The Spotlight on Argentina or Milei?

A challenging week for the Argentine financial market ended with a pause. However, this doesn’t alter the narrative of a historic fiscal and financial surplus for 2024, which would place Argentina among a select group of nations. The crawling peg will adjust to 1% in just a few weeks, and the exchange rate inertia will shift.

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

One way or another, Argentina continues to be the country of good news. The capital markets cooling off a bit (Merval and bonds down after a historic rally) doesn’t change the fact that the global spotlight is still on this country of positive developments.

Inflation and the peso's devaluation are on its way out. With a new step in the crawling peg to 1%, how long will this pace last if inflation quickly reaches 1% monthly? Will it be at Argentina’s speed? Could we finish 2025 without a crawling peg, without currency controls, and with an appreciating peso?

Economic activity has already rebounded and is growing, although some warning signs remain. Many stem from the agricultural sector, where the drought isn’t helping, and defaults by companies like Los Grobo and Agrofina are raising concerns in this crucial area for the country.

For now, Argentina continues playing its own game, drawing the global spotlight as we await a major announcement that could define the country’s future. The world’s fascination with Milei seems boundless—but how much value lies in that? Will Argentina know how to capitalize on it?

Will Argentina become a highway for doing business, showing the world it has truly changed? Are we closer to that reality? Today, there is no doubt: the answer is yes.

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#data.

Is Argentina's Economic Shift Positive or Negative?

Spoiler alert: green amidst the storm. Let’s not be misled by this week’s red numbers in the market—the sustained growth of assets throughout 2024 strongly overshadows the red we’ve seen this week. Moreover, the broader story hasn’t changed: the Central Bank continues to buy reserves, and December’s deficit is largely explained by seasonality, overshadowed by 2024’s financial surplus.

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Understanding in Detail: Dollar and the Strong Peso

Dollar and the Strong Peso

The big news of the week: the exchange rate anchor is changing. The crawling peg will adjust from 2% to 1% starting February 1. What does this mean?

• Changes in expectations for the dollar throughout the year are already reflected in dollar futures.

• A reduction in inflationary pressure from devaluation leads to less pass-through.

• A lower exchange rate by year-end (see chart).

Less devaluation = less inflation.

Meanwhile, the Central Bank continues buying foreign currency, and little change has occurred. January has been very positive for the Central Bank, and fears of an overvalued exchange rate don’t seem to affect the foreign exchange market.

Rebalancing Public Accounts

We must start by highlighting the historic fiscal surplus achieved in 2024: a 1.8% primary surplus and a 0.3% financial surplus (as a percentage of GDP). This marks a new era for Argentina, with fiscal discipline as the cornerstone of the economic program and a key tool to achieve set goals.

After a brutal adjustment (~5% of GDP), the government managed a historic feat, closing the year with a financial surplus without defaulting—unprecedented in modern Argentine history. The macroeconomic order achieved in 2024 was palpable, and what’s notable is that this adjustment and reordering were achieved with social peace.

Central Bank of Argentina (BCRA)

There was speculation about the Central Bank cutting rates last week, but as long as the crawling peg remains at 2%, there isn’t much room for a rate reduction since the incentive to hold pesos would be virtually null. In this regard, there is some logic behind not lowering rates last week. Given the reduced number of business days, a cut this coming week will have less impact.

With the devaluation rate set to drop to 1% per month starting in February, it would make sense to lower rates. Otherwise, the current interest rate would become "too high" relative to inflation and devaluation. Simple calculations: devaluation = 1%, inflation < 2.5%, interest rate > 2.5% (forgive the rounding). There is significant room to lower the Monetary Policy Rate (TPM).

From the exchange rate anchor, we now move to the monetary anchor. In April last year, the government set a goal to maintain the Broad Monetary Base (BMA) at $47.7 trillion. This target was achieved, as the nominal average of the BMA was $47.6 trillion (April 2024 - January 2025). What changed significantly was the composition of the BMA. At the beginning of this program, the Monetary Base (BM) represented just 25%; today, that figure stands at 63%—a very positive development. At the start of 2024, the BM was under $10 billion, but by early 2025, it surpassed $30 billion.

Why is this important? As mentioned several times, the President has highlighted this as one of the critical points for lifting currency controls: BM = BMA. At one point, we were far from achieving this; now, while progress is still being made, we are much closer. With the substantially reduced excess pesos in the economy, lifting currency controls is within reach.

Additionally, this week, the government took new steps toward lifting currency controls and fostering currency competition. From April 1, it will be possible to use any desired currency for everyday transactions. There is a transition period, but by April 1, buying a snack at the kiosk with dollars should be feasible.

National Public Sector

The 2024 surplus was mainly achieved through a historic reduction in spending, surpassing the real-term reductions seen in 2002. Which areas bore the brunt of these cuts? Pensions and retirements, unfortunately, took the largest hit, accounting for 19% of the total adjustment. This was followed by transfers to provinces (17%), direct real investment (15%), social programs (12%), energy subsidies (10%), and wages (9%).

December’s numbers, traditionally challenging due to high seasonality in primary spending, closed with a primary deficit of $1.301 trillion, ending the streak of surpluses. However, this figure is 70% lower than in December 2023. January remains uncertain due to the elimination of the PAIS tax and the question of how that revenue will be replaced.

Debt Auctions

In the year’s first auction, with limited maturities, the government secured $3.49 billion, of which $1.8 billion will go to the Treasury’s buffer at the Central Bank. This peso absorption resulted in a rollover rate of 206% this time and extended maturities, marking another successful auction for the government.

The rates paid were in line with the market. While they don’t currently represent a significant cost, they could become more so if the government succeeds in reducing inflation and maintaining the crawling peg. Only future developments will confirm this.

At the same time, the government enacted a measure this week to limit certain foreign operations. Investors participating in primary auctions with cable dollars will be restricted from selling against MEP dollars for 90 days after subscription.

Economic Activity

Economic stability is driving growth, and SMEs are taking notice. December showed strong growth in SME industrial production (+7.3% YoY), suggesting the month closed on a high note.

Private credit is booming but still has much room for recovery. In December, it grew by 4.5% month-on-month. Will Argentina eventually become a country that grows on credit? For now, this challenge remains unmet. The country primarily grows with its resources.

Meanwhile, the energy sector continues to thrive. While it’s no longer surprising, the country’s energy boom remains impressive—expectations for 2025 point to even better production numbers and a trade surplus compared to 2024.

Inflation

December’s inflation data came in at +2.7%, just on the edge. This gave the government enough confidence to reduce the crawling peg from 2% to 1%. This figure starkly contrasts with the brutal 25.5% inflation seen in December 2023, bringing annual rates to a different level, replacing 25.5% with 2.7%. From now on, we’ll see significantly lower year-over-year rates, especially for wholesale inflation, which dropped from 276.4% in 2023 to 67.1% in 2024—a near-total collapse.

However, 2024 also saw brutal dollar inflation. With a relatively stable dollar and still uncontrolled inflation, Argentina swung from being a "cheap" dollar country to an expensive one almost overnight. Argentina—unbelievable. A phrase that captures so much with so little. Explaining Argentina to outsiders remains a difficult task.

Despite this, the process of becoming a "normal" country continues. Relative prices are still adjusting, and more must be done. While 2024 saw significant price movements, 2025’s shifts should be less abrupt.

Deregulations

The Ministry of Deregulation has introduced significant changes impacting prices and market competition. It is also addressing many bureaucratic hurdles and trade barriers. This week, the government announced updates to the anti-dumping system, and Argentina has become a world leader in the number of measures implemented.

The government modified the anti-dumping system to, as officials put it:

"Prevent abuses that lead to higher prices. The new measures will reduce the duration of future anti-dumping policies from a maximum of 5 years with unlimited renewals to a maximum of 3 years, with a single extension of 2 years."

What are anti-dumping duties? These are measures imposed when imported products are sold below market value in their country of origin, creating unfair competition with local products. In Argentina, such measures have often become entrenched, preventing competition and inflating prices for consumers and industries.

Examples:

• Bicycles have been subject to anti-dumping measures for over 20 years, significantly raising prices.

• Electric irons in Argentina cost over $100,000, while Europe's cost less than half that.

• Water pump import duties are 246% of their total import value, food processors 203%, and fans 164%.

Key updates to the anti-dumping system include:

• Investigations before implementing anti-dumping measures will now be limited to 8 months instead of 12.

• Measures will last for 3 years, with one possible extension for two additional years, replacing the previous system of unlimited renewals.

• Documentation will now be submitted to a single entity, the National Commission on Foreign Trade, instead of two separate agencies.

• The National Commission for the Defense of Competition and the Undersecretariat of Consumer Protection will participate in case analyses to ensure decisions balance public and consumer interests.

Impact of these reforms:
The updated measures aim to foster competition, restore the original purpose of anti-dumping duties, and promote a more transparent and balanced foreign trade system. Argentina, which currently leads the world in anti-dumping measures by import amount and ranks sixth in absolute terms, seeks to reduce costs for consumers and industries.

Actionables

After a long rally, the Argentina trade has taken a much-needed break. Argentine assets pulled back significantly this week. Despite a relatively stable international context, this week's trend was clear: selling Argentine assets and reallocating to others. Brazil recovered after being battered, while the U.S. market also bounced back with notable volatility in the 10-year Treasury yield. The focus of the hit remained almost entirely on Argentina.

Even so, the overall picture remains intact:

1. Hard Dollar Bonds:

   • Bonds remain attractive, particularly shorter-term options such as BPY26, due in 2026 and likely to be paid by the current administration. This bond offers an annual yield of about 7% in dollars.

   • Sovereign bonds continue to provide returns exceeding 10%, slightly increasing this week. Even though country risk increased somewhat this week, the downward path of country risk (which implies rising bond prices) is expected to continue.

2. Peso Strategies:

   • With the Central Bank consistently purchasing foreign currency and increasing its sterilization capacity, carry trades are an excellent option for those with strong risk tolerance. Conservative or moderate investors, however, may wish to avoid this strategy.

   • Fixing rates at current dollar levels can yield returns exceeding 2% per month in pesos as the curve continues to compress. The crawling peg reduction could add a few extra points to this carry strategy. Remember, this approach assumes that the MEP dollar converges with the official exchange rate, making it unsuitable for risk-averse investors.

Carry vs. Sovereign Bonds:
Evaluating the trade-off between carry trades and sovereign bonds is essential. Carry trades offer potential annual returns of around 20% in USD, while sovereign bonds yield roughly 10%. While the differential is tempting, the risks must be carefully weighed. For now, the preference leans toward sovereign bonds with a 10% return and the possibility of slightly higher gains if yields compress further.

3. CER Bonds for Peso Investments:

   • For those who need or prefer peso-denominated investments, CER bonds continue to provide an appealing option, with real positive yields exceeding 6%.

   • This is a good time to manage liquidity while earning positive returns. However, it’s worth noting that in Argentina, "safe" investments are always relative and not suited for everyone.

Finally, Moody’s credit rating upgrade for companies operating in Vaca Muerta was another positive development this week, further boosting the outlook for businesses in the region.

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

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