Dear ArgenGrowther,

This week was marked by the international context and the same dynamics from the Central Bank of Argentina (BCRA) that we are accustomed to, buying dollars and accumulating reserves.

Financial ArgenGuide: Argentina taking off?

Data:

• USD MEP: +2.11%

• Country Risk: 1216; -8.64%

• AL30: +4.57%

• BCRA (Central Bank of Argentina):

  • Purchased foreign currency amounting to USD 601 million.

  • Increased Reserves by USD 530 million in the last week. Currently at USD 29,846 million.

• Trade Balance March 2024: +$2.059 billion.

  • Year-over-year March: +$3.170 billion.

  • Exports: -0.4% monthly; +11.5% year-over-year.

  • Imports: -0.9% monthly; -36.7% year-over-year.

  • Wholesale Inflation March 2024: 5.4%

Now, what does all this mean?

Positive or negative? Spoiler alert: a calm week, given the international context. A dollar rise that doesn't scare and a substantial drop in country risk, with the recovery of bonds and positive inflation data.

Dollar. The 2% rise this week seems to scare no one, the peso remains strong and the major harvest has yet to appear, so we continue with the premise that the 2% crawling peg remains untouched and no currency jump is foreseen.

No currency jump = Greater predictability

Greater predictability = Improvement in economic expectations

At the same time, there is growing confidence in the financial system and government as measured by private deposits in USD, which have seen a meteoric reconstitution.

Higher private deposits in USD = Greater confidence in the system

If there are no changes in the current exchange system, we will see intense downward pressure on the gap and on the Contado Con Liquidación (CCL) in the coming months. It is estimated that the soybean and corn harvest will exceed $25 billion, which, if realized, would mean that $5 billion would be traded through the CCL market (by the current exchange system, 80% MULC / 20% CCL), a massive number for today's market.

Higher sales through CCL = Greater supply of dollars via CCL

Greater supply of dollars via CCL = Greater pressure on the currency appreciation

We haven't talked much about the international context until now. However, it's time to consider it, given the substantial impact it can have. Firstly, we see that the dollar index (DXY) is at its year highs and that emerging markets have followed this dollar appreciation with a consequent devaluation; Brazil, our giant neighbor, is today with a 9% devaluation of the Real (BRL) so far this year. Considering that the peso has appreciated over the year, a dual effect is evident with our main trading partner, and it raises many questions.

Rise in dollar index = Devaluation of world currencies against the USD

Devaluation of the BRL + Appreciation of the ARS = Strong increase in Brazil's competitiveness vs. Argentina

Substantial increase in Brazil's competitiveness vs. Argentina = Pressure for the devaluation of the ARS

Recomposition of Public Accounts. We continue with the same dynamics: the locomotive at full speed and the blender at full steam. New purchases of foreign currency by the BCRA and the process of accumulating reserves and sanitizing the Central Bank continue. Within the process of sanitizing public accounts, we see that the placement periods of the treasury have been extended from the last quarter of 2023 to the first of 2024, moving from an average placement period of 260 days to 484. Coupled with negative real rates, we see a positive combo for the government, remembering that the entire short CER curve is in negative territory.

Longer placement period = Fewer short-term commitments for the government Fewer short-term commitments for the government = Fewer short-term payment risks

Monetary aggregates and the monetary base continue to be destroyed. The possibility that the government has surplus pesos from the auctions, added to the fact of being in surplus, allows it to use those pesos to buy dollars and remove pesos from circulation. This is done via the purchase of bonds held by the BCRA. It is worth mentioning that the monetary base in real terms continues to hit historic lows.

Greater dollar purchases from the BCRA = Greater monetary emission

Greater dollar purchases from the Treasury = Reduction of the monetary base Lower remunerated liabilities = Lower monetary emission

Economic Activity. Last week, we wondered if the stabilization of inflation and the drop in the rate were good times for Argentina to grow with credit. Precisely at the Llao Llao forum, the President stated that he expects the economic recovery to come from this angle: "Economic recovery will come from credit. Fiscal savings allow us to recover 15 points of GDP that previously were consumed by the State and that now will serve to finance the private sector," showing that the engine of economic recovery will be the private sector.

Lower inflation = Greater stability

Greater stability = More credit

More credit = More economic activity

Inflation and Relative Prices. One of the main factors explaining inflation in the coming months is the correction of energy prices. The coverage of the average electric price continued to improve in March and is now at 64%, a level similar to what Cambiemos left in 2019, having risen strongly from 20% in January. To put it in perspective, what took the government of Macri four years to correct, the government of Milei did in four months.

The disinflation process continues. Wholesale inflation in March saw a strong retraction against its February measurement from 10% to 5%, and in food and beverages, we see that the process is practically continuous every week.

Capital Markets - Actionables

Sovereign bonds resumed their rise in a particularly complex context, and Argentina's recovery seems to face headwinds. Geopolitical conflicts have the world on edge and directly impact the markets, with the shift out of risk assets (risk-off) reflected by the rising DXY, as noted earlier. At the same time, the U.S. Federal Reserve (Fed) continues its policy of high rates, and it seems that hawkish policy is here to stay. However, the headwinds do not stop there; the U.S. 10-year bond (a global reference for bonds) has also been climbing this year.

Despite the complex context, this does not change the positive outlook on sovereign hard-dollar bonds, which offer extraordinary yields (we continue to see some bonds with yields above 20%). Optimistically, sanitizing public accounts will provide exceptional returns in a historically tricky country. On the other hand, those who assumed an exchange rate risk and opted for peso-denominated assets continue to make a difference despite the rise in the MEP rate this week. The government is building the curve with Lecaps and continues to mark the improvement process via rate compression.

Setting a rate (buying a bond that yields a specific rate and keeping it fixed until maturity) seems increasingly easy (rebuilding the peso curve). Still, it is more difficult to achieve good returns.

There are still opportunities in sovereign bonds (almost no other reasonable alternatives at the local level) and also opportunities to carry, although increasingly limited given the rate drop (a riskier alternative), closely monitoring what the government does with the pesos. As the government continues to show good numbers, the drop in Country Risk will continue, and rates on hard-dollar bonds will be further compression.

Rate compression = Price increase

Brief Reflection

The world poses an additional challenge for recovery with so much volatility. Still, it seems that the market, the IMF, and the leading global players like the government's economic policy see its fruits, and faster than expected, positioning Argentina as a relevant player for the coming years.

Expert Outlook: As we have been discussing week by week, a strong peso seems to have arrived to stay, and the liquidation of the significant harvest will test how well the government handles the influx of dollars. Avoiding a solid exchange rate appreciation seems to be one of the relevant points in Argentina in the future. Will the government continue at the helm with a scenario opposite to the one initially outlined? We also mentioned that maintaining the exchange controls seems to be in the government's interest. Minister Caputo mentioned there is still time before they can be lifted, so we will have exchange controls longer than initially thought. Will it be lifted in 2024?

The new macroeconomic conditions and the government's chosen economic policy led to changes, rethinking past investments and changing dynamics. The dollar as a value refuge seems to have come to an end, and this raises many questions. On the other hand, for entrepreneurs, it seems to be a time when both agriculture and industry will need to seek competitiveness through higher investments and better management to face a strong peso and a different commercial opening than we have been having.

Argentina needs a highway for doing business, not a street full of potholes. Are we getting closer? Today, yes.

See you next week, Vamos Argentina!

Nau Bernués
Founder, ArgenGrowth

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