Do Anchors Stop Anything?

The Argentine Market Shark Didn’t Get the Memo that Fiscal and Monetary Anchors are Contractionary. Or Did It? The full anchor on fiscal policy continues to bear fruit, as bonds and country risk show. The market is starting to reflect what it sees. The peso is strong with another week of appreciation—how many weeks now?

Dear ArgenGrowther,

As every week, we present the key data from the past week and delve into various aspects of our beloved Argentina to assess their impact, understand what's happening, and make better decisions. The newsletter 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: the party continues! Green, green, I love you, green. Bonds are still enjoying the party; the Merval is following suit, and country risk remains very high while the country risk is down. Seasonal reserves sales this week? No, thanks.

Understanding What's Happening in Detail

Dollar and the Strong Peso. We haven’t changed the introduction: another week of appreciation for the strong peso. The drop in the "PAIS tax" (import exchange rate) is being felt, and the demand for pesos to pay taxes continues to exert downward pressure. The peso ended the week appreciating by 2.15%, with the exchange rate gap narrowing and sentiments remaining the same: the strong peso is here to stay. The week's highlight: the retail official rate broke the 1,000 mark.

We're repeating ourselves: Market vs. Government. The feelings are becoming a reality. Currently, the government is winning, and each passing week increases the likelihood of convergence between the MEP and official rates. A government that appears strong, lifting foreign exchange restrictions and a market responding accordingly.

This week, we saw a big shift: the Central Bank finished with a positive net purchase of USD 241 million, putting September’s balance in the green, with USD +19 million.

At the same time, after more than four years, the Fed is cutting interest rates, giving Argentina a tailwind. The Fed's 0.5% rate cut signals a change in global interest rate dynamics, potentially benefiting emerging markets with lower benchmark rates in the world’s largest economy.

Foreign Exchange Controls (Cepo)

The Central Bank implemented new measures to ease foreign exchange controls. It reduced the payment term for car imports by 30 to 60 days and unified the MULC-CCL restriction to 90 days.

This week, the National Securities Commission (CNV) eased MEP/CCL operations for residents with market financing and transactions over 200 million pesos and for non-residents for general operations.

Recomposition of Public Accounts

As with every month under this administration, another fiscal surplus has been achieved. The state is shrinking, deregulating, and transferring the leading role to the private sector. But is it enough? Is the private sector stepping up? We’re starting to see a shift in the relative weight of the private and public sectors. For example, banks had 50.1% of their assets in government instruments in July 2023, which dropped to 43.1% a year later. Conversely, private sector credit grew from 29% to 43.1%.

National Public Sector

The anchor of the economic program remains intact. The government manages fiscal surplus, bringing the accumulated primary surplus to approximately 1.5% of GDP, with a financial surplus of about 0.4%. This is largely due to a sharp reduction in primary spending, down 30% year-over-year in real terms. The question of sustainability, which we asked months ago, seems to be answered for now. However, the next challenge will come next year when the “PAIS tax” leaves a gap that remains unaddressed. Will the government continue to be surprised by its fiscal results?

Fiscal SurplSurplusntractionary Fiscal Policy

Contractionary Fiscal Policy = Lower Economic Activity

Budget 2025

Want more anchors? You’ve got it. The fiscal anchor will become automatic in 2025, as outlined in the budget submitted to Congress. The budget will need to exceed the amount of interest payments. If revenues are $1,000 and debt interest is $100, public spending will be adjusted to $900.

Revenue - Total Spending (primary + interest) = 0.

Current expenditures will be composed of Automatic Spending (GA) and Discretionary Spending (GD). If revenues are higher than estimated, GA can increase, but GD cannot. Conversely, GA and GD will be reduced if revenues fall short. The government aims to safeguard the fiscal surplus; this is pro-cyclical: if the country performs poorly, the government will intensify the downturn with reduced spending, and if the country performs well, the government will stimulate the economy with increased spending. If revenues exceed projections, two scenarios are proposed:

1. If the increase is temporary, the surplus will pay down more debt (debt reduction).
2. If the increase is permanent, taxes will be reduced.

Lower public spending = Lower activity

Higher public spending = Higher activity

The government is proving that it keeps its word, as the PAIS tax (set to expire in December) does not appear in the 2025 budget. Could there be more downward pressure on the dollar soon? For now, the exchange rate anchor remains. Will economic activity recover with the handbrake on? Article 1: Fiscal Rule. "The Public Sector must achieve a balanced or surplus financial result. In the event of any deviation that negatively affects the financial balance, expenditures must be cut proportionally."

Some relevant data from the Budget projections:

• Inflation “end-to-end”: 18.3%
• Exchange rate December 2025: $1,207
• GDP growth: +5%
• Fiscal surplSurplus% of GDP

Amidst all these numbers, the 100% growth in DEX (export duties) caused a stir. The government clarified that this is due to a "low base" for this tax in 2024, and they expect an agricultural price rebound in 2025. Some doubts remain about this explanation, but I find it important to highlight the government’s dialogue with the public. On the same day that the uproar over the DEX occurred, the government responded through social media with the necessary "clarifications." The fact that we can openly discuss the budget is one of the greatest victories we Argentinians can have—applause for the government here (whether the projections are accurate or not is another debate, but that’s not the point).

Economic Activity

According to the latest activity data released by INDEC, the crisis doesn't seem to be as severe. The data show a GDP reduction of "only" 1.7% year-over-year in the second quarter and also -1.7% compared to the previous quarter. The recession continues, but the crisis is easing (remember that the first quarter marked a harsh -5.1% year-over-year).

The RIGI continues to bring all sorts of news. With the RIGI in motion, the reversal of the northern gas pipeline has entered its final stage, allowing gas from Vaca Muerta to reach the country's central and northern provinces: Córdoba, Salta, Jujuy, Santiago del Estero, Catamarca, La Rioja, and Tucumán. This project is essential to ensure supply and facilitate other types of investments.

This week, Renault Argentina announced an investment of USD 350 million to manufacture a half-ton pickup truck at its Santa Isabel plant in Córdoba. For its part, Golar confirmed an investment of USD 2.2 billion to build a floating plant for liquefying natural gas (LNG).

Higher economic activity = Higher inflation

Trade Balance

The RIGI will undoubtedly help support what is already a reality—a strongly surplus trade balance. August marked a surplus of USD 1.963 billion. Twin surpluses are not tainted. Some relevant points:

• In August 2023, the deficit was USD 974 million.
• Accumulated USD 14.151 billion in 8 months of 2024.
• Exports fell by 2.1% month-over-month and have posted their third consecutive monthly decline. They accumulate a year-over-year advance of 14.9%.
• Imports fell 10.1% month over month, possibly due to the expectation of a reduction in the PAIS tax. Year over year, they are down 29.8%.

Deregulations

Sturzenegger started the week with a bang on Monday, with many new developments in this area.

From now on, any airline operator can provide ground services for airplanes and passengers at all airports in the country—a direct hit to Intercargo amid strikes and protests. The government continues to push forward with the transformation and deregulation of air transport, aiming for modernization that ensures safe, efficient operations without monopolies.

Less bureaucracy = Lower costs. The time to legalize documents for export has been reduced from up to 45 days to just one day.

The approval timelines for industrial and commercial measuring instruments have also been shortened. Thermometers, fuel pumps, scales, and taximeters, among others, will be approved automatically if they have international certification. The regulation also provides for the incorporation of new laboratories in the country, which will be able to carry out periodic verification tests and conduct model and quality verifications.

Passenger and cargo transport is also being deregulated, allowing greater freedom. Decree 830/24 implements full deregulation of free services, allowing the choice of vehicles, routes, and frequencies without any restrictions.

Meanwhile, under Diana Mondino, the Ministry of Foreign Affairs announced a measure aimed at reducing travel costs for official delegations. Administrative Decision 888/24 reduces these costs by requiring only one official travel (except in special cases), issuing the cheapest ticket (Decree 747/24 eliminated the requirement to purchase through Optar), and not paying per diems if the inviter covers the cost. In short, it’s about using common sense to protect taxpayers’ pockets.

In addition, the government has sent a bill to reduce technology costs, lowering the import tax to 0%. This is crucial if we want to grow and make the knowledge industry one of the pillars of Argentina's future.

The Street

Real wages continue to recover. Rebound and relief. The July RIPTE data showed a 6.6% monthly increase compared to 4% inflation. Everything indicates that wages are experiencing a V-shaped rebound. Is it enough? For now, it seems so for the people. Confidence in the government and the President's image remains steady. However, we are still below November 2023 levels (-5.2%), so there’s still some way to go.

On the labor market side, the second quarter unemployment rate, according to INDEC, closed at 7.6%, an increase of 1.4% from the previous year—a bad figure. Still, it could have been much worse given the country’s current situation, especially considering it was only 0.1% higher in the first quarter.

Private dollar deposits are soaring: 16/9 +381M, 17/9 +512M.

Inflation

After some grim data, the good news arrived. The Internal Wholesale Price Index (IPIM) "caught up" with crawling inflation, posting +2.1% in August, which marks a positive development for the government on one of its more stubborn fronts.

The market's breakeven inflation expectation averages 3.7% until December. The market still doesn’t fully believe the government and hesitates to pay.

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Capital Markets - Actionables

Don’t stop; keep going, keep going. The shark that is Argentina is devouring everything in its path, literally. Argentine stocks and bonds are taking the prize for the best returns of the year, and they don’t seem to have a ceiling.

Do you want to know more about regularizing assets and entering the tax amnesty?

The week's big news was the turning point in interest rates from up north. The U.S. Federal Reserve (Fed) cut rates by 50 basis points (bps), bringing them down to a range of 4.75% - 5%, marking the start of a new era. Today, the Fed’s rate-cutting cycle signals that there will be another cut this year, and next year, there will be an additional cut. The path ahead would be 50 bps more this year, 100 bps in 2025, and 50 bps in 2026, leading to a reference rate of 3%.

Let’s look at some basic U.S. data and projections to provide context for what's ahead. Members of the FOMC (Federal Open Market Committee) project a GDP growth rate of 2.0%, an unemployment rate of 4.4%, and year-over-year general and core inflation rates of 2.3% and 2.6%, respectively. For 2025, the projections are 2.0%, 4.4%, 2.1%, and 2.2%, respectively.

The 50bps cut brought a more aggressive Fed (hawkish) in reducing rates, which could imply a weaker economy. The market celebrated the more aggressive cut, with the S&P 500 closing the week at record highs. Beyond these implications for the U.S. economy, this tailwinds emerging markets.

With a weaker dollar, Treasury bills no longer act as a money vacuum in turbo mode, and investors looking for returns elsewhere will activate the "risk on" sentiment, which can enhance returns on various emerging market assets. At the same time, a weaker dollar may revitalize the prices of agricultural commodities, which are currently at rock bottom. These are strong positive points looking ahead to 2025 if perspectives don’t change.

We repeat: we continue to see great value in sovereign bonds if the government keeps consolidating its numbers and recovering public finances. With still very high yields, if country risk decreases, we will see extraordinary results in sovereign bonds. This is far from over; a country risk of 1300 bps is still very high for a country with orderly public accounts and sustainable debt repayment.

The market is following along, but not everywhere. As mentioned, breakeven inflation remains “high,” and the market is waiting to pay. On the other hand, Lecaps had a good week, and CERs retreated slightly—could the 2.1% IPIM have had an influence?

Lecaps are now almost an obligatory asset for cash management due to their differential yield compared to similar instruments.

Both peso- and dollar-denominated bonds remain opportunities if we trust that the government will perform well. Always remember that Argentine assets are very risky and not for the faint-hearted. If the budget numbers are met, especially inflation, Lecaps will result in extraordinary returns.

Javier Milei: "From now on, Argentina will be solvent, leading to a consequent reduction in country risk, interest rates, and ultimately an increase in investment, productivity, real wages, and a decrease in poverty and indigence."

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Brief Reflection

The government is accelerating and seems unstoppable (except for the fiscal and monetary anchors), hitting the mark again with fiscal surplus expectations, thanks to a budget plan that "forces" the state’s accounts to remain positive. The market is celebrating this and other measures and continuing to rally. These small victories are accumulating, and for now, the government's performance in the market is shaping up to be a historic win. Every week, Argentina has less bureaucracy and fewer obstacles to production, and the market continues to believe in the government’s economic program and put in money. However, the rule remains “wait to see before paying.” How many times has Argentina burned investors?

The people? They rush to deposit dollars through the tax amnesty, revitalizing the system and bringing deposits back to pre-pandemic levels. Confidence is growing, it can be felt, and people are beginning to notice it through small measures that bring peace of mind to their day-to-day lives and certainty in their week-to-week routines: the elimination of protests, the reduction of bureaucratic hurdles in countless procedures, and other measures that we’ve been mentioning. These actions allow people to plan better, opening up a future for Argentina that can plan. What? Yes, planning. A word that seems lost from the lexicon of Argentinians for decades is regaining prominence.

A more realistic budget indicates that we can take some of the economic projections to make better decisions (still a gamble), and the government seems to be taking the Budget with responsibility, not with the frivolity of presenting numbers disconnected from what could happen. Let's hope the politicians rise to the occasion and that we can have a country with a budget that allows the government to carry out its economic program and, most importantly, rebuild public finances. I believe this has been a remarkable achievement. I think the reconstruction of public finances must remain the priority, especially for a country with a broken Central Bank (net reserves are still negative and will remain so for a long time). It’s hard to achieve sustainable growth when you are bankrupt.

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, we have another strong yes.

See you next week, Vamos Argentina!

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Nau Bernués

Founder, ArgenGrowth

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