Does the Locomotive Pause to Gain Momentum?

After a spectacular rise in Argentine assets, a pause has arrived. However, the government remains unaware and does not slow down, with twin surpluses once again setting the tone and anchoring everything, especially wholesale inflation, which registered 2% in September and is now in line with the crawling peg.

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: we’re still gaining. The dollar's beating takes a breather; the market does it, too. The country's risk isn’t paying attention and continues its journey toward a thousand points nonstop. Positive data on central bank purchases and wholesale inflation continue to give the government breathing room despite a disconnect with the street. Twin surpluses keep setting records.

Understanding What's Happening in Detail

Dollar and the Strong Peso.

The strong peso took a break this week, and the dollar won the tug-of-war with a 2.28% gain. After the previous week, when the peso was the strong currency (4.4%), and with a bit more turbulence than usual, the dollar regained some strength, though only in the financial market. Rofex remains calm, and the market still believes in the crawling peg. The Central Bank continues its buying streak, giving the government more firepower to sterilize through the market and add selling pressure to the dollar. With the gap below 20%, the government seems comfortable, steadily working to bring the MEP dollar closer to the official rate.

The Central Bank's currency purchases during October surprised many for several reasons. First, higher demand for dollars from importers was expected due to overlapping payments under the current authorization scheme. Additionally, as we've mentioned, October is usually a challenging month for seasoning. Moreover, banks have more dollars to lend (thanks to the amnesty, which significantly increased the amount of private dollars deposited in banks), allowing credit in dollars to finance imports. Lastly, there’s a positive synthetic dollar-linked rate (buying Lecaps + futures). How does all this interconnect? Let’s walk through the importer’s path to better understand these aspects and their consequences. So, the importer:

1. Finds banks willing to lend, so takes the credit.
2. Is left with debt (in official dollars).
3. Hedges against exchange rate risk by purchasing futures (with the entire curve below 3.5% and even more comfortably).
4. Given credit, the company uses the pesos not spent on imported goods to buy Lecaps, yielding a positive profitability differential, as Lecaps will offer higher rates than the projected depreciation in the future.

Recomposition of Public Accounts

The surplus no longer surprises us. The twin surpluses continue to show the government's economic determination. The government keeps hitting historical milestones and is expected to maintain this trend in the future. This is the?ninth month of surplus?without?default. The foreign exchange market is also gradually normalizing for import payments.

National Public Sector

The fiscal axe has already cut 3% of GDP, which is the main reason the government manages to achieve a fiscal surplus month after month. Revenues fall by 8% year-on-year in real terms, but spending drops by 25%. The cumulative fiscal result for the year represents 0.43% of GDP, while the primary surplus reaches 1.7%. The contrast between 2024 and 2023 is stark.

Analyzing the distribution of accumulated public spending cuts over the year's first nine months shows that 14 of the 16 spending categories were reduced. Which areas fell the most and bore the brunt of the cuts? Pensions and retirement benefits continue to suffer the most, accounting for 25% of the total reduction (their share at least dropped by 1% compared to the previous month). Direct real investment accounted for 15%, transfers to provinces 16%, energy subsidies 11%, and salaries and social programs 8%. Is this dynamic sustainable?

Debt

There’s a lot to unpack here, but let's be concrete for this edition. Recently, Pablo Quirno, Secretary of Finance, shared on X (Twitter) how the net financing obtained by the Treasury has been used as a source of monetary absorThehat the cushion at the Central Bank, combined with bond and dollar buybacks, explains the difference between peso maturities and the financing obtained. Notably, the real accumulated rate, according to the government, is -7.7%. Yes, the government was "paid" to take on debt.

Economic Activity

The activity indicator continues to show mixed results that keep us in the tunnel without reaching the light. While steel production saw a significant monthly rebound (+9%), potentially boosting industrial ore, there are many negative monthly exits from dairy and gas production to cars, construction, and a significant drop in confidence in the government. We remain optimistic that we are getting closer to the light

The RIGI (Real Infrastructure and Industrial Growth Index) is going strong. This week, YPF announced another development: it is exploring USD 5 billion in investments with Profertil and Pampa Energía to increase local urea production.

The trade balance is also positive, though more modest than in previous months. With exports up 20.6% year-on-year and imports down 8.8%, we reached a USD 981 million surplus.

More Economic Activity = More Inflation

Deregulations

Progress continues. The privatization of Corredores Viales has been confirmed: The Ministry of Economy, through the Transport Secretariat, published the bidding for the concessioned sections of the federal road network. The Road Administration clarifies: "We will tender the operation and maintenance of the sections to private companies, not privatize CVSA."

In the judicial realm, processes are being digitized, and divorces will now be expedited.

In healthcare, professional licenses will no longer have expiration dates, a measure aimed at simplifying and eliminating unnecessary procedures.

Less bureaucracy = Lower costs.

The Street

How do people endure the crisis? By recovering purchasing power in dollars at an incredible pace. Lower inflation and the strong peso have led to a remarkable recovery in dollar-adjusted wages. In just a few months, wages have returned to pre-PASO 2019 levels, recovering five years in a short span.

Inflation

Wholesale inflation stood at 2% for September, a celebratory figure. Domestic product prices rose 2.3%, while imported goods fell binge, in line with the 2% crawling figure ng peg, allowing us to say that inflation is practically in a coma. With devaluation and prices both growing at 2% per month, inflation is virtually zero. This is a significant achievement for the government, especially considering that the figure was running at 54% monthly in December. We are getting closer to leaving inflation behind.

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Capital Markets - Actionables

It was a busy week. Everything had been going up rapidly, without pause, but some volatility is The. The frantic rise has halted on the bond side, but we are still climbing, and the Merval had a down week. In perspective, the Merval has significant potential, but let's remember that this is Argentina, with risks at their peak.

The week's highlight came from the peso side, with wholesale inflation delivering a strong figure. The market kept accelerating, and fixed-rate bonds and bills compressed their rates significantly, providing excellent returns for those already invested. If we enter now, we will get lower rates but still attractive ones if we believe the government will succeed in its fight against inflation.

The government had warned months ago about returning to a positive real rate, and we could say we are already there, especially for those who bid on Boncaps last week.

Not everything is rosy for those with pesos looking to place them at a rate. This week, the Central Bank raised reserve requirements from 15% to 20%, which will result in an approximately 2% drop in the yield of money market mutual funds.

We've been talking about Lecaps returns; this week, they surged after the inflation data. So, we repeat: Lecaps contain attractive returns for those anticipating a downward inflation trend. With a rate above 3.5% today and inflation approaching the crawling peg, there's value here.

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Brief Reflection

We take a break from Argentina's locomotive. The drop in country risk continues, helping to rejoin the world once again. Argentine companies celebrate, and financing begins to flow abundantly. Edenor, YPF, Galicia, IRSA—there’s a new auction every week.

In addition, international organizations (IOs) seem to have remembered Argentina, with the IDB likely granting USD 3.8 billion in loans to the country.

With falling inflation and a strong peso, could a rate cut be on the horizon? It feels like the government is paying a real rate that is too high for the current context and market demand, especially in long-term fixed rates. If the government expects to continue monthly reducing inflation, will monthly rates be above 3%?

Let's not forget to look at our big brother. Brazil continues to show considerable currency volatility, and the depreciation of the real could strongly impact our trade balance with our main trading partner. The real closed the week at 5.69, putting external pressure on us.

Reducing Argentina's cost is fundamental to gaining competitiveness in the face of an appreciating currency, and the trend suggests it will continue appreciating. Less bureaucracy, lower tariffs, and fewer taxes are emerging in Argentina.

For now, there's much waiting among those with fresh capital that is desperately needed to grow again. As Argentina's risk premium shrinks, so should business profits. Are Argentine entrepreneurs prepared to earn less?

Argentina needs a highway for doing business, not a pothole-filled road. Are we getting closer? Today, it’s a strong 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.

Happy Mother's Day! To my wife, on her first Mother's Day, enjoy this special day!

Nau Bernués

Founder, ArgenGrowth

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