with banks, it was agreed to pay what the banks paid, adjusted for inflation.

Recall that President Javier Milei spoke of three concrete conditions for lifting the currency controls:

1. ✅ Eliminate remunerated liabilities.

2. ✅ Eliminate the puts.

3. ❌ Lower inflation to be in line with a 2% monthly devaluation.

National Public Sector 

Balancing Public Accounts 

The government again marks a surplus in a seasonally challenging month like June. Six consecutive months of surplus and counting.

June’s revenue maintains the dynamic of the country’s tax gaining ground. Given that the government has already committed to reducing it in September and holds the discourse of eliminating it this year, it is crucial to resolve how to replace these revenues to provide visibility for the incremental debt payments assumed by the Treasury and maintain the surplus as a fundamental anchor of the economic program. The recession strongly impacts revenues, and this will be the key point to monitor for economic recovery and sustainability of the surplus over time.

On the spending side, we see a strong year-on-year real decline; the main components are pensions and social security, which accounted for 29% of the total reduction, and direct real investment, 14%.

It is important to emphasize that, given the economic path and program undertaken by the government, fiscal data become most relevant for expectations and debt repayment. After the exchange of BONCER for LEFI, a maturity peak of $30 trillion in July 2025 was generated.

Contractive Fiscal Policy = Lower economic activity

Contractive Monetary Policy = Lower economic activity

Contractive FP + Contractive MP = Lower economic activity

Economic Activity 

It was a week of good news and consolidation amid a brutal crisis for most of the country. The Monthly Economic Activity Estimator (EMAE) marked the first month-on-month rise in economic activity of the Milei era and even rebounded year-on-year. The EMAE marked a +1.3% compared to April in the seasonally adjusted measurement and a +2.3% compared to May last year. It is crucial to highlight that the positive year-on-year result is due to the significant jump in the agricultural sector (+103.3% y/y) following last year’s drought. Excluding agriculture, activity fell 5.5% year-on-year. We see that the monthly dynamic begins to change, where, with seasonal adjustment, non-agricultural activity also managed to post a positive figure in May of 1.1%, driven mainly by export sectors. However, construction has already rebounded in the seasonally adjusted monthly figure, and the industrial decline seems to have bottomed out. The data (from the ocean floor) is good.

The trade surplus remains consolidated and, along with the fiscal surplus, strongly aids the public accounts’ recomposition. The trade balance surplus is due to a 21.7% increase in exports and a 35.4% decrease in imports compared to last year.

The more than USD 10,000 million accumulated in the year's first half means fresh currency for a country desperately needing dollars to emerge from the crisis. The surplus is expected to continue, with energy and mining beginning to become pillars of the emerging Argentina.

In this case, credit as a lever and motor begins to appear increasingly great news for energy, with Transportadora Gas del Sur (TGS) securing USD 490 million for seven years at a rate of 8.75%. The country's appetite is firm, and there is a lot of interest in financing this new era and investing through the RIGI. We will likely have many more updates on this in the coming weeks.

Not everything is rosy; we are in Argentina and in a crisis. Retail sales remain on the floor at -22% y/y, and SME industrial production at -20.4% y/y. While we start to see activity rebound, many sectors still need recovery, and there is still a long way to go to reach previous levels.

The Street 

Strong relief for small taxpayers. A much-awaited increase in the limits brings relief to a sector often forgotten. At the same time, labor reform brings some common sense to the right to strike and allows companies greater flexibility in hiring. Some key points:

• The trial period extends from 3 to 6 months. Collective labor agreements may extend this period.

• The regime for independent workers with up to 3 collaborators, by a natural person, to be added to a productive enterprise.

• Contracts for work and services of professionals are excluded from the scope of the Labor Contract Law.

• Workers hired by contractors or intermediaries can ask the main company to withhold, from what these should receive, amounts owed for wages, compensation, or other labor rights.

• Elimination of all fines applied by judges for lack of registration or deficient registration.

• Severance Fund: Through collective bargaining agreements, a severance fund can replace the current severance pay.

• Employers can opt for a private system at their cost to pay severance or any sum freely agreed upon by mutual agreement.

• The possibility of dismissing with just cause those who incur severe misconduct by the following direct action measures:

  • Intimidate or threaten those who do not adhere to the strike.

  • Impede or obstruct the entry or exit of people or things to the establishment.

  • Cause damage to people or property of the company.

Inflation 

The highlight of the week was a very good wholesale inflation figure for June: 2.7%, which brought the 2% monthly inflation target closer.

Capital Markets - Actionables

In a volatile market, caution and analyzing the impact of measures is everything. As we have been mentioning, the timing of the carry trade can make all the difference, and this week, it paid off for those who bet on the peso with a 6% dollar drop + approximately 1% interest rate. However, if done midweek, this trade turned negative. Remember, the country's movements are abrupt and fast, so much risk is assumed in this type of operation. In the long run, we see much value in betting on the peso with a government convinced it will win the arm-wrestle against the dollar (only for aggressive investors willing to take significant exchange rate risk).

The CER curve with positive yields takes on a different color, and as we have seen, Lecaps for cash management generate a strong differential against Money Market returns. The migration of BCRA debt to the Treasury will also create a differential due to the non-payment of Gross Income, and if there is a rate hike, we will see a rate increase in several instruments in the market.

In a week of rising country risk and a blow to bonds, we see a better entry point with a government that keeps scoring fiscal points in its favor.

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Brief Reflection

May's growth over April marks the first month of growth in the Milei era, and the government has its first triumph in the real economy. Facts, not expectations. Argentina's dichotomy couldn't be more evident; when the economy seems to start recovering, the market doesn’t.

The twin surpluses marked a growth era for the country "at Chinese rates" two decades ago, and seeing them consistently again undoubtedly gives us much hope. For now, the trade balance is very firm, and the upcoming investments and the energy sector's takeoff seem to support the trade surplus. The downside? The fiscal surplus seems tenuous and under increasing pressure. The debt on the Treasury's shoulders and a country tax that currently has no replacement raise many doubts about the surplus's sustainability for next year.

In the duel with the market, the government seems to have won one battle but lost another. It reduced the gap somewhat but increased country risk and dropped bonds. In the short term, a lower gap seems more favorable to the government, and it trusts that country risk will decrease as it continues to show good fiscal numbers and bolsters confidence with upcoming payments already secured. For now, a tie. The caveat is that while the government keeps making a difference by buying cheap and selling high, the dream of large-scale arbitrage remains.

Having resolved most of the puts, the government continues advancing in macro normalization to lift currency controls. Fewer issues remain, and if there are no pesos, inflation will lose its inertia and, through the crisis, cease to be the problem it has been for nearly two decades.

The signing of the May pact and the provinces adhering to the RIGI are beginning to shape a new country. I believe we are facing a historic opportunity to change the paradigms of the past that led to stagnation and recurrent crises. The gain in competitiveness will not come from a devaluation but from a tax cut that will translate into real fiscal competitiveness in a globalized world, in a country with great natural resources and incredible human talent (otherwise, how would we survive in such a changeable country?). They have accelerated monetary policy, and lifting currency controls seems closer, although the gap is at 50%. Correcting imbalances in the exchange market is crucial for the country to have healthier foundations to grow again.

Argentina needs a highway to do business, not a pothole-filled street; are we closer? Today, we have another 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

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