People are still buying everything blue and white, while the peso gets stronger each passing week. Another week of announcements from the RIGI and deregulations. The strong peso seems here to stay, although revenue collection raises questions about the anchor of the economic program.

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1. Data

2. Understanding What's Happening in Detail

3. Actionable Items

4. Brief Reflection

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#data

What does all this mean?

Positive or negative? Spoiler alert: Go Argentina! We repeat because even though the revenue numbers aren't great, the peso and Argentine assets show much strength in a world that isn't always forward-moving. Will the country's courting of Elon Musk translate into investments?

Understanding What's Happening in Detail 

Dollar and the Strong Peso. Another week of appreciation for the strong peso and counting… The downward pressure following the reduction of the PAIS tax (with the importer exchange rate dropping from $1,120 to $1,025) was felt, and the peso ended the week with a 2.82% appreciation. The gap closes the week below 30% for the first time in a long while, and the feeling is that this is just the beginning. We also note that while the government has used the peso sterilization mechanism through the market, the firepower utilized so far has not been significant. As mentioned a few editions ago, "sell first, sell better" remains the norm.

Market vs. Government: The sensations are becoming reality, and today, the government is winning by a landslide.

Reiterating: Every week that passes, the chances of MEP converging with the official rate increase. A government that presents itself as strong and a market that starts to buy into it signals this. At the same time, we believe that the country's gain in competitiveness will come from tax cuts, not from devaluation.

Recomposition of Public Accounts

National Public Sector

August's revenue shows a "bad" number for the treasury. In a year-on-year comparison, we see that the real drop in income of around 14% raises questions about the anchor of the economic program, the fiscal surplus. The good news within this data includes some details, such as commercial VAT (excluding customs) growing by 13% in August compared to July, which, assuming a 4% inflation for the month, indicates a real consumption recovery of approximately 9% versus the previous month. Once again, export duties (DEX) marked a strong year-on-year increase of nearly 70% in real terms.

It’s also important to highlight the "base effect," given that August 2023 saw a peak in revenue due to the devaluation effect, among other factors. Thus, the year-on-year comparison takes into account a "good" revenue month in 2023.

Fiscal Surplus = Contractionary Fiscal Policy

Contractionary Fiscal Policy = Lower Economic Activity

Economic Activity

Economic activity is beginning to show many green lights in the seasonally adjusted series. However, sectors and "activity rebounds" vary monthly, so these early data should be taken carefully.

As we await confirmation of an economic activity rebound, we see progress in the RIGI every week. Mining is playing a strong hand, and there's talk of a USD 19 billion bet on the country, which would generate 15,000 jobs. The main beneficiary provinces in this case are Salta and Catamarca, which have investments of USD 9 billion and USD 7 billion, respectively, and in Jujuy, they would be USD 3 billion. Companies involved include Posco Argentina, Ganfeng, First Quantum Minerals, Eramet, Rio Tinto, and Alpha Lithium/Tecpetrol.

The provinces are beginning to play, and Neuquén is taking the lead. The Hydrocarbon Queen province is promoting investments below USD 200 million, so there’s no minimum capital limit within the province. Will it be the first of many?

It’s worth noting that the oil complex has displaced the automotive sector as the country's second-largest exporter. The sector's exports saw a 25.8% year-on-year jump, reaching USD 5.123 billion, the absolute maximum since the series began in 2002. This is just the beginning.

It’s not just foreign companies; Argentine companies are starting to show that they, too, will contribute. This week, Aluar, the country’s largest aluminum producer, announced a USD 400 million investment in a wind farm in Puerto Madryn, allowing it to achieve energy self-generation for aluminum production.

Repeating the Question: Will credit lift the country, as the President said several months ago? Mortgage loans seem to say yes. Banco Nación reports that 40,539 applications have already been received, of which about 7,000 are in the home search or signing stage. The bank reports that the total financial cost (CFT) is 4.72% for those cases with a 4.5% nominal annual rate (TNA). Of the applications, 62.2% are aimed at home purchases, 12% at construction, another 12% at expansion, 10.61% at second homes, and 3.18% at property swaps.

The number of properties registered with the Buenos Aires Property Registry increased by 31% in August compared to the previous year.

More Economic Activity = More Inflation

Deregulations

Sturzenegger's ministry is moving full steam ahead. The ministry states that they continue to clear out useless and obsolete processes. This week, several resolutions were repealed, including Resolution 1195/16, a schedule compliance registry imposed on all air traffic that later had no practical use, according to the government. Additionally, they moved forward with Resolution 1044/24, and Resolutions 164/94, 321/94, 78/03, and 331/03, related to the national citrus health plan, weevil plague, and various phytosanitary notebooks, were repealed, reducing useless or obsolete procedures. We can only agree with the government: "Less paperwork means more energy devoted to production."

The week's main course comes from the push to the commercial sector with multiple repeals, including the Gondola and Supply Law. The government suggests that deregulations will liberalize the commercial industry, strengthen competition, and save time and resources.

The Street

Another new increase for the Universal Child Allowance (AUH), together with the Food Card, brings the basic basket coverage to almost its entirety for the neediest. With 99% coverage, it far surpasses the percentage covered during the previous government, "only" 65%. It seems the chainsaw isn’t cutting here.

Meanwhile, the security ministry, headed by Patricia Bullrich, will announce an anti-blockade command to guard Vaca Muerta, the Rosario port, and other productive enclaves. The street will be fed, and "the activity will be guarded." This measure aims to "ensure productive security" to prevent protests like those of the Mapuches or unions from stopping productive agents.

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Capital Markets - Actionables

We repeat, Argentina is a valued refuge. Argentine assets keep rising in a convulsed world and show great resilience to global volatility. We’re repetitive: is finance ahead of reality? Will we see the rise that’s beginning to be glimpsed in market assets and also in the rest of the economy?

Argentina = Value Refuge

Speaking seriously, we can highlight that Argentine credit risk, as a leading indicator of what Argentina’s risk is, shows that we are almost at Latam levels. What does this mean? The difference paid by a bond of a top-rated Argentine company (Tier 1) is very similar to what a "peer" Latin American company pays. How does this translate, and what implications does it have? Firstly, Argentine companies pay less to borrow and refinance their debt. Secondly, we can also say there is an "appetite" for this type of risk and interest in Argentine assets. This could eventually translate into capital inflows and reserve accumulation; unlike the world (how strange), in Argentina, the corporate credit curve has less risk than the sovereign curve. Eventually, when considering investing in this type of risk, we will see more options, longer durations, and, if things go well, also lower yields.

Argentine stocks keep rising, and the Merval is at its highest since Milei took office. The trade-off between equities and fixed income is becoming increasingly relevant. In Tuesday's webinar, we will analyze this aspect in detail.

Remember that we live in a globalized world and can face headwinds or tailwinds from abroad. In addition to the expected rate cut, Brazil is banning Twitter and raising taxes to reduce its fiscal chaos. Agricultural commodity prices have rebounded slightly, and this directly translates into more dollars for the country.

Bonds in pesos and dollars remain an opportunity if we trust and believe that the government will do well. Always remember that Argentine assets are risky and not for the faint of heart.

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Brief Reflection

It was another good week for Argentine assets and the strong peso, giving the government another small victory. The race is long, but the government is steadfast in its efforts to deregulate and battle against measures implemented in the country in recent decades.

Week by week, the government somehow manages to show results from its program. The executive moves forward without pause and, in some areas, without haste (currency controls) to demonstrate management and a leaner state. The bickering in the Legislative contrasts with the government's united front in the executive: oil and water.

High-level business leaders support the government with words (and some actions), giving it strong backing in front of the public. Dollars or pesos? Few, very few. Mercado Libre's commitment of USD 75 million to generate 2,300 direct jobs and increase capacity and shipments seems small compared to the value of the companies with which the President rubs shoulders.

Another of the President's "great friends" is former US President Donald Trump, who, although now running for the presidency in a closer election, would be a great ally for Argentina if he wins. Will Trump’s victory bring visible results for Argentina?

Amnesty remains a hot topic; dollar deposits are increasing daily, and Argentine assets in the capital markets know it. Will we continue to see a rally in Argentine assets due to fresh money from the amnesty? Most likely, given the rumors, the amnesty will be extended until the end of the year, allowing for more clarification for asset regularizers and, at the same time, boosting the amnesty numbers.

The RIGI keeps moving full steam ahead, and we’re all waiting for the announcements to become reality. The carrot is huge, but for now, the only one eating it is Bugs Bunny. The dollars still haven’t arrived.

As we affirm each week, we continue to believe that the gain in competitiveness will not come from a devaluation but from a tax reduction that will translate into real fiscal competitiveness in a globalized world in a country with great natural resources and incredible human talent (how else would we survive in this ever-changing country?). Today, they move the goalpost for fresh money but give us a feast of deregulation and less bureaucracy. Will it be enough to get started? Argentina's risk premium is shrinking, so corporate profits should follow. Will Argentine businesses be ready to earn less? 

Argentina needs a highway to do business, not a street full of potholes. Are we getting closer? Today, let’s say yes.

See you next week, Vamos Argentina!

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Nau Bernués
Founder, ArgenGrowth

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