Dear ArgenGrowther,

This week, there was a lot of movement in Argentina, and the path that the country will take still remains to be seen. The country needs a highway to do business, not a bumpy road. 

In today's edition, we’re going to have the main section of Financial ArgenGuide, and we’re going to delve into Business Environment and Market Opportunities again in May:

Financial ArgenGuide: Twin Surplus

Data:

• USD MEP: +2.71%

• AL30: +3.74%

• BCRA (Central Bank of Argentina):

  • Purchased foreign currency amounting to USD 1.019 million.

  • Reduced Reserves by USD 13 million in the last week. Currently at USD 28.203 million.

• Placement of BOPREAL Series 3 (BPY26): USD 100 million. Out of a total remaining series of USD 2,409 million.

• Inflation February: +13.2%; 12-month cumulative 276.2%.

• Fiscal Outcome February:

  • Primary: Surplus of 1,232,525 million; cumulative 3,243,270 million (0.5% of GDP).

  • Financial: Surplus of 338,112 million; cumulative 856,520 million.

  • Total Real Year-over-Year Revenue: -6.3%.

  • Primary Real Year-over-Year Spending: -36.4%.

  • Accumulated Total Real Year-over-Year Revenue: -2.5%.

  • Accumulated Primary Real Year-over-Year Spending: -38.0%.

• Monetary Policy Rate: changed from 100% Annual Nominal Rate (TNA) to 80% TNA.

• Argentina's S&P Credit Rating: from CCC- to CCC.

• Debt Swap in Pesos: 42.6 trillion due in 2024 out of a possible 55.3 trillion nominal value.

Now, what does all this mean?

Positive or negative? Spoiler alert: It was a very positive week with aspects to review. Inflation decreased significantly compared to January, marking a significant deceleration process as the government seeks to anchor expectations. On the other hand, we continue with excellent data from the financial level and the BCRA.

Dollar. It was a very volatile week, but the peso remains very strong. The Central Bank's rate cut did not trigger a dollar spike, which ended the week with a slight rebound. The spread continues to maintain very low levels if we discount the PAIS tax, and no changes are seen on the horizon regarding monetary policy. For now, the crawling peg continues at 2%.

Will the rate cut put pressure on the exchange rate?

Destruction of pesos = Reduction of the monetary base. We had mentioned the difficulty the government could have in placing this week's Bopreal with the MEP at these values, which did not generate enough incentives to bid, and this was reflected in the amount of only 100 million (validating an implicit CCL of 1,385), which translates again into a peso absorption; this time, 85 billion pesos are absorbed. At the same time, a collection via PAIS tax of 15 billion pesos.

Clearing up peso obligations. The government managed to swap 77% of the peso bonds maturing in 2024. Essentially, the government extended terms from an average life of 0.46 years to 3 years. Of the 46.9 trillion issued, they distributed (all CER): 12/25: 30%; 12/26: 30%; 12/27: 22%; 6/28: 17%.

With a 77% acceptance, it can be said that the swap was a success, and the market also took it that way with a rise in CER bonds after the swap.

2024 peso debt swap cleared = Lower payment commitments in 2024

Lower payment commitments in 2024 = Increases payment capacity of all sovereign debt in 2024

BCRA Reconstitution. Continues strong dollar buying. This week, we had a change in monetary policy and saw a sharp drop in rates from 100% TNA to 80% TNA.

The rate cut has many impacts on the real economy and finances. We had been seeing that a rate cut was a latent possibility, and the BCRA, with a lot of command capacity, anticipates and lowers the rate, further diluting its liabilities.

Lower interest rate = BCRA pays less for its remunerated liabilities

Paying less = Emit less

We can see that a good part of the cleanup is due to the BCRA's remunerated liabilities going from 10% of GDP to 5%.

In recent months, the main factor of monetary emission was the interest on remunerated liabilities.

Not only does this imply a rate cut, but it also implies a positive factor for economic activity.

Lower interest rate = Higher economic activity

At the same time, the floor for fixed-term deposits was lifted, and rates went from 110% TNA to approximately 70% TNA (depending on the bank). This makes the already difficult task of making a rate in pesos even more challenging. The dilution continues as a strategy on the part of the government.

Economic Activity ≠ Financial Market. As we have seen every week, the Argentine financial world is experiencing very good moments with data that validate a recovery and a path of reconstitution every week. However, the flip side of this is an economy in full crisis and, for the moment, without a floor.

Capital Markets - Actionables

The country risk continues to fall, and the bond curve compresses the rate, getting closer to comparables (first step, Ecuador). That said, we still see value in Argentine sovereign bonds. We remain optimistic about taking advantage of the eventual rate compression (optimistic scenario).

Lower Rate = Higher Bond Prices

We saw a week with a lot of volatility in the dollar and movement in the peso curve. We posed the question of whether it was time to dollarize last week, and despite the abrupt rate cut, the dollar seems not to awaken. While the peso absorption from this week's Bopreal was not so relevant, we do see that the harvest is just around the corner, and dollars from exports are beginning to appear. Will dollars from imports with fewer restrictions also start to appear? Everything seems to indicate once again that the peso may continue to have the strength to hold the exchange rate.

Brief Reflection

The work from the MECON and BCRA surprises and does not surprise at the same time. We see that the government is closely following market variables and their impact and is very clear about the next steps.

Expert Outlook: Again, we were surprised (or not) by a great maneuver on the part of the government by lowering the monetary policy rate from 100% to 80%. It was expected, given the decrease in the inflation rate and the choice of dilution by the government, to emerge from the crisis. However, they did it before the market asked or demanded it. I want to emphasize that I consider it very important for the government to take the lead, set the pace, and have command of the helm. For now, I think the direction is correct regarding financial terms.

The bond swap dissipates the 2024 maturities and enormously aids in the payment expectations of all sovereign debt; the rise in the country's credit rating reflects the work done with fiscal balance as a fundamental and foundational goal of a new Argentina.

From a political point of view, it seems that the noise will continue until the May Pact, whether due to the rejection of DNU, discussions with governors, or the current issue.

See you next week, Vamos Argentina!

Nau Bernués
Founder, ArgenGrowth

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