In the shortest week of the year, the fifth consecutive month of twin surpluses was confirmed, while it seems that the momentum of foreign currency purchases by the BCRA has ended.

Dear ArgenGrowther,

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:

• MEP: 1,273.81, +2.34%

• Country Risk: 1,420; +2.75%

• AL30: 56.28; -0.30%

• BCRA:

  • Foreign Currency Purchases: USD -74 million

  • Reserves: USD +778 million; Today, USD 29,944 million

• National Public Sector:

  • Primary Surplus: $2,332,205 million

  • Financial Surplus: $1,183,571 million

• Trade Balance: USD 2,656 million

  • Exports: USD 722 million; +21.7% YoY

  • Imports: USD 4,966 million; -32.8% YoY

Now, what does all this mean?

Positive or negative? Spoiler: Positive. The twin surpluses are fundamental, with little movement in other areas.

Understanding What's Happening in Detail

Dollar and Strong Peso.

A very short week leaves little room for analysis, but the government remains firm in this aspect, communicating the following through the Minister of Economy:

• No devaluation is planned.

• The 80/20 rule remains in place, and the IMF has no problem.

• The 2% crawling peg is maintained.

• Negotiations for the following agreement with the IMF have not started, but relations remain very good.

Less uncertainty = Less volatility

Less volatility = Greater stability

Greater stability = Improved economic expectations

Recomposing Public Accounts

Central Bank of the Argentine Republic (BCRA)

In a very short week, we saw the entry of USD 800 million from the IMF and foreign currency sales amounting to USD 74 million. It was an atypical week with no auctions, so there is little to analyze here. Instead, we take the opportunity to delve into put options (sale options of sovereign bonds in this case).

When we talk about puts, we refer to the stock of American puts that can be exercised at any time and, according to private estimates, cover sovereign bonds held by banks with a market value of around $16.5 trillion, discounting those already exercised. As we mentioned last week, the President stated that the foreign exchange controls will be lifted once the puts are resolved. What is the problem with puts? The issuance associated with their sale is mainly something the government cannot control. Wcan'tn't the government control it, and why is it a problem? The government cannot control it because the option is in the hands of the banks, who can sell the bond whenever they want, being an American option; at the same time, this would create an obligation for the government to issue to repurchase that bond, with issuance being one of the fundamental points to control for the government to keep inflation in check and maintain a solid monetary program. The existence of these options is a problem.

Although rumors are circulating, there is still no particular path on how the puts will be resolved. Bloomberg reported that the Central Bank is talking to banks to change the legal format of these instruments so that they can only be exercised in extreme liquidity needs. We will have more news on this in the coming weeks with greater certainty.

Lower monetary emission = Lower inflation

National Public Sector

The twin surpluses (fiscal Surplus + trade surplus) continue to give a solid boost to expectations. The government achieved a financial surplus for the fifth consecutive month, a situation not seen since 2008. The fiscal anchor remains strong.

This situation is achieved thanks to a sharp reduction in capital expenditures (-83% YoY), Discretionary Current Transfers to Provinces (-75% YoY), and Other Current Expenditures (-47% YoY); these three items explain a third of the real reduction in spending during the period. Is it sustainable for a State not to invest? Meanwhile, in real terms, Pensions and retirements accounted for 31% of the total reduction. At the same time, revenues grew for the first time this year by 5.8%, mainly driven by Income Tax.

Economic Activity

Trade Balance

Due to a dual effect of increased exports (+21.7% YoY) and decreased imports (-32.8% YoY), we saw a substantial trade balance surplus of USD 2,656 million. It is the sixth consecutive month of trade balance surplus, generating much-needed fresh dollars. This year's star has been energy, changing a dynamic that augurs an excellent future for energy exports from the country. Is this just the beginning?

Inflation

Soon, only relative prices will remain to be resolved. The high-frequency inflation data are excellent, with general inflation, according to Ferre’es' IPC-OJF, last week at 0.2% weekly and core inflation at 0.3% weekly.

Relative Prices

According to the IMF, progress is being made in correcting relative prices, which is the situation today compared to December 2019.

Debt

The IMF report was released following the approval of the USD 800 million disbursement, in which the country surpasses the targets. Although the report has value, it seems outdated in line with the ongoing weekly analysis in Argentina. The government even denied some of the points mentioned in the report, such as eliminating the 80-20 rule for export settlements, which we mentioned earlier as one of the points of the economic program that will be maintained.

It is worth noting that the IMF also observes the need for the country to manage its liabilities, extend payment terms, and seek market financing. The Minister of Economy also mentioned that the negative real rate is over, which was highlighted in the IMF report as an incentive to improve the demand for pesos.

In line with the search for financing, the President mentioned that a strong bet from the World Bank to the country is expected; we will see how many dollars this bet translates in the coming weeks.

Follow me on Twitter

Capital Markets - Actionables

Only one day with a regular trading session in the week, very little to change anything we have been discussing.

Stocks saw a sharp drop in the United States during the holidays on Thursday and Friday; we will likely see a strong drop in the local market tomorrow, Monday.

We did have some reinforcement of expectations with what was mentioned by the Minister of Economy; we will see how this translates into the week for both peso rates and the dollar.

The payment of amortization and coupon for the Bonar 2030 (AL30) is approaching. Will we have a mini-rally around here?

We affirm that as long as the government continues to show good numbers, the country's risk will eventually resume its downward trend, and hard-dollar bond rates will continue to compress.

Brief Reflection

The twin surpluses will give the government a lot of breathing room. If the fiscal Surplus is non-negotiable and we also see a trade surplus, the government will have greater room to maneuver to correct macroeconomic imbalances. The recovery of public accounts seems to continue, which is good news for those betting on the country.

One aspect to watch closely is the devaluation of the currency of our brother Brazil. The Real went from trading at 4.85 against the dollar at the beginning of the year to above 5.40, a more than 10% movement that will undoubtedly test the Argentine peso. If Brazil gains competitiveness, how will Argentine products fare? How will bilateral trade with the South American giant develop?

The Base Law is already in play, and the first investments under the RIGI framework have been announced. TGS and SIDERSA will take the lead and invest USD 700 million and USD 300 million, respectively. National investments are taking the lead and seem the first of many. The country needs many more of these initiatives, and the government is starting to show that the Base Law works in its favor. Is good news approaching from a tech giant? For now, there are more rumors than certainties.

Despite the apparent weekly progress toward lifting the foreign exchange controls, the agony seems never-ending. Correcting imbalances in the foreign exchange market is essential for the country to have healthier fundamentals to grow again.

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!

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

PS: Follow me on Twitter and LinkedIn, and let's talk about the Argentine economy's challenges.