Dear ArgenGrowther,

We spoke about how Javier Milei is in the world's spotlight now. The surprising thing is that every week is for something different. Donald Trump and Javier Milei are making a MAGA duo. Will that mean investments will come to Argentina if Trump wins the elections? The speech that Milei gave to Congress was historical; now, it remains to be seen if the Pacto de Mayo will be a new foundation of the country. The country needs a highway to do business, not a bumpy road. 

This week's edition focuses on a hospitality part of Argentina's economy. In today's three main sections, we have:

1. Financial ArgenGuide: Writing History

2. Business Environment & Spotlight: Welcome to Paradise

3. Market Opportunities & Entry Strategies: Hotels in Patagonia

Financial ArgenGuide: Writing History - Which Way Does the Coin Fall?

Data:

• USD MEP: -2.15%

• AL30: +3.11%

• BCRA (Central Bank of Argentina):

  • Purchased foreign currency amounting to USD 245 million.

  • Reduced Reserves by USD 149 million in the last week. Currently at USD 27.328 billion.

  • Purchased foreign currency in February for USD 2.357 billion.

• Placement of BOPREAL Series 3 (BPY26): USD 491 million. Out of a possible total for the series of USD 3,000 million.

• Treasury Auction. Various instruments totaling 3.2 trillion, maturing 3.1 trillion (rollover of 103%):

  • CER: LECER (X20Y4) issued 179 million at -87%, valued at 290 million pesos; BONCER (TZX25) issued 1.276 billion at -13%, valued at 1.544 billion pesos; BONCER (TZX26) issued 686 million at -5%, valued at 947 million pesos.

  • Linked: BOLI (TZV25) issued USD 502 million at 0.95%, valued at 416 million pesos.

Now, what does all this mean?

In simple terms, is it positive or negative? Spoiler alert: despite the challenges of a recessionary scenario and high inflation, we are, for now, on the right track in macroeconomic terms.

Dollar. The drop in USD MEP brought the gap with the official, discounting the 17.5% country tax to a mere 4%. The tax PAIS seems to set a floor to the dollar's decline. With a gap of 21.5%, we see an increased probability of exchange rate unification without a devaluation jump.

Dollar futures saw a very volatile session on Friday before the presidential speech as traders sought coverage, with a substantial rise in short contracts, which, given the absence of economic measures announced by the President, will likely see a reversal of much of this rise on Monday. For now, we do not see an intention by the government to modify the 2% crawling peg (the 2% monthly devaluation that the government has been implementing as monetary policy).

Lower Exchange Rate Gap = Higher Probability of Currency Control Liberalization

Destruction of pesos = Reduction of the monetary base. The new placement of Bopreal translates again into an absorption of pesos. In this case, importers give the BCRA pesos at an A3500 exchange rate of 841.15. Additionally, for this series 3, the PAIS tax of 17.5% must be added, resulting in an exchange rate of 988.35 pesos per VN. What is the crucial detail here? Bopreals do not trade at a 100% parity in the secondary market; we will find the previous series trading at parities between 60% and 70%. This means that if series 3 aligns with the hard dollar bond curve, the implicit exchange rate paid by those who bid for this series 3 would be approximately 1,400 pesos. Given the drop in MEP and the exchange rate by quotation in the secondary market, the government was able to place 16% of the total, which seems to be good news. The question remains whether the parities or the exchange rate will rise for the subsequent auctions, as there is little attractiveness to bid at these values, making it more difficult for the government to complete series 3.

The blender is at full throttle. This week's Treasury auction indicates no defense against inflation for the investors. The blender does not stop. The government continues with the same strategy: diluting the BCRA's monetary and remunerated liabilities with negative real rates and financing itself with negative rates through the Treasury.

It is a challenging moment for banks and financial managers of companies seeking to hedge against inflation. The Lecer at -87%!!! And I'm short of exclamation marks. The Boncers are at -13 % and 5%. What does this mean? On the one hand, the government secures financing "charging" (it finances at negative rates). On the other, investors have to "pay" (investing at negative rates) in search of losing as little as possible. At the same time, a (very small) amount of dollar-linked was auctioned at 0.95%, a favorable rate, although irrelevant given the amount auctioned.

There is No Rate, and it's clear who wins and who loses today at these values. Now the question is, how long can this be sustained? Are they waiting for inflation to drop to favorable real rates, or will we continue with negative rates to encourage economic activity once the macro is normalized?

We see the Treasury getting free pesos and the BCRA buying dollars; undoubtedly, this helps improve macro numbers, and the data also show that the government is cleaning up the public accounts and the BCRA's balance sheet. As we saw, this is carried out at the cost of value loss for savers and anyone wanting to hedge against inflation (and even devaluation last month). Although the dilution of assets is a hostile measure for most of the population (short term), it is essential to highlight that, in my opinion, the government had to choose the lesser of evils, and given the context received, the work done is extraordinary (long term) to lay the foundations for the country to grow again. The long-term vision from the Economy and BCRA can have a short-term negative impact that is important to consider.

Dilution of Monetary Liabilities = Recomposition of the BCRA's Balance Sheet

Financing at Negative Rates = "Cheap" Money for the Government

Capital Markets - Actionables

The government's determination to clean up the accounts does not waver; this is reflected in the country's risk continuing to drop and, consequently, sovereign bonds rising. Have they risen enough? When we see where Argentina stands on the bond curve with comparables, we notice that we are still quite far away (higher yields than comparables), so we continue to see an excellent opportunity to take a position in sovereign bonds and take advantage of the eventual rate compression (optimistic scenario).

Lower Rate = Higher Bond Prices

This week, we saw several placements of Corporate Bonds from different companies. However, we see a better risk return in sovereigns. Today, we also have Bopreal as an alternative, with yields of approximately 20% annually in dollars. As we saw with this week's treasury auction, we still do not have many options for a rate in pesos that covers us from inflation. If we have to maintain the position in pesos, there is a possibility of going a little longer in the CER peso bond curve. However, one must be very attentive to the drop in inflation since the long bonds may suffer the most if inflation drops faster than expected.

Brief Reflection

We are living in a historic moment; in the coming months, we will find out if it ends up being for the positive or the negative, and week by week, the history of Argentina is being rewritten.

In a historic speech, Javier Milei initiated the regular sessions of Congress. With a reading of more than an hour, he communicated part of the inherited legacy, the results of measures implemented so far, some government plans and ideas, the ideological work plan that the government has, and extended a hand for a re-foundation of Argentina with the May Pact, putting other political parties and governors between in a difficult position with this call for dialogue, since the conditions are already imposed with the 10 Principles:

1. The inviolability of private property.

2. A non-negotiable fiscal balance.

3. The reduction of public spending to historical levels, around 25% of the Gross Domestic Product.

4. A tax reform that reduces the tax burden, simplifies the lives of Argentines and promotes trade.

5. A rediscussion of the federal tax sharing to provinces, to put an end to the current extortionist model.

6. A commitment of the provinces to advance the use of the country's natural resources.

7. A modern labor reform that promotes formal employment.

8. A pension reform that gives sustainability to the system, respects those who contributed and allows, those who prefer it, to subscribe to a private retirement system.

9. A structural political reform that changes the current system and realigns the interests of the representatives with the represented.

10. The opening to international trade, so that Argentina becomes a protagonist of the global market again.

Expert Outlook: The government gains time with the call for dialogue and will keep the population on edge during the most arduous months of Argentina's economic crisis. Will this carrot be enough to hold the streets calm? For now, there's no doubt that the world will watch this Argentine experiment. Can Argentina use this moment of being fashionable to attract investments, capital, and brains that put us on the growth path? Today, we have a date to wait for, or will the brave anticipate and begin to invest today to reap the fruits of a historic moment?

Business Environment & Spotlight: Welcome to Paradise - Argentina’s Hospitality Sector

The hospitality sector in Argentina is a growing player in the country's economy. Known for its rich culture, breathtaking landscapes, and warm hospitality, Argentina offers attractions ranging from Iguazu's Falls through Mendoza's wine regions to Patagonia's stunning natural beauty. This sector encompasses hotels, restaurants, travel services, and entertainment, each contributing to the vibrant tapestry of Argentina's tourism appeal.

Key Characteristics

Diverse Offerings: Argentina's hospitality sector is marked by its broad offerings, including luxury accommodations, eco-tourism, adventure travel, and culinary experiences. This diversity attracts a broad spectrum of travelers.

Cultural and Natural Attractions: The sector capitalizes on Argentina's rich cultural heritage and natural wonders, offering visitors a unique blend of experiences, from tango shows in Buenos Aires to glacier tours in Patagonia.

Challenges and Opportunities

Challenges: The sector faces economic volatility, impacting international visitor numbers and spending. Environmental concerns also pose a challenge as the need for sustainable tourism practices becomes increasingly critical.

Opportunities: There's a growing demand for authentic and sustainable travel experiences among global travelers. Argentina's hospitality sector can leverage this trend by promoting eco-friendly accommodations and practices. Additionally, expanding digital marketing and online services offers the opportunity to reach a wider audience, enhancing visibility and bookings.

Expert Opinion: the future success of Argentina's hospitality sector lies in sustainability and digital innovation. By adopting green practices, such as reducing waste and conserving energy, businesses can appeal to eco-conscious travelers. Furthermore, leveraging technology to offer personalized experiences and top service can set Argentina apart as a premier global destination.

In conclusion, Argentina's hospitality sector stands at a crossroads of tradition and innovation. The rich cultural and natural heritage provides a solid foundation, while the opportunities for embracing sustainability and digital transformation pave the way for future growth. By addressing the challenges head-on and capitalizing on the emerging trends, Argentina can enhance its position on the world stage, attracting visitors eager for unique and responsible travel experiences. As the sector evolves, it will continue to play a pivotal role in Argentina's economic development, showcasing the country's resilience, creativity, and unparalleled hospitality.

The Trend - MAGA: Make Argentina Great Again

Argentine President Javier Milei's engagement at the Conservative Political Action Conference (CPAC) in Washington, D.C., marks a significant moment in Argentina's international political relations. Milei's meeting with former U.S. President Donald Trump, characterized by mutual admiration and shared libertarian values, underscores a pivotal alignment with conservative economic and political ideologies.

During his CPAC appearance, Milei passionately advocated against socialism, urging for the embrace of free-market principles and criticizing economic regulation and abortion rights, resonating well with the conservative audience. His rhetoric on Making Argentina Great Again, combating corruption, and skepticism towards climate change initiatives further cements his stance on critical global issues. This engagement not only highlights Milei's international outreach but also reflects his strategic positioning of Argentina within a global conservative movement, aiming to fortify ties with like-minded political figures and ideologies.

Market Opportunities: Hotels in Patagonia

Patagonia, a region renowned for its breathtaking landscapes and pristine natural beauty, presents a unique opportunity for investors in the hospitality sector. As one of Argentina's premier tourist destinations, it attracts adventurers, nature lovers, and those seeking solace away from bustling city life. Investing in a hotel in Patagonia capitalizes on the growing trend of eco-tourism and contributes to this majestic region's sustainable development.

Key Characteristics

Eco-Tourism Hub: Patagonia is at the forefront of eco-tourism, offering visitors a chance to experience its glaciers, mountains, and wildlife with minimal environmental impact.

Seasonal Dynamics: The region experiences distinct tourist seasons, with peak periods during the southern summer and winter, attracting hikers, skiers, and nature enthusiasts.

Growing International Appeal: Patagonia's global recognition as a must-visit destination has steadily increased, supported by international campaigns and coverage in travel publications.

Challenges: Investors must navigate logistical challenges, including the remote location and the need for sustainable construction and operations to preserve the natural environment. Economic fluctuations and regulatory changes can also impact investment returns.

Investment Opportunities

There is a significant opportunity to develop hotels that cater to the luxury market or offer unique experiences, such as glamping, eco-lodges, and adventure tourism packages. The demand for accommodations integrating with the natural surroundings and promoting environmental conservation is rising. Developing partnerships with local communities and businesses can enhance the guest experience while supporting local economies.

Expert Opinion: Creating hotels that offer eco-friendly practices, from renewable energy sources to waste reduction and conservation initiatives, not only appeals to the modern traveler but also aligns with global efforts to combat climate change.

In conclusion, investing in a hotel in Patagonia offers a promising avenue for those looking to enter the hospitality sector in a region that prioritizes sustainability and unique travel experiences. By focusing on environmentally responsible practices and innovative guest services, investors can contribute to preserving Patagonia's natural beauty while tapping into the growing market of travelers seeking destinations that offer adventure, tranquility, and a connection to nature. The key to success lies in balancing economic objectives with environmental stewardship and community engagement, ensuring that Patagonia remains a pristine and inviting destination for future generations.

See you next week, Vamos Argentina!

Nau Bernués
Founder, ArgenGrowth

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