Green, lovely green. It was a great week for Argentine assets and the government. After stormy weeks, we had a shower of good news: Basic Law, Swap with China, IMF, and Inflation. What will be the government's agenda with the Basic Law approved in the coming weeks? The week left us with a lot to analyze and reflect on.

Dear ArgenGrowther,

Each edition will see the week's primary data and delve into different sections of our beloved Argentina to see their impact, understand what is happening, and make better decisions. This time, we have a bonus track added to the four main sections:

• Data

• Bonus Track

• Understanding What’s Happening in Detail

• Actionables

• Brief Reflection

Financial ArgenGuide:

Data:

• MEP: 1,244.64; -2.94%

• Country Risk: 1,382; -12.64%

• AL30: 56.45; 9.93%

• BCRA:

  • Foreign currency purchases USD 0 million.

  • Reserves USD -131 million; Today, USD 29,166 million.

• May 2024 Inflation:

  • General level (CPI): 4.2% monthly.

  • Core: 3.7% monthly.

• Tenders: offers for $16.4 trillion; awarded $5.4 trillion in:

  • Lecap (S12L4): Deserted.

  • Lecap (S16G4): Deserted.

  • Lecap (S13S4): 4.25% TEM; $5.4 trillion.

Now, what does all this mean?

Positive or negative? Spoiler answer: POSITIVE! In bold, uppercase, and with an exclamation mark. Expectations needed some good news, and there were several. Questions were cleared, the government showed political strength, and inflation closed the week with a better-than-expected number.

Bonus Track: Bases Law

Let's go with a mini-summary of the Basic Law for informational and enumerative purposes without going into depth.

• An economic emergency is declared, and powers are delegated to the President:

  • Extension of powers to make decisions by decree without going through Congress (this is common in Argentina; all presidents since 1983 have had it).

• State reform:

  • Possibility to close agencies, dependencies, and entities by decree.

  • Elimination of the permanent staff in the State.

  • Several companies currently in State hands can be privatized.

• Contracts:

  • Development of public-private work.

  • Extension of concessions from the State to the private sector.

• Labor reforms:

  • Easier employee hiring.

  • Regularization of precarious employees.

  • Introduction of new forms of hiring.

  • Elimination of entry and exit barriers in labor contracts.

  • Extension of trial periods.

  • Introduction of dismissal insurance as an alternative to severance pay (aims to end labor lawsuits).

  • General deregulations of the labor market.

• Energy reform:

  • Deregulation of the energy market.

  • Replacement of the concept of energy sovereignty with that of maximizing income.

  • Expansion of exploration and exploitation rights.

  • Liberalization of hydrocarbon trade.

• Large Investment Incentive Regime (RIGI):

  • Fiscal, exchange, and legal benefits for 30 years for those who invest more than 200 million dollars.

  • Investment promotion regime.

  • Benefits for local suppliers.

• Moratorium (rejected in the Senate with possibilities of reintroduction by Deputies):

  • Elimination of the possibility of retiring without contributions.

  • Replacement of pensions without contributions with a subsidy for old age, those below the poverty line.

• Earnings and Personal Assets:

  • The decrease in the Earnings floor was not approved.

  • The increase of the Non-Taxable Minimum of Personal Assets was not approved, nor was the surtax for the exterior with benefits for early payment this year.

Understanding What’s Happening in Detail

Dollar and Strong Peso.

Good news helped, and we had a week that honored the strong peso. Questions that had been adding volatility to the markets were cleared.

With the confirmation that the swap with China is renewed and payments are postponed until 2026, the government will not have to face the payment of USD 5 billion (CNH 35 billion) in the coming months, giving greater room for maneuvering in the short term. On the other hand, the IMF also confirmed 800 million dollars after Argentina exceeded the program's goals with the IMF in its 8th review. Remember that Argentina has a USD 44 billion program with the IMF, and this year, the goals set in the framework of the program's reviews have been met. The country must be able to refinance this program and extend the payment terms, which are very substantial in the coming years.

Lower uncertainty = Lower volatility

Lower volatility = Greater stability

Greater stability = Improvement in economic expectations

We have mentioned that the pace of foreign currency purchases by the BCRA had significantly slowed; it seems that the strong purchase pace took a break, and looking at the average of the last few weeks, we are very close to zero.

Added to this, the President mentioned at the Argentine Economic Congress (CEA) that it is very likely that the BCRA will sell dollars in the third quarter of the year due to Argentina's seasonal issue, which is what they have stipulated within the economic program.

Last week's statement that the flare doesn't scare seems to have even more substance after the vote in Congress on the Basic Law. There is no oxygen for a dollar surge with the recession and lack of pesos (contraction of the monetary base) that naturally extinguished the fire and put a ceiling on the dollar's rise. 

Recession = Less pressure on the exchange rate

Contraction of the monetary base = Less pressure on the exchange rate

With the Basic Law's approval and the capital's regularization, we can have oxygen for the Strong Peso. Will we see an inflow of foreign currency with the regularization that helps the peso's appreciation? After a week of good news, the path is cleared to return to a gap that only reflects the PAIS tax. At the same time, the government had said that if the Basese Law were approved, it would lower the PAIS tax to 7.5%; if this is effectively executed, the dollar at 1,250 seems expensive.

Higher dollar income = Greater pressure for the peso appreciation

Greater pressure for the peso appreciation = Less pressure on the exchange rate

Recomposition of Public Accounts

Central Bank of the Argentine Republic - BCRA

On the way to destroying remunerated liabilities but accumulating fewer reserves than expected? This seems to be confirmed as the weeks go by, where the reserves were also impacted by energy payments this week.

BCRA-Treasury Relationship. We see a substantial change in this section within the recomposition of public accounts and the economic program. Fundamental to the path towards the normalization of the BCRA-Treasury relationship is that there is no financing from the BCRA to the Treasury, and the economic team has already ensured that they will strictly comply with this. To put it in perspective, in the 12 months before this government took office, BCRA issued a total of 50 trillion at today's prices to finance the Treasury, and today that number is negative. Words are unnecessary.

Less financing = Less monetary issuance

Less monetary issuance = Lower inflation

Remunerated Liabilities

This week, there was no massive migration of Pases in the Treasury tender, as only maturities were renewed. We will probably have to wait another 15 days to see if we have another movement of the mountain of pesos from Pases to Treasury. In any case, the Pases are no longer the problem they were; we can see that they are practically at their lowest in recent decades as a percentage of GDP. 

Lower remunerated liabilities = Less monetary issuance

Less dollar purchase = Less monetary issuance

Less monetary issuance = Lower inflation

We mentioned that the constant migration of pesos from BCRA to the Treasury aims to clean up the BCRA's balance and, as a clear counterpart, a higher debt in the Treasury's head. Is the government seeking to strengthen BCRA to pave the way for removing the exchange rate control? According to the government's communications, this seems to be the case, but liabilities are only part of the equation.

Tenders auctions and Rates

In the bond tender, the Treasury again rejected a mountain of pesos and left the shorter Lecaps deserted, which had no minimum reference rate, to validate a rate above what was traded in the market (estimated by the curve) in the September Lecap.

After some busy weeks, we saw some calm in the rates and prices of the Lecaps and a government statement to the market: "Real negative rates are over.” For now, this is just a statement, with a small sample in the last tender that validated an Effective Monthly Rate of 4.2%, given that when we buy in the secondary market, rates are well below that 4.2% per month. Again, the government is getting ahead and showing that it is attentive to the curves and market sentiments. It remains for inflation to finish coupling to the crawling and for the market to start seeing positive real returns on several fronts. For now, real negative rates are just a statement; we do not find them in any instrument.

Economic Activity

Some positive numbers start to be confirmed month by month. Is it only possible to go up from the bottom of the pit?

Economic Recovery

We see a strong recovery in retail sales according to the CAME index. Are we heading for a V-shaped rebound? Have we already found the bottom of the recession? I think it's still too early, but the numbers show us that we can be optimistic and that the worst of the crisis is over.

The Street

The CPI data enormously helps the path of salary recovery against inflation, which is excellent news for the government. The street is beginning to regain purchasing power.

The recovery of salaries is fundamental as a thermometer of society and endurance capacity. If we have already seen the bottom, does that mean the worst is over, and people continue to support the government despite everything? The sharp drop in inflation, I think, undoubtedly contributes a lot to these aspects.

The History

Can we leave behind the last 100 years and stop repeating the cyclical crises that have left us as the black sheep of the world? I think that's the game we're playing right now. Will it be the turning point for the economic takeoff of a country with many tools to do so? Or will we continue on the same path and head towards another crisis in a few years?

In the last 70 years, we have spent the most time in recession. To leave those statistics behind and start a new path, it is necessary to lay good foundations for investment to return to the country and allow the development of long-term policies at the national and company levels.

Inflation

Section soon to disappear. The CABA data anticipated an excellent national number, with a CPI of 4.2% for May and the core at 3.7%. Here, we see one of the most outstanding achievements of the current government. The core had not been at these numbers since January 22.

The challenge will come from the regulated ones and their impact on the general price level. This time, the regulated ones increased by 4% and must be corrected.

What can be said is that as long as the fiscal anchor is there, the government dismantles the remunerated liabilities and does not buy so many foreign currencies, there will be no pesos to inflate the economy. One less problem here. The inflation problem is not over, but the game is being won.

If we look at the first numbers recorded in June, we see that they continue downward, very close to achieving stability in food and beverages (0%), among other items.

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Capital Markets - Actionables

Green is back. A political victory was needed for the government to return to the positive path, and this past week was undoubtedly that way. The approval of the Bases Law clears several questions regarding the country's diagram proposed by the Executive and the possibility of carrying it out, and the assets react accordingly. 

The drop in risk shows this, as well as the rise in bonds. It's an excellent week for bonds, although we have not yet surpassed the previous highs from a few weeks ago. 

The drop in the dollar helped maintain more stability in the peso curve and gain from the dollar drop and the compression of rates—an excellent week for peso assets in general. The government's tender also gave us some reward (approx 1%) when the tendered Lecaps went to quote in the secondary market.

Stocks responded with a timid rise to the approval of the Bases Law, evidencing the volatility and uncertainty that still needs to be cleared. Busy months could mean significant profitability or a great loss depending on the entry moment, only for brave and aggressive profiles. 

The relevant point for pesos came from the expectations side. It seems we only talk about expectations, but when we look at the market, we understand their importance. The Minister of Economy mentioned at the CEA that the real negative rate is over, and the Secretary of Finance did the same on Twitter. What does this mean? That the rate the government will pay will begin to be above inflation. Since taking office, the government had used liquidation as the primary economic policy tool; there was no refuge for pesos, and beating inflation was an odyssey. According to the government's statement, this stage seems to end soon, but we are not there yet. If we want to beat inflation, we must take many risks, and nothing is guaranteed.

Rate drop = Price rise

We affirm that as long as the government continues to show good numbers, the drop in Country Risk will eventually resume, and the rate in hard-dollar bonds will continue to compress.

Brief Reflection

We keep dancing to the rhythm of politics. In this case, for the first time since the government took office, we see the Legislative body giving more than favorable news to the Executive. The Bases Law was sanctioned after a marathon session and a solid shave for the project. Although we take the positive point (an almost ideal scenario for the government, without 2/3 rejections in the Senate), there are some vital questions, especially in the revenue chapter, given the government's setback in the Earnings chapter. Can the government turn that setback around and start governing with more political support?

The fiscal surplus will clearly be the anchor of expectations that the government is unwilling to negotiate for anything, and the President makes sure to emphasize it in every exposure. This is excellent news for those betting on the country and the cleanup of public accounts, but there is still a long way to go, as the how is a question with few answers. 

Is the world coming to the rescue of a forgotten Argentina? President Javier Milei is the star of the G7. To this, we add a close relationship with Giorgia Meloni, President of the Council of Ministers of Italy; the bond strengthened earlier in the year with the candidate for President of the United States and top favorite to win the elections, Donald Trump, Silicon Valley, and many more augur a splendor of the country in its relationship with the world. At the same time, rumors are beginning that the government would have agreements for USD 15 billion to help lift the exchange rate control and that a future Trump government would have preferential treatment towards Argentina.

The government's program was paved on Wednesday with a favorable vote in the Senate. That same day, the President gave hints of a path towards lifting the exchange rate control: resolve the BCRA's remunerated liabilities and the puts. There is no exact moment; the market will give way out as it accepts the proposed swaps and the government manages to dismantle the potential 20 trillion pesos of issuance in the puts.

Are we going to a country where politicians represent the population and act according to what Argentina needs? Will the judges be up to the circumstances and adjust to a liberal Argentina? The three powers acting in the same direction will be a fundamental pillar to show the world that Argentina has changed.

Argentina needs a highway to do business, not a street full of potholes. Are we closer? Today, strongly 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

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