Argentina peso faces election pressure as refinancing risks build

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Argentina peso election risk

Highlights

Argentina's inflation dropped from 211 per cent in 2023 to 33.5 per cent, but analysts warn election-year pressures may soon weaken the peso.
Exports rose 21 per cent January–August year-on-year, boosting the trade surplus to $18 billion and helping the central bank exceed its $10 billion reserve target by June.
Argentina faces $26 billion in foreign-currency debt refinancing in 2025 and over $30 billion in 2026, as risk premium rose above 6 percentage points amid investor concerns.

Currency strategy and election-year vulnerabilities

As reported by Financial Times, Argentina's stabilisation plan relies in part on a tightly managed exchange rate, a policy mix that has helped bring inflation down from 211 per cent when Milei took office in 2023 to 33.5 per cent. Some economists and business figures say that approach supports disinflation but leaves the peso overvalued and increases the economic strain from the broader opening of the economy.

Analysts say Argentina's markets remain highly sensitive to electoral politics because of the country's history of abrupt policy shifts and pre-election currency stress. Martin Rapetti, professor of economics at Buenos Aires University, says the current situation is relatively controlled but expects pressure on the currency to begin building next year.

That pattern already emerged before the legislative elections last October, when fears over a weak result for Milei's government triggered a run on the peso and threatened the macroeconomic stabilisation effort. Markets steadied only after the Trump administration offered a $20 billion swap facility, and sentiment improved further when Milei's party won the vote.

Exports and reserves bolster outlook, but financing concerns persist

Milei's supporters argue that the economy is now better placed to absorb election-year volatility, helped by post-election reforms, rising exports and larger foreign-currency reserves. From January to August this year, exports were 21 per cent higher than in the same period last year, while the trade surplus reached $18 billion, more than triple the earlier level, supported by mining investment and expanding oil and gas output from Vaca Muerta.

Foreign-exchange buffers have also improved. The central bank set a target in January of adding $10 billion to reserves during 2026 and had already reached that goal by June, while China renewed a $19 billion bilateral currency swap in August for another five years. In July, IMF managing director Kristalina Georgieva also said Argentina is in a much stronger position and expressed confidence that the country would meet its debt obligations.

Even with those gains, economists still see reasons for caution. The IMF estimates the peso is 9 to 20 per cent overvalued depending on the methodology, and industrial companies say trade liberalisation is exposing them to contraband inflows and dumped imports, particularly from China, worsening factory closures and job losses.

Argentina also faces sizeable external financing needs, with about $26 billion in foreign-currency debt to refinance next year and more than $30 billion the year after. Although Finance Minister Luis Caputo says the government can meet repayments without returning to international capital markets, Argentina's risk premium has risen from 4 percentage points earlier this year to above 6 percentage points, signalling that investors are growing less certain about Milei's re-election prospects.

We previously reported on how elevated global interest rates, persistent geopolitical shocks, and sustained fiscal spending are increasing sovereign borrowing and refinancing risks. That piece noted that emerging and frontier markets are especially exposed because debt-service costs tend to be high relative to their narrower revenue bases, leaving less room to absorb inflation and funding-cost surprises.

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