Argentina's Severe Recession and Strong Peso
After many weeks with so much movement about Argentina worldwide, this week has taken a little pause. After the historical speech last week, Javier Milei is receiving the support of many governors. So now, it remains to be seen if the Pacto de Mayo will be an inflection point in Argentina's history. The country needs a highway to do business, not a bumpy road.
In today's three main sections, we have:
Data:
Now, what does all this mean?
Positive or negative? Spoiler alert, playing with fire. It is a highly complex scenario at the economic activity level with solid warning signs. On the other hand, we continue with excellent financial data from the BCRA.
Dollar. The decrease in the MEP brought the gap to less than 20%; discounting the 17.5% PAIS tax, we now have a gap below 1%. As we mentioned last week, the PAIS tax seems to set a floor for the dollar's fall. The dollar futures returned to normal after last Friday's madness and again reflect strong market credibility in the government's monetary policy. The market believes that the crawling peg continues.
With these dollar values, will the PAIS tax continue?
Will we go to a high TCRM within the historical average, as suggested by the IMF?
Destruction of pesos = Reduction of the monetary base. Another week, Bopreal was placed, which again translates into absorption of pesos; this time, 255 billion pesos were absorbed. At the same time, a collection via PAIS tax of 44.5 billion pesos. The Bopreal is crucial to keep the monetary base in check.
However, the auction still surprises, as we mentioned last week those who bid are paying a "high" exchange rate. Given the new decrease in the USD this week, can the government complete the series without issues? There is USD 2.5 billion of the series left to bid, and there is very little attractiveness to bid at these values.
Will the blender continue for investors? This week, the government plans to rollover virtually all of the peso maturities for 2024. The eligible securities total $54.5 trillion: 26.4 trillion CER, 5.2 trillion Dollar-linked, 22 trillion Dual. The public and private sectors are invited to participate in the exchange, if successful participation is achieved it will be great news for the government clearing the bond maturities for the entire year.
2024 peso debt rollover = Fewer payment commitments in 2024
Fewer payment commitments in 2024 = Increases payment capacity of all sovereign debt in 2024
BCRA Rebuilding. Continues strong dollar purchasing and rebuilding the Central's net and gross reserves. Payments to international organizations impacted this dynamic. In particular, a payment to the IMF of USD 776.1 million was made in February, and the loan from the CAF granted in December was canceled at the beginning of the month for USD 966.4 million. These payments were partially compensated by purchasing foreign currency worth USD 2.36 billion.
At the same time, we see that, in real terms, remunerated liabilities are at their lowest since May 2020. We can also observe a 44% real fall from peaks in August 2023 and 22% real since the beginning of Milei's administration.
Low wages = Less consumption = More recession. A brutal decrease in wages, to see a year-on-year fall of this magnitude, we have to go back to March 2003, with a direct impact reflected in a powerful drop in retail sales as reflected by CAME.
The first indicators of economic activity reflect that the recession is at alarming levels, and the monetary tourniquet strongly impacts the real economy. The government must closely monitor the impact of the measures. Almost any economist will agree that cleaning up public accounts is essential; however, by implementing shock policies that generate a solid recessive impact, closely monitoring how the real economy receives the measures is fundamental for the success of the economic program.
Lower Economic Activity = Less Inflation. A drop in the activity level directly impacts inflation. The accelerated disinflation process delves into fewer pesos in the street and a strong recession. Economic activity is one of the main variables affecting inflation, and the brutal drop in activity we see directly lowers inflation.
Capital Markets - Actionables
On the dollar side, the government continues to be determined to clean up the accounts, so I believe there is still a lot of value in Argentina's bond curve. We remain optimistic about taking advantage of the eventual rate compression (optimistic scenario).
Lower Rate = Higher Bond Prices
Given the strong appreciation of the peso this week, the question arises whether it is time to dollarize, if we are in pesos, or if the carry trade continues (making a rate in pesos, a weak currency, to generate a rate differential against a strong currency, dollar). The TCRM (multilateral real exchange rate) continues to show us that the dollar is historically expensive at these values; the absorption of pesos by Bopreal and the harvest around the corner could indicate that the peso might have some strength to hold the exchange rate.
Brief Reflection
I continue to believe that the Ministry of Economy and BCRA are doing an extraordinary job; I also think that, at the same time, the government is playing with fire in the face of free-falling economic activity.
Expert Outlook: The government last week bought time with the May Pact and was getting support from the governors for what could be a turning point in the country's history. Looking at the economic activity numbers, will the carrot be enough? Rumors of tax cuts are already starting to emerge, something that would directly impact social mood and economic activity. Does the government have enough capacity to do it in time?
Business Environment & Spotlight: Argentina’s Financial Sector
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