Sad Data for a Dual Reality

Today, there are no jokes or humor. More than half of Argentines are poor; there is nothing to celebrate. EMAE data shows an incipient monthly recovery, wages are improving, and the tax amnesty is taking the spotlight. On top of all this, the President continues to rub shoulders with the world's leading entrepreneurs, and we are back on the radar of major investors after many years of being forgotten.

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: Negative. The macro is getting in order, but the numbers are a stark reality slap. We insist expectations don't feed anyone. We are growing, yes, but still far from a solid recovery.

Understanding What's Happening in Detail

Dollar and the Strong Peso. And the streak ended. After seven weeks, the peso's appreciation streak ended, with the dollar rising 0.68% over the week. Government data on market operations was released, showing USD 153 million was used in August to "contain" the gap. Nothing out of this world. The peso's appreciation seems more genuine than due to intervention, and the feelings haven’t changed — the probabilities of convergence of the MEP to the official rate remain strong. The government seems solid in this regard; the Central Bank is buying dollars again, and the tax amnesty helps increase reserves.

This week's data comes from dollar deposits in the private sector, breaking records daily. On September 24th, deposits reached USD +1.34 billion, the highest daily increase on record, until the USD +1.713 billion on the 25th. Argentines deposited one billion seven hundred and thirteen million dollars in one day. Madness.

The rumor was confirmed, and the government decided to extend the first stage of the tax amnesty, responding to operational difficulties and the high interest reflected in the dollar deposits. This deposit increase directly helps the Central Bank's reserves due to increased cash reserves. In the case of amnesty, if the money is withdrawn due to the penalty payment, this would go directly to the Treasury account in the Central Bank.

Recomposition of Public Accounts

The restructuring of the public sector is gradually giving the government more breathing space in achieving its goal of achieving a sustainable fiscal surplus. Month by month, public sector jobs are being reduced (except in the Ministry of Security), and inconsistencies are being uncovered in the various government audits. During the first seven months of management, public sector restructuring led to savings of 36 billion pesos. From December 2023 to July 2024, more than 28 thousand jobs were cut, representing a 5.7% reduction in staff.

This reduces expenses and helps gain credibility with the public by "cutting the fat." In recent weeks, disability pensions have been at the center of the issue. Let's put some (approximate) numbers:

• Beneficiaries between 1999 and 2003: 80,000
• Beneficiaries (growing until) 2015: 1,060,000
• Beneficiaries between 2016 and 2019, stable: 1,060,000
• Beneficiaries (growing until) 2023: 1,200,000
• Disability pensions as a percentage of Argentina's population: 2.6%
• Equivalent program pensions as a percentage of the population:

If we consider Mexico's case comparable (the highest in the sample), Argentina should have 433,000 people with access to pensions, 767,000 less. Two-thirds of the pensions could be fraudulent. Money from Argentines was used incorrectly. Government audits found things like a dog's X-ray justifying a retirement and an X-ray used 150 times for the same procedure.

In line with this, the government re-established the requirements for accessing disability pensions with Decree 843/24, eliminating the flexibility of the system. The system costs the State USD 3.4 billion annually, representing 3.5% of the 2025 budget. The new decree once again requires disability for the pension and that the beneficiaries not have a working relationship, as the pension was created for those unable to work. The decree also sets a procedure for detecting and correcting irregularities. This measure is another step towards building a more austere state.

President Javier Milei will sign a decree to begin privatizing Aerolíneas Argentinas within the public sector cuts. The company has never made a profit since its takeover in 2008 and has been a constant source of peso demand due to its deficit operations.

Less Public Spending = Less Activity

National Public Sector

Bidding and Debt

This week finally reached what the government had been communicating for weeks: not all maturities were renewed. Maturities worth $7.1 trillion came due, and $4.78 trillion were awarded.

What does this mean? Several things. First, the government used part of its cushion at the Central Bank to make up for the pesos that were not renewed to pay the maturities. At the same time, we can analyze what happened that not enough was offered to roll over the debt. The government enlightened us and indicated it reached the "Anker Point." What? Simply put, banks prefer lending to the private sector over renewing Lecaps. Since no more pesos are issued and private credit is increasing, it is more profitable for banks to lend to the private sector than the State.

In the words of Felipe Nu?ez, director of BICE and host of the MECON Streaming: "As planned in the economic program and as we anticipated in the MECON streaming, the strong credit impulse, resulting from lower inflation and the peso shortage due to the fiscal and monetary anchor, is creating a 'Crowding in' effect. In other words, the State is now returning savings to the people and companies, implying growth in investment and consumption. This virtuous process is explained by increased money demand and credit.

The level of real Treasury debt is consolidated because, with a fiscal surplus, the existing pesos in the Treasury account at the Central Bank will support re-monetizing the economy as it continues to deepen. This is why it was essential to conserve these pesos and not use them to buy back more Treasury debt held by the Central Bank."

The government claims that this outcome is part of what they expected and aimed for, as the economy is revitalizing. They also have the cushion at the Central Bank (accumulated in previous auctions) to deal with unrenewed maturities. Let’s remember the Treasury's mountain of pesos in the Central Bank is approximately 16 trillion. At the same time, LeFi was never a bogeyman and only $3.4 trillion is in private hands — nothing severe. If you've heard a lot about "crowding in" (https://economipedia.com/definiciones/efecto-atraccion-crowding-in.html) these days, this is exactly what we are talking about. "Crowding in" would be beneficial compared to "crowding out" (https://www.investopedia.com/terms/c/crowdingouteffect.asp).

Additionally, INDEC data showed that external debt reached USD 286.881 billion in nominal value in the 2nd quarter of 2024, 1% less than the previous period. More on debt in this edition: https://finbizproposito.ck.page/posts/entendiendo-que-pasa-25-08-2024

Contractive Monetary Policy = Less Economic Activity

Economic Activity

The EMAE (Monthly Estimator of Economic Activity) for July showed a positive inter-month figure of +1.7%. However, on an inter-annual basis, we are still in negative territory at -1.3%, a figure made possible only thanks to agriculture, which saved the day. Mining, quarries, and energy were also contributing. Conversely, sectors like fishing, construction, commerce, and industry remain heavily impacted. Let’s not miss the forest for the trees. In July, there was also a jump in the dollar, which likely helped boost certain economic sectors.

Based on the general economic activity indicator from OJF, August is likely to return to a negative inter-month trend. The seasonally adjusted series indicates -0.6% for the month and a brutal -5.6% year-on-year. The macro is becoming more orderly, but we are far from climbing out of the hole.

Nevertheless, we remain optimistic and seek the light at the end of the tunnel. In the activity signal from Econviews, green represents hope.

The hope-colored green smells like a carrot and the RIGI keeps us running (not a typo; it still hasn’t materialized), as Canadian company First Quantum confirms a significant investment in Salta, with USD 3.6 billion for the Taca Taca mining project (primarily copper), the most important mining project in the province.

Greater Economic Activity = Higher Inflation

Deregulations

There couldn't be an update without news in this area. Decree 847/24 regulates the labor chapter of the Bases Law. It's among the most significant reforms the government has enacted. Undoubtedly, whether we like it or not, we are witnessing the most important change in labor relations in years.

• The chapter permits labor amnesty.
• It removes the presumption of an employment relationship in service contracts.
• It implements a simplification in labor registration.
• It relaxes maternity leave policies.
• It eliminates penalties in compensation lawsuits.
• It allows the hiring of independent workers.

• It allows the hiring of independent workers.

• It allows the design of termination systems.

The Street

According to INDEC data for the first half of the year, more than half of Argentines are poor. Unfortunately, it comes as no surprise. It's a sad reality from every angle. Fifty-two point nine percent of Argentines live in poverty when measured by income, and 18.1% live in extreme poverty. In terms of poverty, this represents an 11.2% increase compared to the second half of 2023, mainly due to a significant increase in the basic food basket, which far outpaced household income growth (119.3% vs. 87.8%).

Poverty among children is through the roof. Sixty-six point one percent of children under 14 years old live in a household below the poverty line. Two out of three children are poor. No words.

These are historical numbers for a historical disaster. This was not built overnight. Years of wastefulness are leaving their mark on the population and Argentina's future.

Breaking down the data, it is important to emphasize that the sharp increase in poverty is due to a decline in income, not a rise in unemployment. At the same time, looking at the quarterly results, a nascent recovery can be seen in the second quarter compared to the first quarter of the year. The figures were even worse in the first quarter, with 54.8% poverty versus 51% and extreme poverty at 20.1% versus 16.1%. The ongoing recovery of wages may reduce this horrible figure over time. If this dynamic continues, we won't reach the poverty levels of the 2001-2002 crisis, which, according to the current methodology, would be a 65% poverty rate.

The V-shaped recovery of wages is seen month after month and brings relief to the population amidst these catastrophic figures. However, in the race against the basic food basket, we are still below November 2023. If inflation follows a new downward trend, this year will likely close better than the previous one. INDEC reports 4% inflation in July and 7.5% wage growth. Macroeconomic order is crucial for this wage recovery trend to continue.

After many months of crisis, the impact is felt, and confidence in the government fell by 14.8% in September. This was the biggest monthly drop since the start of the administration and marked the lowest confidence level for the government since taking office. The lack of a rebound in economic activity is evident.

Confidence, in terms of deposits, is stronger than ever. Private dollar deposits are on their way to a record. 23/9: +1.105M, 24/9: +1.354M, 25/9: +1.713M. TREM-EN-DOUS.

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Capital Markets - Actionables

After so much rise, there's a pause—a logical break for equities after showing a remarkable upward trend in recent weeks. The situation is different for fixed income, where country risk continues its downward path, and I believe it would be logical for this to continue given the numbers and the government's discourse.

Sovereign bonds continue to show very high risk, diverging sharply from the cost Argentine companies incur to finance themselves. Here lies an opportunity for those seasoned enough to switch from corporate to sovereign risk. If these were to align, sovereign bonds would soar.

On the peso side, Lecaps still offer interesting returns for those seeing a downward inflation path, with returns above 3.5% per month. Those seeking CER coverage find interesting returns again; maybe it’s time to take another close look at these bonds.

The President continues to make friends with the world's leading entrepreneurs and rings the bell at Wall Street, showing that Argentina has returned to the world stage. We are all waiting for Elon Musk's statements to come true, attracting investments, dollars, and jobs to a country desperately needing fresh funds.

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Brief Reflection

Writing a reflection with over 50% of impoverished households is difficult. Wages are recovering, and the macro is becoming orderly. Let’s hope, for the sake of all Argentines, that the recovery continues so we can start growing and leave behind these indicators that show how low we have fallen.

The other side? An Argentina with an incredible amount of dollars under the mattress. Which is the real Argentina? The one living in poverty or the one that doesn’t stop adding dollars to the system? It’s difficult to answer with an economy that has 50% informality. The truth is that these two sides coexist, and it will be a monumental task to change the peculiarities of a country that no longer believes in the State, politics, or paying taxes.

People are beginning to show less confidence in a government that keeps its course unmoved—echoes of an economy that hasn’t taken off? The same people are also depositing dollars and taking dollar deposits to record levels. The ever-cyclothymic Argentina makes us believe that we have everything to be a powerhouse while we live in poverty—the two faces of a country that is unique in the world.

Argentina needs a nation that eats well and is healthy in order to grow again. Are we getting closer? Today, we are sad, but yes.

See you next week, Vamos Argentina!

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Nau Bernués

Founder, ArgenGrowth

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