Investors are pushing Argentina to relax its foreign-exchange regime, contending that a more flexible peso would be a big help in reigniting reserves and maintaining foreign investment.
According to Reuters, the calls come even as top officials continue to reiterate that the band system in place will not be altered.
President Javier Milei and Economy Minister Luis Caputo have been adamant that they will protect the existing framework, which adjusts the peso daily within an expanding band.
The policy will remain in effect until the 2027 presidential election, the one Milei will probably run for re-election, according to officials.
However, money managers warn that the fact that Milei is reluctant to let the currency float more freely puts a dent in growth and foreign-currency inflows just when Argentina is trying to solidify stability following a better-than-expected ruling-party performance at last month’s midterm election.
Market views: adjustment seen as inevitable
The nation will probably need to make some kind of adjustment in order to develop reserves naturally through 2026, according to Kathryn Exum, co-head of sovereign research at Gramercy.
According to her, “the authorities can probably muddle through without an immediate change, but that would undershoot expectations and could make things more challenging from a country-risk premium perspective.”
Exum proposed that a formal reserve-accumulation program that would be well received by markets may be combined with a progressive widening of the official band, which is now planned to increase by 1% per month. “
Evolution of the FX framework is both likely and required over the medium term,” she said in the Reuters report.
After months of dollar demand, the peso is still trading close to the weak end of its official band, although pressure on it has recently subsided.
Investor expectations of an eventual correction are highlighted by futures markets, which suggest the peso may break the band within a year.
Analysts question the authorities’ interpretation of the Peso weakness
Many in the market, according to Christine Reid, a portfolio manager at Ninety One, believed that the peso’s previous weakness was related to worries that the opposition Peronists would do better in the midterm elections and jeopardise Milei’s austerity program.
However, she claimed that the statistics led in a different direction.
“It was evident that the currency was slightly overvalued even before the political issues started flaring up, and the authorities chalked it up entirely to political risks getting priced into the currency,” she stated.
Investors have significantly exaggerated the likelihood of a post-election devaluation, Reid continued. “The likelihood of fiscal reforms and governability is far better than anyone anticipated, and that does matter for what an equilibrium real-exchange-rate valuation is,” she stated.
She said that the peso is still somewhat pricey despite having weakened by almost 25% since controls were partially lifted in April, and that it would currently be inexpensive to make the exchange rate more flexible.
Debt-market re-entry provides extra support
Meanwhile, an additional source of FX support is coming from Argentina’s re-entry into international debt markets.
After years of slack issuance abroad, several major Argentine companies have issued over $1.7 billion in global bonds.
Analysts say that the inflows, upon being converted locally for capital expenditures and operations, could supply desperately needed dollars to the local market.
A $20 billion US Treasury swap line from the government has also helped, letting the central bank sell dollars in the spot market before the election.
That facility, combined with rumours of a consortium loan from major lenders and an array of investment commitments, acted as an unofficial US backstop that calmed investor nerves about the government being able to defend the currency.
Long-term questions remain
Investors nevertheless stress that structural adjustments to the FX policy are crucial. “Reserve accumulation is a function of how much they allow the peso to depreciate, whether they rethink the crawling bands,” stated William Blair portfolio manager Jared Lou.
There would have been less strain on reserves if a somewhat quicker crawl had been permitted.
Additionally, he issued a warning that a strict FX structure might discourage more foreign direct investment outside of the commodities industry.
According to him, political continuity into the upcoming presidential election could alter that perspective.
The majority of analysts anticipate that the administration will stick with the current structure through year’s end and review it as 2026 reserve targets approach closer.
Economists caution that the opportunity for adjustment may close due to ongoing pressure on the peso and inflation, which is 31% annually.
In general, Lou claimed that the government has breathing room because of its stronger mandate, budgetary anchor, and assistance from the United States.
However, in order to replenish reserves and reestablish stable market access, Argentina will eventually need a more flexible FX policy.
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