A Sailboat (ARCA) Called Freedom: Argentina’s Economic Outlook and Government Reforms
Nahuel Bernués, CFA
CEO | Asesor de Negocios y Financiero | Administración de Patrimonios
Yesterday, Argentina’s AFIP took its "belongings" and set sail on a journey. A Lecap, a Bonar, and the Peso set off, raising questions: Where will they go? Country Risk said its farewell, venturing into a duel with the dollar, setting off around the world to sail. Naming its vessel "Freedom," it found adjustments in the sky and painted surpluses on the sea.
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:
Financial ArgenGuide:
#data
What does all this mean?
Argentina’s Financial Outlook: Positive Momentum
Is this good news? Yes! Argentina is on the rise. In one week, we saw a significant drop in country risk, rises in Argentine assets, and another strong Peso appreciation, showcasing Argentina’s positive trajectory. Meanwhile, the Central Bank continues buying foreign currency as it does every week, ensuring steady progress.
Understanding What's Happening in Detail
Argentina Peso Appreciation and Dollar Analysis
Normalcy has returned; the Peso appreciates, shrinking the exchange gap. With fresh inflows, devaluation risks diminish, and markets are reacting accordingly.
Months ago, the government sterilized currency purchases on the market, highlighting that “those who sell first sell best.” With limited government intervention (selling “only” USD 120 million in September, the same as in August), we see the market leading the peso’s appreciation.
This trend was accompanied by an improvement in economic outlooks, with the Central Bank continually buying and the core region experiencing rainfall that boosted projections for foreign currency from the next agricultural campaign. The BCRA already purchased over USD 1 billion this month, marking the best result in 15 years.
At a dollar rate of 1,142, the inflation-adjusted exchange rate is now at pre-2019 PASO levels, with the MEP rate aligning with the official BNA plus the PAIS tax. Is it cheap or expensive?
Amid favorable international commodity prices, let’s remember our Brazilian neighbor. The real bilateral exchange rate with Brazil has dipped below levels in early December last year. A chart by Amilcar Collante shows the 25-year trend, which might prompt some questions.
Currency Controls and Lifting Conditions in Argentina
Has the government moved the goalposts again? The intention to lift currency controls remains, with conditions still pending. President Javier Milei recently added a new condition: resolving the “commercial debt stock problem.” While it appears the requirements are shifting, logically, this issue should be resolved before achieving BM = BMA.
Despite these statements, rumors persist about a potential lift in currency controls. Fresh money spurs impatience, and markets crave an Argentina without currency control sooner than planned. However, while new funds offer stability and “reassure” debt payments for next year, they shouldn’t be seen as signals that lifting currency control is imminent. For now, currency controls are here to stay.
Public Account Rebalancing and AFIP Dissolution
This week, AFIP dissolved. While this might hint at a slow-down or "taking a breather," the government is full speed ahead. Colapinto’s impact is substantial, contributing to government coffers.
The government reported the following: ARCA’s creation led to a 45% reduction in senior officials, a 35% reduction in lower levels, and an overall 34% reduction in public positions. There were savings of $6.4 billion pesos. 3,155 agents with irregular entry under Alberto Fernandez’s administration were removed. Senior ranks will now earn ministerial salaries, significantly lower than previous levels.
Economic Activity Insights in Argentina
August’s EMAE reveals monthly economic growth of 0.2%. Though mild, development continues. Year-over-year, the trend remains negative at -3.8%, slowly closing in on zero.
The EMAE should not mislead; challenging times persist, with some sectors yet to recover fully—however, recent data hints at progress. Wholesale sales dropped 15.1% YoY in August but grew 2.2% from July, and shopping center sales saw a 5.3% YoY increase, indicating consumer growth. Meanwhile, SME industrial output recorded a YoY decline of -6.6% in September but showed a 3.7% monthly increase.
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In the OJF Industrial Production Index, Argentina shows signs of a V-shaped rebound in activity. Year-over-year, we’re nearing the positive with -0.3% in September and a 1.9% rise from August. This reflects an accumulated 8.2% annual decline, but optimism is rising.
In Mendoza, the RIGI is confirmed with YPF Luz and the first renewable energy project under this framework, involving a USD 220 million investment for a solar park.
Oil production in Neuquén is at record highs, with Vaca Muerta reaching 446,890 barrels daily—4% higher than August and a 33% YoY increase. Argentina’s energy future looks promising.
Deregulations and Privatizations in Argentina
Minister Sturzenegger advances with deregulation, ending hereditary public sector roles and progressing with privatizations—e.g., Trenes Argentinos Cargas, aiming to reduce state expenses and streamline administration.
Resolution 3/2024 requires eligible public employees to retire promptly, and the ministry has signed an agreement with ANSES to identify those eligible. Additionally, two trade-related norms were repealed, eliminating the need for sector-specific “observers” in Customs for container releases and removing export reference values.
Meanwhile, the government will cancel 200,000 irregular disability pensions.
Less bureaucracy = Lower costs.
Argentina's Consumer Confidence and Wage Growth
In October, consumer confidence rebounded by 8.8%, reflecting real wage growth and boosting the government’s public image. In August, private informal sector wages rose by 10.6%, while registered wages saw a 5% increase.
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Actionable: Argentina’s New Financial Inflows
The long-awaited inflows are USD 8.8 billion from the World Bank and IDB, plus USD 2.7 billion in Repo financing. Argentina’s speed is unstoppable, marking strong gains. This inflow supports the public and private sectors, promoting strategic and productive sector development. With debt payments secured, country risk declined, ending the week below 1,000 points—a significant milestone since pre-2019 PASO. The next target is 800 basis points, which could reduce refinancing rates.
Lower Country Risk = Lower Interest Rates
Dollar-denominated bonds reflect this reduced risk with notable gains across the curve. Should you buy it? If you trust the government’s fiscal rebalancing and debt repayment, there’s still potential.
The peso curve celebrates with an appreciating peso and compressing rates. The week’s price gains position the curve with an inflation breakeven aligned with the 2025 Budget. The government speaks, offering only CER next week—no fixed rate—indicating market alignment. As real rates remain positive, the question is how low the government will go.
With narrowing CER coverage costs, there may be rotation for positive real rate gains and inflation protection. Is there value in fixed rates? If inflation reduction succeeds, yes. Is it worth the risk? With tight margins and a strong dollar globally but a weak one in Argentina, it depends on investor appetite.
Brief Reflection on Argentina’s Economic Momentum
Argentina's Macroeconomic Framework and Final Thoughts
Argentina’s macroeconomic order is visible in the real economy, and expectations keep improving weekly. With fresh money, significant changes are underway. Congratulations to Economy Minister Luis "Toto" Caputo, recognized by LatinFinance as “Economy Minister of the Year” for his substantial work in rebalancing public accounts.
With economic program anchors intact, activity rebounds are visible but not yet felt. A rate cut may provide the final push. Argentina’s risk premium shrinks, and businesses may soon adapt to lower profits. The country needs a smooth path for business—are we nearing it? Vamos Argentina, let’s move forward.
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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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