Unforced Error to Avoid Boredom
Nahuel Bernués, CFA
CEO | Asesor Financiero & Administración de Patrimonios | Creador de Contenido
But it wasn't boring. Well, Argentina doesn't care about that. Last week we mentioned that the country is like this: uneven, dichotomous, polarized, somewhat schizophrenic, unpredictable, a bit capricious, and perhaps that's why we like it so much. Today we repeat it, but for a different reason. When the spotlight was on Congress, the real economy, and the agreement with the IMF, the President communicated via Twitter, and the bomb went off. Movie-like.
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
Unforced error. The presidential office didn't have to wade into the murky waters of the cryptocurrency world, where scams abound. The President's Office has already acknowledged the mistake and communicated accordingly. President Javier Milei immediately involved the Anti-Corruption Office (OA) to determine if there was any improper conduct by any member of the national government, including the President himself. In a country where problems are never scarce, and challenges are always around the corner, giving ammunition to those seeking noise and hindering Argentina's progress is never a good idea.
If the government had already faced a few complex weeks with the market, this would have only added more noise. While it's a micro-world and likely has minimal effect, the underlying issue is the mistake made, from which the Executive should learn. Disruptive communication undoubtedly helped Javier Milei reach the presidency, but if these errors become frequent, they could also cost him his position. With great power comes great responsibility, and such communications should not occur. For now, in a game where the government won the first set 6-0 (let's stick with tennis analogies), they've started the second set a game down. 6-0, 0-1; the match has just begun, and the match point is far away.
The important thing is that this incident likely won't immediately impact the real economy, which continues to grow without pause. To keep planning and developing, people must regain purchasing power and feel that expectations are improving. This is a bump in the road, but the gravel is giving way to smooth asphalt, and each passing month makes Argentina more conducive to business and development.
Government auctions continue to direct pesos toward better uses, and the crowding-in effect is taking hold. An elite economic team continues to set the agenda and lead the way. The confidence gained last year remains intact, as evidenced by this week's auction, where almost no one opted for the dollar-linked bonds. The Monetary Base is finding its place, and the pathway out of foreign exchange controls appears clearer as the MB approaches the Broad Monetary Base. There's still some distance to cover, but light's now at the end of the tunnel.
Unraveling Argentina's institutional labyrinth, reducing bureaucracy, and curbing the infamous "Argentine cost" is a herculean task that the government is pursuing with haste and persistence. The deregulation minister has already announced the imminent arrival of the 2.0 chainsaw for bureaucracy; we are eagerly waiting. Will Argentina become a business-friendly highway that showcases its transformation to the world? Are we getting closer? Today, we pause our usual optimism, considering the recent presidential communication a significant misstep. Still, one "no" in a series of "yeses" doesn’t obscure the broader picture. Let's go, Argentina, more than ever!
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#data.
Is Argentina's Economic Shift Positive or Negative?
Spoiler alert: positive. Here, we only examined the data; the worst tax of all—inflation—continues to decline, the Central Bank keeps buying dollars, and wages are recovering. The government's bond auction wasn't the best, but last year's stellar results set a high bar.
Dollar and the Strong Peso
Volatility remains absent, and the Strong Peso regained some ground this week. With little movement here and a government steadfast in its economic program, it seems like a good time to hold Strong Pesos, especially considering the government's apparent comfort with the current exchange gap. If the government sticks to its plan and maintains the 1% monthly crawling peg, the MEP dollar will likely converge with the official rate.
In February, traditionally a slow month, the Central Bank has already bought over USD 650 million—no small feat. However, these purchases haven't yet translated into net reserve growth as the government continues servicing debt; for instance, on February 6, it paid the IMF USD 600 million. This pattern will unlikely change until a new agreement with the IMF or fresh funds arrives.
Rebuilding Public Finances
As we've mentioned, much of the fiscal consolidation will stem from a smaller state. Month by month, we see fewer public-sector employees, agencies, and departments.
This week, the government dissolved the National Housing Secretariat and transferred the Urban Integration Subsecretariat to the National Public Works Secretariat. Simultaneously, the privatization of Corredores Viales S.A. has been initiated. According to the Ministry of Economy, this will end concession contracts and sell the state company, reducing Treasury expenses.
National Public Sector
Peso Auctions and Debt
When discussing an elite economic team that understands markets, we rely on facts, not words. For example, amid recent market chatter about exchange-rate lag, the government offered dollar-linked bonds, essentially challenging the market: "Think there's a currency lag? Put your money on it." The market didn't bite—another victory for the government. Although the offered yield—official devaluation plus 5% over 11 months—wasn't particularly enticing, the tactic reinforced the government's stance and quieted some detractors.
Ultimately, the government rolled over most of its short-term debt, albeit with less success than in previous auctions. It paid a slight premium on the May issue and didn't achieve significant term extensions. The government placed ARS 5.2 trillion in instruments (against ARS 6.6 trillion maturing), broken down as follows:
The next significant maturity, ARS 7.8 trillion, arrives at the end of March. For now, the peso curve remains under control.
Central Bank of the Argentine Republic (BCRA)
The monetary anchor functions as intended: no fuel is being added to the fire that the dollar has historically been, and pesos are becoming increasingly scarce.
"When will foreign exchange controls be lifted?" remains the key question. As we've said before, one condition is that the Monetary Base (MB) equals the Broad Monetary Base (BMA). While there's still a gap, steady growth and declining inflation are closing. With strong growth and low inflation, money demand and economic activity are increasing the MB and getting closer to the BMA. Estimates suggest this could happen in 5 to 8 months. The exit is approaching, but the Central Bank still needs recapitalization with external funds or domestic growth.
Economic Activity
Growth is taking off, and credit will be the engine behind it. Macroeconomic stability gives individuals and companies the confidence to borrow, boosting activity.
Let's walk through the virtuous cycle of peso credit recovery: Macro stability enables planning, prompting individuals and businesses to seek loans. Banks then need liquidity to meet this demand, which they obtain by letting bonds and letters mature or selling them. Consequently, fewer public-sector instruments remain in banks' portfolios, and more funds flow into private-sector loans. This is the crowding-in effect: the state steps back, and the private sector takes the lead.
This week's auction illustrated this process: ARS 6.6 trillion in maturities were met with ARS 5.2 trillion in new debt issuance, releasing ARS 1.4 trillion into the system.
If their issues come from th, those pesos will come from the BCRA cushion built during last year's auctions. The outcome will be less pub-sector debt in banks' portfolios, more resources for productive loans, and, ultimately, greater economic dynamism.
The RIGI framework also continues to attract investment. McEwen Copper has requested RIGI participation for its Los Azules project, planning a USD 227M investment this year as part of a USD 2.7B total.
Imports also reflect the V-shaped recovery. After last year's collapse, they rebounded strongly, along with export growth.
Meanwhile, registering a new car is now 60% cheaper than before. Digital dealership registration has eliminated paperwork and reduced costs, streamlining the automotive market.
The CNV has introduced a simplified regime for mortgage-backed securities, cutting disclosure periods, automating issuance for two years, and facilitating real-estate financing.
Additionally, Argentina's economic activity shows encouraging signs of diversification. Recent data indicates increased agricultural production, with higher-than-expectarvests for key crops like soy and maize. The industrial sector is also experiencing positive momentum, particularly in automotive manufacturing and construction. Moreover, the services sector, led by tourism and technology, continues to expand, contributing significantly to GDP growth. As long as macroeconomic stability is maintained, these sectors are expected to provide sustained growth in the coming months.
The Street
Wages rose 3.1% in December, marking nine consecutive months of growth. All wage indicators now exceed pre-transition levels. Real wages are up 3.3% from November 2023, and total payrolls have grown by 1.3%.
Additionally, the government has covered the basic food basket to 100%, ensuring essential support for the most vulnerable.
Inflation
Fortunately (or not), this section is becoming less critical. According to INDEC, January's inflation was just 2.2%, with the food basket rising only 0.9% (the lowest in eight years). Core inflation fell from 3.2% in December to 2.4%. With the crawling peg at 2% and U.S. inflation above 0.2%, Argentina gained momentum in dollar terms despite last year's steep dollar.
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Actionables
After weeks of decline, markets seem to have stabilized. Although the Merval ended the week slightly down, sentiment improved, and Brazil's rally helped.
With a stable dollar, those positioned in pesos are still rewarded for taking on currency risk. The government's commitment to maintaining peso scarcity should eventually bolster its value.
Amid ongoing IMF negotiations, bonds continue offering extraordinary yields. This week, bond prices rose again, reinforcing our long-standing view: Argentina's hard-dollar debt remains attractive, provided the government's anchors hold and the economic program advances smoothly. Argentina risk isn't for the faint-hearted, but strong-willed investors seeking double-digit dollar returns can still find plenty of opportunities.
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