It's another month of twin surpluses and counting. The political noise continues, but is the government taking advantage? Economic activity remains sluggish, and the RIGI is starting to take shape. It was a week filled with movement, but there is still much to define.

Dear ArgenGrowther,

This time, we have news. Join our Free Webinar (in Spanish) next week. Also as every week, we have the primary data from the past week and delve into different aspects of our beloved Argentina to see their impact, understand what's happening, and make better decisions. The FInancial ArgenGuide is divided into four main sections:

1. Data

2. Understanding What's Happening in Detail

3. Actionable Items

4. Brief Reflection

Financial ArgenGuide:

#data

What does all this mean?

Positive or negative? Spoiler alert: Positive. The trade balance shows a strong figure in another week with relatively good numbers for the government, though the EMAE does not. A stable dollar and the Central Bank buying foreign currency are good signs.

Understanding What's Happening in Detail 

Dollar and the Strong Peso. The Central Bank continues its positive streak of buying foreign currency, and the peso marks another week of appreciation and narrowing the gap. This week saw little movement on both local and international fronts. The question is: Will the PAIS tax decrease on September 1st? Will the buying streak reverse once the PAIS tax drops? It's highly probable.

It’s also essential to note that the current import payment scheme, which has been reduced from 3 quotas to 2, will create more pressure in the coming months as quotas overlap (similar to credit card payments).

On another note, the agricultural sector continues to liquidate, and the peak of winter energy imports has passed. We’ll see how the Central Bank’s currency buying and selling unfolds in this new energy sector dynamic.

As long as the currency controls remain, complications will persist, and we won’t be a normal country. For the RIGI and investments to arrive, it’s crucial to remove exchange market regulations that complicate a company's and a country's normal operation.

There’s still talk of currency misalignment, but many indicators suggest this might not be true. The "crisis ratio" developed by J.P. Morgan based on Central Bank data shows that we are above the average, suggesting that currency misalignment might not exist according to this indicator. As we’ve mentioned week after week, we see a greater likelihood of convergence between the MEP and official exchange rates. Simultaneously, we believe that the country's gain in competitiveness will come from tax cuts, not from devaluation.

Recomposition of Public Accounts

Twin surpluses are stronger than ever. The eighth consecutive month of fiscal and trade surplus shows that the economic program remains firm. But will it be enough to move forward?

Debt

support for Argentina has yet to materialize. Neither from the World Bank, as mentioned earlier, nor from other International Organizations (IOs); it seems to be the opposite, as they observe (or set higher standards) the Argentine experiment from afar. The assistance? Nonexistent. In 7 months, the net payment (payments minus disbursements to Argentina) to multilateral organizations has been the highest of recent administrations.

If we add to this that the IMF's standards changed when the new government took office, it seems that the IOs do not benefit from the country emerging from the hole it’s in. Despite the higher standards imposed by the IMF in its program with Argentina, the government is overachieving its targets.

As we've been saying, the debt in the coming years poses a significant challenge for the country if it fails to refinance. The most likely scenario is to refinance the debt with the IOs, as their goal is to help countries develop, right? Until the next presidential elections, Argentina has to pay IOs:

• World Bank (WB): USD 3.3 billion

• Inter-American Development Bank (IDB): USD 6.7 billion

• Development Bank of Latin America and the Caribbean (CAF): USD 3.4 billion

• Paris Club: USD 1.3 billion

• International Monetary Fund (IMF): USD 12.7 billion

The peak of obligations falls in January and July with the payments of sovereign bonds. In total, the amounts due are:

• 2024: USD 4.6 billion

• 2025: USD 18.0 billion

• 2026: USD 18.7 billion

• 2027: USD 20.3 billion

Will the twin surpluses be enough to generate the dollars needed to pay off all this debt? Unlikely. The government claims it already has the dollars to honor its sovereign bond commitments until January 2026. The fiscal chainsaw must be sharp, and the country must grow significantly even to consider the possibility of non-refinancing.

Positive Trade Balance = Inflow of Foreign Currency

Financial Surplus = Less Debt

Fiscal Surplus = Contractionary Fiscal Policy

Contractionary Fiscal Policy = Lower Economic Activity

Regarding pesos, remember that after transferring the repo debt (see the July 15th edition and June 30th edition for more details) from the Central Bank to the Treasury, the obligations now fall on the Nation, and the fiscal surplus as an anchor for the economic program will face this additional challenge.

Economic Activity

The Monthly Economic Activity Estimator (EMAE) shows that climbing out of the pit is tough. The monthly trade balance shows that Argentina's export future could be bright, easing some burdens with a strong result of USD +12 billion this year.

While the EMAE marked a -39% year-over-year decline, the monthly drop continues, and it seems we haven't hit bottom yet at -0.3%. Industrial production remains severely affected, down 18.6% for the year. Despite these figures, several leading indicators of economic activity are beginning to show that the path to recovery has already started.

Finally, the RIGI was regulated, and we will now see if investments arrive and when or if we continue chasing carrots. YPF has already started with the construction of the Vaca Muerta Sur oil pipeline, the first RIGI energy project in the country, which will involve a total investment of USD 2.5 billion. Will the RIGI regulation give a new boost to the energy sector? For now, provinces continue to join, with San Juan being the latest key for the province's mining sector. Mendoza also sees a mining future, and the Canadian company Kobrea Exploration has already taken steps, signing an exclusive option agreement to acquire a 100% stake in the Malargüe Occidental Copper Projects.

Higher Economic Activity = Higher Inflation

Trade Balance

With a July surplus of USD +1.5 billion and exports rising +19.2% year-over-year, we see a sharp turnaround from -5 billion to +12 billion compared to the previous year. That’s USD 17.455 billion in difference, measuring seven months (2024 cumulative vs. 2023). What stands out within the numbers is that all major sectors saw year-over-year increases in quantities: Primary Products (PP) +38.4%; Agricultural Manufactures (MOA) +41.9%; Industrial Manufactures (MOI) +41.9%, and Fuels and Energy (CyE) +26.7%.

Some measures have had a rapid impact; exports have now been the highest since 1990, and Argentine meat is starting to appear on shelves worldwide. There’s a future here.

Energy

This topic deserves its section. First, let’s start with some history: energy imports in the country over the past two decades totaled USD 120 billion, and energy subsidies accounted for USD 150 billion.

The various measures implemented by the country in recent decades have led to a sharp decline in oil and natural gas production, causing multiple problems on both the external (imports) and internal (subsidies) fronts. For these reasons (and many others), it’s crucial to emphasize the importance of eliminating subsidies (fiscal relief and normalization). Vaca Muerta and the RIGI for changing the dynamic and becoming an energy exporter will significantly alter the country’s productive matrix and the tariff and commercial dynamics.

Changes are already evident: Neuquén achieved the highest gas and oil production levels. Month after month, production records are broken, bolstering national production. In this case, gas production reached a record of 109.6 million cubic meters per day, mainly thanks to the commissioning of the Tratavén compressor plant linked to the Néstor Kirchner Gas Pipeline (GPNK).

Deregulations

The government implemented another measure that brings relief to a severely affected sector—retail. It eliminates withholding taxes on account of VAT and income taxes on sales with debit, credit, purchase cards, and similar transactions. This measure relieves countless points of sale nationwide, reducing cash usage and promoting the formalization of purchase-sale transactions. This is not the end; the National Government also requests that provinces adhere to this regime and eliminate Gross Income withholdings and other local taxes.

The government also announced that this is the first step in a series of measures to significantly reduce the Argentine cost, which will be announced over the next 30 days.

The government says enough with privileges and repeals the obligation for companies in which the State has a stake to:

• Pay salaries at Banco Nación.

• Buy fuel and lubricants from YPF.

• Purchase flights from Aerolíneas Argentinas.

• Contract insurance policies with Nación Seguros.

Almost every week, a new organization was eliminated. In 2012, the Coal Exporters Registry (RECAR) was created. Since its implementation, exports have plummeted, and the number of exporting companies dropped from 250 to 15. It’s out. Another piece of bureaucracy was eliminated for the productive sector starting this week.

The Street

Confidence is there, and the bills show it. Not only does the street hold up, but it also deposits dollars into the system. The recovery of private dollar deposits shows great speed (like everything in the past nine months).

Politics continues to be a hot topic and a breadwinner for the street. While senators seek to raise their salaries, a controversial pension law is voted on. Finally, the executive acted and vetoed the law, stating that if it were enacted, it would result in the following:

• An increase in public spending in 2025 equals 12% of GDP.

• This sum requires a significant fiscal effort, either through spending cuts or tax increases of an equivalent amount.

• To explain it in simple terms, if we consider the flow of spending imposed by the new law, it represents, in present value, a debt that burdens the State by 24% of GDP (at a 5% discount rate). In other words, the project increases the government’s liabilities by an amount similar to the public debt that Martín Guzmán restructured in 2020 because he claimed it couldn’t be paid.

• The law is much more expensive because it also includes an automatic increase equivalent to half of the real wage growth. Therefore, if real wages grow by 3% annually, the obligation imposed by the law will grow by 15%, increasing the debt by 34% of GDP at current values. If, on the other hand, real wages rose by 6%, the increase would be 60% of GDP.

• It is irresponsible for Congress to approve a law that increases the public sector’s liabilities by that volume without outlining where the resources will come from. Incredibly, the political class doesn’t feel the responsibility to do so.

According to the executive, the President’s veto also gives Congress an opportunity to develop a more reasonable project or seek funding sources for the additional spending it proposes. None of this means that the government doesn’t wish for a greater recovery of all Argentines’ incomes. However, to achieve this, fiscal solvency and genuine growth are needed. A country is managed with realism and responsibility.

Pensioners were receiving the minimum amount lost up to 37% of their purchasing power during Fernández and Massa’s administration. The government’s implemented bonus left them with an 11% loss. Those receiving the maximum amount lost 43%. Despite the adjustment in recent months, pensions are recovering and are now at September 2023 levels. It’s hard to understand an Argentine policy that remembers the most in need only at certain moments in history.

Remember that the Argentine pension system faces increasingly significant problems as pensions rise, but the system supporting them does not. While pensions grew by 196% between 2005 and 2023, formal employment only grew by 75%. The numbers don’t add up.

Capital Markets - Actionables

The week's news came from a potential reclassification of the country in the MSCI index from (https://www.msci.com/our-solutions/indexes/market-classification) “Standalone” to “Emerging Market.” Argentina lost the emerging market category a few years ago when it implemented currency controls and imposed restrictions on the free flow of capital. However, the reality is that until the currency controls are lifted, the likelihood of this happening is practically nil. If this reclassification occurs, the potential rise for the main Merval stocks like YPF, GGAL, and PAMP is significant, as it’s estimated that the inflow could be USD 1 billion. This would happen due to Argentina's weighting in the index, and investment funds would start participating in these stocks when they currently do not. The Merval could receive an additional boost when this becomes more certain, but we don’t give much weight to this news for now. In perspective, Argentina’s previous reclassification to emerging market status was proposed in 2016 and materialized in 2018, coinciding with a peak in the country’s valuations.

On the other hand, a new buyback by the Treasury from the Central Bank of bonds, this time AE38, for a face value of USD 11,195,487 using $6,518 million. The government takes advantage of the opportunity and reduces debt by buying at a low parity.

As for pesos, the curve holds between 3.5% and 4% of Effective Monthly Rates (TEM), and inflation break-evens are around 3% until the end of the year. The difference between positioning in CER or Lecap is not that great, but it is defined moment by moment.

What we can affirm is that dollar-linked bonds are increasingly lagging. While coverage continues to be paid in certain cases, the government gains credibility every week with the crawling peg (https://economipedia.com/definiciones/trade-off.html). The trade-off between being in a Lecap with a monthly return above 3.5% and betting on devaluation seems to have a clear winner.

Political noise will continue, and it will likely create moments of volatility that can be exploited to buy cheap bonds if one believes this new experiment in the country will succeed. The market seems to be buying into the government’s discourse but with much caution for now.

A positive aspect for the country that seems to have gone somewhat unnoticed is that the yield on "junk bonds" in the United States is at its lowest in over two years. What does this mean? That risk-on is activated (https://es.tradingview.com/chart/DXY/7quHiz3c/). If funds start seeking risky assets, we know that Argentina occupies a privileged position in risky assets.

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Brief Reflection

Politics feeds Milei’s government. While the executive has frozen salaries since December 10th, senators raise their salaries again to 9 million pesos monthly. This provides ammunition for the President, who doesn’t miss an opportunity to target the political class. Will the executive suffer any political or social backlash after the veto on the pension law?

One of the turning points is getting closer. The result of the tax amnesty will not only determine how much extraordinary (and regular for future years) income the State will receive but also indicate the level of taxpayer confidence in the country and the direction taken by the government. The design of the amnesty is intended to encourage investment in Argentina, with no cost; I consider it very favorable to regularize assets this time and take advantage of the moment to buy Argentine assets that are historically low (If you need help with this, click here).

In line with the need for revenue and to offset the PAIS tax loss, the moratorium results and those who opt to pay Personal Assets five years in advance will also be critical. Will we also see some results in any of the proposed privatizations of State companies?

Continuing with the turning points, will the RIGI regulation be a turning point for attracting investments? I believe we will have a definition of this in the coming weeks to see if we change the carrot salad or if the results will only be long-term.

The government prioritizes the fiscal surplus above all, but it still hasn’t provided certainty on how it will replace the significant revenue from the PAIS tax, which expires this year. Argentina’s lack of predictability remains as evident as ever, and it seems we will have uncertainty for a while.

As we affirm every week, we continue to believe that the gain in competitiveness will not come from devaluation but from tax cuts that will translate into real fiscal competitiveness in a globalized world, in a country with vast natural resources and incredible human talent (otherwise, how would we survive in such a constantly changing country?). They move the goalposts on lifting the currency controls but feed us with deregulations and less bureaucracy—will it be enough to get started?

Argentina needs a highway for doing business, not a pothole-filled street. Are we getting closer? Today, we’re undoubtedly closer.

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

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