Dear ArgenGrowther,

A week dominated by interest rates. With the central bank at the helm, we once again see a decrease in interest rates, immediately affecting fixed-term deposits and with a slight lag in funds; meanwhile, the treasury issues at an effective monthly rate below 5%. Now, what do we do with the pesos?

Financial ArgenGuide: Long Live Negative Real Rates?

Data:

• USD MEP: +0.46%

• Country Risk: 1331; +2.23%

• AL30: -3.51%

• BCRA (Central Bank of Argentina):

  • Purchased foreign currency amounting to USD 959 million.

  • Increased Reserves by USD 553 million in the last week. Currently at USD 29,316 million.

• Tenders: Expirations were at $0.5 trillion, and $3.0 trillion was taken.

  • Lecap (S14O4): 4.75% MER; $0.7 trillion.

  • Lecap (S28F5): 4.5% MER; $0.6 trillion.

  • CER (TZXD5): -13.3%; $1.7 trillion.

  • Dollar Linked (TZV25): Deserted.

  • Surplus: 2.5 trillion; purchase of USD.

  • Bopreal: Awarded VN USD 103 million.

• Rates

  • REPO: Decreased from 80% ANR to 70% ANR.

  • Fixed-term rates: Banco Nación reduced rates to 65% ANR.

  • Reserve requirements: Increased from 0% to 10%.

• March Inflation:

  • Retail: 11.0% monthly; 287.9% annually.

  • Core: 9.4%.

Now, what does all this mean?

Positive or negative? Spoiler alert: complex. Another week with good data for Argentina, but with more volatility in the bond market and an economy that is not rebounding.

Dollar. Once more a week that had very little volatility in the exchange rate; this time, we saw a peso depreciation almost in line with the 2% crawling peg.

The gap remains virtually nonexistent if we discount the PAIS tax: blue 13%; MEP 14%; CCL 19%.

As we have been discussing, the market has virtually taken for granted that there will be no exchange rate jump in the coming months.

Devaluation without exchange rate jump = Greater predictability.

Greater predictability = Improvement in economic expectations.

Recomposition of Public Accounts. Full steam ahead and blender at full blast. Another week with the same dynamics of foreign currency purchases by the BCRA, nearly a billion dollars to continue the process of reserve accumulation and sanitation of the Central Bank. The purchase of foreign currency will likely be one of the main factors of monetary issuance during the year, so the BCRA will seek to minimize remunerated liabilities and, consequently, the issuance by this factor. The rate cut and the migration of BCRA risk to the Treasury are fundamental.

Greater dollar purchase = Greater monetary issuance.

Lower remunerated liabilities = Lower monetary issuance.

We had mentioned that the government would have the opportunity to continue setting the pace with tenders, so it was again. Just a few weeks ago, it issued letters for January with a monthly effective rate (EMR) of 5.5%, and now it has issued letters for February at 4.75%, taking advantage of the reasonable expectations regarding the disinflation process. It manages to continue placing at a fixed rate and continues with the process of de-indexing the debt. However, the most notable move comes from the issuance of CER, where the government continues to get cheap money -13%, and the masterful move (allow me this adjective) is the purchase of dollars with the surplus from the tender for the payment of maturities in foreign currency, why masterful? The government gets dollars to cancel maturities in dollarized debt that yields 20% annually in USD with a bond issuance at a negative rate in pesos. That is, it cancels maturities in dollars that yield 20% and takes on negative debt in pesos while maintaining the same level of debt.

Lower interest rate = Cheaper financing for the government.

Cheaper financing for the government = Lower yield for investors.

Lower yield for investors = Dilution of investors' savings.

The downside of the excellent Lecaps and Bonceres tender was the almost null issuance of Bopreal, with just 103 million it is clear that at this moment it is not attractive to bid. The high implicit exchange rate (approximately 1275) plus the low gap does not generate incentives to enter the tender.

Dilution on all fronts. With the lowering of the pass rate and the increase in reserves, dilution also moves to fixed-term deposits and mutual funds. As part of the government's strategy to reduce the BCRA's remunerated liabilities, the pass rate was reduced from 80% to 70%, and at the same time, the percentage of reserves was raised from 0% to 10%. The latter refers to normalization of liquidity management through reserves as of April 15, given that the reserve on the balances in remunerated sight accounts of money market mutual funds (FCI) changes from 0% to 10%; this measure seeks to advance in the normalization of the prudential regulatory treatment of accounts of a similar nature and as a consequence, we will see a lower transfer of rates to investors, so the rate cut we will see in the FCI will be greater than 10%. It should be noted that this rate cut practically did not affect the exchange rate.

Lower rate in remunerated liabilities = Reduction of monetary issuance.

Lower reference rate = Greater economic activity.

Higher reserves = Lower rate for investors.

Lower rate for investors = Dilution of investors' savings.

Positive net reserves. After receiving a bankrupt central bank and with impressive speed, positive net reserves were achieved this week (preliminary data). From USD -11 billion to 0 in 5 months, applause for the government. This week, the debt payment to the Bank for International Settlements (BIS) was also completed.

Lower activity = Lower salaries. Early activity indicators for March are through the floor, the RIPTE for February shows another real-term drop (-26% year-on-year) and the manufacturing production index falls 9.9% year-on-year and 0.6% monthly. As we have been seeing, today two Argentinas coexist: the financial Argentina, where each week a new positive record is set, and we have excellent numbers, where everything is booming; and the real Argentina, where each passing week the questions grow larger, the numbers do not translate the good from the financial, and the population faces one of the most challenging moments in recent history.

Without a doubt, lowering rates and inflation will help economic recovery. Will stabilizing inflation and lowering rates be a good time for Argentina to grow with credit?

Lower activity = Lower inflation. Lower inflation = Greater stability. Greater stability = More credit.

The disinflation process continues. The rise in prices is increasingly explained by the recomposition of relative prices. With three consecutive months on the decline and core inflation, which excludes the regulated and seasonal components of the index, already running at a single digit (9.4 monthly), in April it is unlikely that we will see such a marked drop due to energy tariff increases. In the words of Minister Caputo: "The combination of fiscal, monetary, and exchange rate anchors, and the measures that are being implemented to deregulate domestic trade and normalize foreign trade, are fundamental to sustain this path of disinflation."

An important point to highlight is the deceleration of inflation in food in the last four weeks.

Capital Markets - Actionables

After a long time, we had a drop in sovereigns this week and a rise in country risk. After reaching the first objective of comparables (Ecuador), the positive view on hard-dollar sovereigns with still extraordinary returns (we continue in some bonds with TIR above 20%) does not change.

Those who assumed an exchange rate risk and went for the peso part continue to make an outstanding difference. Doing carry trade continues to pay off enormously, with the Lecap S31E5 +11.5% in 2 weeks.

Last week, we talked about fixing the rate (buying a bond that yields a specific rate and keeping it fixed by holding until maturity) due to an upcoming rate cut by the Central, and it seems that this will be one of the main points to consider for safeguarding pesos this year. The new Lecap tender continues to show a recomposition of the peso curve with MERs adjusting week by week, now January around 4.5%. The market believes in the economic disinflation process and seeks to fix the rate before another possible rate cut by the BCRA. Analyzing the disinflation process and comparing Badlar versus Lecap is essential to optimize pesos.

I believe that opportunities in sovereigns continue, as well as the opportunities to do carry, although increasingly limited given the rate cut (more risky alternative), closely watching the government and what it does with the pesos.

As long as the government continues to show good numbers, the drop in Country Risk will continue, and the compression of rates in hard-dollar bonds will continue.

Rate compression = Price increase

Brief Reflection

The government ends the week with a new spectacular tender for its plans. The blender does not stop, and the latest rate cut by the Central leaves us with a growing difficulty of what to do with the pesos.

Expert Outlook: The government has a pro-market discourse and anchoring of expectations, and, not least, this discourse has a robust correlation with what it does. The market pays for this consistency by putting the pesos and dollars in the various Argentine instruments, do they pay because there is a trap and the options are limited? Given the current economic course, I think it is a business for the government to maintain the trap; this allows it to continue with the path of reserve accumulation, dollar purchases, and issuance at negative rates. From now on, all this is an excellent business for public accounts and a lousy business for those looking for real positive returns in pesos. As mentioned before, the alternative lies on the side of dollar sovereigns assuming another type of risk.

On the other hand, on the political aspect, we see that the base law is presented as a new project that is more "consensual" and more limited (279 articles), fundamental for the country to find its growth path without political noise that allows projecting and thinking in the long term.

The government continues to show its financial expertise. It is at the helm with the rate cut, the outstanding issuance of pesos at negative rates, and the dollar accumulation demonstrating this.

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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