Hop on and hold on
Nahuel Bernués, CFA
CEO | Asesor Financiero & Administración de Patrimonios | Creador de Contenido
I don’t want to repeat myself, but you make it very difficult. Will you allow me to say again that the Argentine economy is like this: erratic, dichotomous, polarized, a little schizophrenic, unpredictable, a bit capricious, and, perhaps because of that, we like it so much? On Monday, we had a finished government, and by Saturday, we had the Executive riding the wave's crest. Not even the best screenwriters could come up with this—cinema at its finest.
Dear ArgenGrowther,
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:
Brief Reflection: Argentina’s Economic Paradox
How do you summarize a week in a couple of lines? It's a roller coaster. Last Sunday, in our Argentina financial news update, I wrote about mistakes and market noise, and that’s how we started the week. But—with a big but—we ended it with fanfare, watching the flashes coming from the United States. Argentina at its finest. Switzerland, who loves you?
In the midst, we found that the main anchor of the economic program is not moving at all. Fiscal and financial surplus in January continues to demonstrate more than just agility in the recomposition of public accounts. We add key victories from the political sphere such as the suspension of the PASO, the photo with Trump, and the reciprocity of 0% tariffs. It even seems that the Judiciary is willing to reduce the Argentine cost and gives the government the upper hand in its fight against Municipal Rates. It is forbidden to include municipal rates in public service invoices (the items contained in the invoices issued by providers of goods and services must refer in a unique and exclusive manner to the good or service specifically contracted by the consumer and provided by the supplier, and cannot include amounts or items unrelated to said good or service).
Fortunately, what seemed like it could create market noise dissipated very quickly. Yes, we remain expectant regarding the agreement with the IMF, which could imply and signify many short-term developments for Argentina's economy.
Did you want more? Let’s go with a light at the end of a very long and expensive tunnel: a trial for the YPF case. For a complaint against Cristina and Eskenazi, Judge Preska could overturn her ruling against Argentina for USD 16 billion. Folks…
After months of uncertainty due to the lack of news and agreements, some news seems necessary for the Argentine markets to react. Fortunately, the real economy doesn’t care and keeps going at full speed. Will Argentina be a highway for doing business and show the world it has changed? Are we any closer? Today, the flashes say yes.
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Is Argentina's Economic Shift Positive or Negative?
Spoiler alert: The ups and downs have been positive. There was a fiscal, financial, and trade surplus in January. The Central Bank keeps buying. Wholesale inflation remains below the crawling peg, and economic activity is moving at full speed.
Dollar and the Strong Peso
Volatility without volatility—that seems to define the dollar this year. Although the weekends are the side of the green bill, the reality is that all the market movements and political shocks don’t move the needle. Or perhaps we were so accustomed to sudden moves that a 2% weekly change seems like child’s play? The monetary tourniquet appears to be taking effect, and amidst so much uncertainty, the movement of the dollar is no longer what it used to be. The Strong Argentine Peso is indeed strong.
The Central Bank’s purchases of foreign currency don’t stop—where do they come from? From agriculture, yes, sir. This week, they were almost USD 700M and an estimated USD 2,000M for February, +50% year-on-year. Imagine what this would be if there were no withholdings. But, and there is always a but, in the new Argentina, agriculture doesn’t have the spotlight by itself; Vaca Muerta came to break the paradigm, and when the harvest is over, dollars will continue to go in, energy imports will no longer be an issue, and the surplus of the energy trade balance will keep growing in the coming years.
On the other hand, the meeting between Milei and Kristalina Gueorguieva, the IMF director, does not seem to have brought in fresh money for the moment. Thus, as long as the peso sterilization mechanism continues and there is no agreement with the IMF, Net Reserves remain negative.
Recomposition of Public Accounts
We are forced to repeat ourselves: one more month of twin surpluses, and off we go… However, the January data show that while public accounts continue to be recomposed, January is the first time that public spending has increased in real terms year over year. The trade surplus marked the lowest point of the Milei era. For now, the anchors remain intact.
With no news of agreement with the IMF, the Central Bank (BCRA) will remain under strain for a long time. Already, underway privatizations could provide fresh money that the market is not currently pricing. Meanwhile, the government has fine-tuned public companies and recorded the largest surplus in 17 years. The BNA is moving towards becoming a corporation. How much value is there if the State divests itself from the bank, and how much is lost?
The people also assumed a large part of the recomposition; after years of heavy subsidies, the “electricity” that users pay now makes more sense: it went from 22% to 84%.
National Public Sector
Normalcy returns after the December fiscal deficit. The fiscal anchor comes into play and gives it its all. However, January marked a change: real public spending increased year-on-year by 13.5% (the chainsaw of January ’24 had been brutal). What is this due to? Mainly to pensions and retirements, which represented 57% of the increase. In short, 13 expenses increased, and three decreased (spending on social programs, transportation subsidies, and subsidies for other functions). There was a real variation of -2.1% year-on-year on the revenue side. Tax revenues remained constant, and non-tax revenues fell by 27% in real terms year-on-year.
Nevertheless, this did not prevent achieving a new fiscal or financial surplus. A few weeks ago, we mentioned that the absence of an economic surplus was lamented in light of the hefty debt payment in January; it is a pleasure to be proven wrong. The reduction in interest expenses by 33.4% in real terms helps to explain this—a financial surplus of $599,753 million; well done. The primary surplus of $2,434,865 million fell by 34.4% year-on-year, representing 0.35% of GDP 0and .07% of GDP for the financial surplus.
Banco Central de la República Argentina – BCRA
With no news from the IMF, we will continue with negative Net Reserves, waiting for the Monetary Base to equal the Broad Base and for rate moves to materialize. Many wonder: where did the dollars they purchased go? Fernando Marull shows us a simple mathematical account to understand it:
Are we bankrupt? Yes. Are we much better? Yes. The negative net reserves of USD 11,000M have moved to 4,000M. A recomposition of USD 7,000 million in just over a year. Coming out of the coma costs.
The Central Bank relaxes the conditions for granting loans in dollars. By eliminating point 1.4 of the credit policy, loans are no longer limited to exporters, as long as the funds come from the issuanceuanceof Negotiable Bonds or foreign credit lines. However, the previous restriction remains, or funding with depots; what implications does this have?
On the one hand, it creates an additional source (for those who previously could not access credit) for the purchase of Net Reserves through the “mechanism of reserve accumulation via domestic credit,” a point that has been very relevant in recent months as the Central Bank has been buying heavily for this reason. On the other hand, it increases the economy's total credit—and in dollars—. It gives the impression that there is a greater risk (at least today) than in the previous scheme. Until last week, credit had to be directly or indirectly associated with goods and services whose prices varied more directly with the exchange rate (exportables, import substitution, services with international pricing to produce trtradableetc.). In a country with a somewhat unfavorable history in exchange rate terms (or so they say), if the ability of bank debtors to pay is affected by mismatches in the exchange rate, for example, it can lead to problems in the banks. Everything is moving towards a two-currency economy; steps are being taken, but for the entire real economy to function that way and for these risks to be mitigated, there is still a long way to go.
Economic activity
Economic activity is recovering, and imports are taking note, impacting the trade balance directly. The trade surplus is maintained, but it marks the lowest of this government,t with USD 142 million and a drop of 81.9% year-on-year. An important caveat is that the terms of trade played in our favor—what does this mean? We would have had a trade deficit of USD 249M at last year's prices. Exports of USD 5,890M increased by 9.1% year-on-year (car exports dropped significantly by USD -700M), and imports of USD 5,748M rose by 24.6% year-on-year and reached five-year highs. Who comes to save the potatoes? Energy, of course. The country’s energy future is enormous and is already being experienced. The energy trade balance is in surplus by USD 678M (USD 390M in January ’24); on the export side, we have a price effect of USD -34M and a volume increase of USD 300M, and on the import side, prices by USD -28M and volumes by USD 69M.
Let's put things into perspective: in 202,2, we had a deficit of USD 4,000, which turned into a surplus of almost USD 6,000M in 202. Insert your description here.
Let’s not forget about the regional economies. The export of peanuts and their derivatives reached a historic record in 2024. Exports totaled USD 1,186M, +13% year-on-year. For 15 years now, Argentina has been one of the world’s largest peanut exporters, alternating between 1st and 2nd place with India.
Speaking of regional economies, we can further put things into perspective from another angle: the copper projects in Chile produced almost 800,000 tons of copper, compared to Mendoza's production of nearly 800,000 tons. This translates into more than USD 6,900M in exports, compared to the province's total of USD 1,60tal last year.
The real estate sector is taking off, and December marked a record in mortgage loans—we haven't seen these values since 2017/18. At the same time, construction costs increased by 0.9% in January compared to December and +67.1% year over year.
According to the CAC, AC consumption continues to soar, with a +4.3% monthly increase and a +5.4% year-on-yeardustry is not far behind, with a +4.8% monthly increase and +12.2% year-on-year increase.
On the side of deregulations, Decree 101/25 of this week drives significant deregulation in the external and internal commercialization of fertilizers—one of the key inputs for the Argentine economy. As of the decree, any fertilizer (non-organic) certified abroad may be marketed in the country without restrictions and requiring procedures or authorizations.
According to the government:
“The most important thing, and curious, is that we have freed the transit of fertilizers within the country. Was it restricted? Yes, and believe it or not, for military reasons. What? We explain. Ammonium nitrate (NH?NO?) is both a fertilizer and a potential precursor to explosives. For this reason, the regulation—the Lanusse law—imposed restrictions on the movement of all fertilizers in the country (Article 6 of Fertilizer Law 20.466). The truth is that what in 1973 might have made sense (let’s be generous) lost its meaning long ago. But the restriction was forgotten … for 50 years! Decree 101/25 frees the transit of fertilizers in the country, regulating Article 6 of Law 20.466, leaving the restriction only for ammonium nitrate and only when it is moved in significant quantities. In this way, we give rationality to a regulation that had unnecessarily increased the cost of production for our Argentine agricultural sector. This decree, as simple as it may seem, took the government exactly 365 days from the first meeting, they mention. They stated the following: it was a complication to figure out who would verify the transit of ammonium nitrate. Security? Senasa? Nobody knew. Which reveals another thing: the procedure existed, but in practice nobody verified anything. In other words, it was a regulation that only imposed costs, because yes, the procedure was required, but not the control that was supposed to come with it.”
La Calle
The labor market showed an increase in unemployment in the third quarter of 2024 compared to 2023, indicating that there is still a long way to go. Activity, employment, and unemployment rates were 47.2%, 44.2%, and 6.4%, respectively, in Q3 2024.
With more recent data, consumer confidence fell in February after four consecutive months of increases; the UTDT indicator registered a decline of 0.3% this month. While there are better feelings about the macroeconomic situation (+1.1%), the personal situation of those surveyed worsened (-1.3 %). However, if we look at it year after year, we see we are up 28%.
After the legalization boom, the drip of dollars leaving the system did not stop, and USD 4,000 has already been removed.
Inflation
Wholesale inflation in January was +1.5% and increased slightly compared to December. Nevertheless, it remained below the crawling peg of 2% and registered a +43.8% year-on-year. The relevant data comes from the fact that imported products fell by 2.1% year-on-year. The opening of the economy also seems to have come to control inflation and provide us with more competitive prices.
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Actionables
Phew, where to start? Let’s create a mini timeline of the week following the president’s tweet last week.
Monday: holiday in the United States and the massacre at the Merval (approximately -7% in USD), punishment for the bonds (between -1.5% and -3% in USD), and total uncertainty. And the government? It announces a brutal primary surplus and a fiscal surplus.
Tuesday: the stock market in the United States opens and stocks rise, yes, they rise. Ladies and gentlemen, nothing has happened here, they say from the North, and the Monday drop is recovered. It was a different story for the bonds—they recovered but only partially. And the country? The twin surpluses are confirmed, and the trade surplus in January continues its streak.
Wednesday: Surveys indicate that the Libra case strengthened the executive. The Merval rises again. Argentina, you wouldn’t understand it.
Thursday: all eyes are on Congress and Milei’s trip to the United States.
Friday: the PASO are eliminated and the week ends red for the markets but green for the government.
The flashes come in once the markets are closed, and we see Musk with a chainsaw and Milei shaking hands with Trump. For those from abroad, this is living in Argentina—a simple child’s play (insert meme of “I’m tired”).
Let’s go with some numbers. The sovereign fixed-income trade was purely and exclusively domestic, from -0.5% to -1.5%. The comparables (excluding Ecuador) had a positive week, and the external context was not bad. The country’s fundamentals after the week’s surpluses seem to remain intact, and this is nothing more than the typical volatility of the Argentine market. For a reason, we yield what we yield. High yield = High risk.
On the equity side (stocks), according to a JPM report, Argentina is currently trading at 9.0x P/E, still far from the highs during Macri’s government at 13.6x. If we believe that the fundamentals of the companies for growth are better, there is still a lot of potential for a rise in the Merval. Remember that with stocks, we are talking about a higher risk than with fixed income, and if we add that it is Argentina's risk, we are facing one of the greatest risks on the planet. If the cap is lifted, do we enter emerging markets and take off? Up to USD 2,640M could come solely from emerging market flows. There is still a lot of speculation for a country with much to rebuild.
If you are in pesos, you can continue taking advantage of the rate above 2%, which seems to be acting as a floor for now. The positive real rate is here to stay, but beware that the week ate up the monthly rate if you do carry trades. You can also get a nice hedge against inflation and real rates for next year by holding CER bonds with yields above 5%.
We are all waiting for news following the executive meetings in the United States, but for now, there is little to nothing. Meanwhile, we continue to take advantage of achieving extraordinary returns above 12% per annum in dollars for those with a strong and healthy heart (aggressive profiles). We trust the government’s anchors and the economic program set by the Executive—to keep accumulating bonds.
If you’ve enjoyed this analysis, please share your thoughts, comments, and feedback. Let’s keep the conversation about Argentina’s transformation alive.
Nau Bernués
Founder, ArgenGrowth