A decisive week is coming for the Government: the treatment of the Bases law and the fiscal package in the Senate is a true litmus test, which keeps the markets in suspense. Investors are crying out for a show of negotiating ability from a political force that is in a clear legislative minority. After six months of management, it is the opportunity to achieve at least a first legislative victory.
Argentine assets had their worst week of the year, in which several factors were mixed. Firstly, our own mistakes, based on poor management in the distribution of food and the crisis unleashed in the Ministry of Human Capital. The President had to go out to bank personally Sandra Pettovello, whom he considers “the best minister” of the Government. These management problems impacted asset prices at the start of the week.
But then there was the half-sanction of a new retirement formula voted jointly by Kirchnerism and radicalism in the Chamber of Deputies. A resounding support is expected in the Senate, where both blocks reach a comfortable majority. At the same time, this alignment casts doubt on the possibility of the Government adding the votes it needs to advance with the Bases law, which requires the support of several radicals.
The project has a strong fiscal impact, although some legislators such as the radical Martin Tetaz They seek to minimize it. “It is only 0.45% of GDP, which the Government could compensate by taking subsidies from companies in Tierra del Fuego,” he says. However, neither this suggestion to compensate for the fiscal hole nor any other was included in the text.
Now it is politics’ turn to play. She explained it well Javier Timerman, partner of Adcap. “Investors today expect more a snapshot of Javier Milei with mayors than with Elon Musk”. Therefore, it was no coincidence that during the week the Minister of Economy, Luis Caputo, held meetings and praised words with the governors of Neuquén and Santa Cruz. It’s all part of the task of working to secure the votes needed for the Senate vote.
Dollarized bonds, which had flown in the first months of Milei’s management, now returned part of that rise. The falls averaged 15 percent in the last two weeks. The AL30, for example, had touched $60 and now barely stayed above $50. Other bonds returned to the $40 area, especially the longer ones. The country risk, which was heading to break through 1,000 basis points, suddenly jumped to values of 1,600 points.
The half-sanction of a new pension adjustment formula was a blow for the Government because it puts the balance of public accounts at risk. It is not clear, however, that the alliance of radicalism and Kirchnerism could have any type of projection in the face of next year’s elections and could even be beneficial for Milei.
Profit taking also strongly affected bonds in pesos. There was a sale especially of Lecaps, which were left with rates 10 points higher than in the tenders carried out by the Treasury. The next one will be on Wednesday, coinciding with the treatment of the Bases law, so the uncertainty will be very high. The Government may need to shorten placement or mix of bonds, offering more CER adjustment to investors instead of a fixed rate as in the last opportunity. But it is also likely to recognize higher returns for investors who decide to stay in pesos.
The last rate cut decided by the Economy, although implemented by the BCRA, was highly criticized among investors. Confidential reports from Wall Street banks called the move “hasty.” From that last decrease, exchange pressure and the rise in country risk began.
Despite the strong correction in Argentine assets, Wall Street’s interest in Argentina remains intact. It is even possible that the drop in prices will be taken advantage of by many to reposition themselves. But it is difficult for this to happen before the treatment of the Bases law.
Argentine assets had their worst week of the year. The longest polarized bonds returned to levels of USD 40, which distances Argentina from a possible reintegration into the financial markets. However, there are many who considered that the titles could recover the rally and that the country risk would go from 1,600 to 1,000 points in the next semester.
Ultimately, what maintains investors’ enthusiasm is that progress on some key issues, such as the maintenance of the fiscal surplus, the sharp decrease in remunerated liabilities of the Central Bank (which strongly reduces the need for monetary issuance) and the consequent decrease in inflation. The government’s message that it will keep this objective unchanged is valued by the markets.
On the other hand, economic activity is also beginning to show signs of rebound in almost all sectors. Clear rebounds were seen in April and May, although year-on-year comparisons remain strongly negative.
Credit to the private sector (both public and companies) also recovered strongly in May, thanks to the reduction in rates and the reappearance of quotas. Check discount rates fell for some companies to levels of 25% annually.
It’s been a while since anyone has talked about a “V”-shaped rebound, but the consensus of most analysts is that the bottom of activity would have already been reached in March. In the best-case scenario, the revival could become much more palpable towards the end of the year.
This week could mark the turning point after the wave of sales of Argentine assets. The eventual approval of the Bases law, the retail inflation figure below 5%, the formal confirmation of the fiscal surplus in May by the Treasury and the approval of the IMF board of a disbursement of USD 800 million would be key to an improvement in the financial climate.
On Wednesday, May inflation will be known, which could be below 5%. For the coming months, consulting firms see a more complex panorama. It is almost certain that in June it will have a jump to levels of 6% or something above and then it will be difficult to lower it from the range of 4.5% to 5% monthly
But, again, the next political signals will define the question. It will be in Congress, where it will be seen if the Government advances at least part of its agenda or if its hands are tied. In the latter case, not only could any attempt at reform become impossible, but the maintenance of the fiscal surplus would also be in jeopardy. This is the main asset achieved by Milei in his first six months of management and what he continues to sustain expectations going forward.
