Argentina’s energy export surge quells fears over currency management

Argentina’s booming energy sector is easing concerns that a strong peso will dent efforts to bolster foreign exchange reserves ahead of looming debt payments.

Rising oil and gas production on the back of more drilling in the country’s Vaca Muerta shale fields is providing the central bank with a reliable source of dollar inflows, independent of the peso’s appreciation in recent months, BlackRock Inc.’s Pablo Goldberg and Barings LLC’s Ricardo Adrogue said in separate interviews.

Taking the strong outlook for energy exports into account, Argentina’s “managed FX program shouldn’t be much of a concern,” said Adrogue, who heads Barings’ global sovereign debt and currencies team.

Investors are keen to see how President Javier Milei advances his FX policy as it may hinder efforts to grow holdings at the central bank. That cash is ammunition that authorities need to pay debt holders and eventually lift capital controls, making every dollar count. There’s more than $4 billion in bond payments due in July.

Goldberg, BlackRock’s portfolio manager for emerging-market debt, expects Argentina to expand its energy surplus, already at a 20-year record, in 2025, adding to the optimism among investors. “We’re going to continue to see very strong growth of the energy balance,” he said. “This is a structural factor changing, reshaping the trade balance of Argentina.”

Risks ahead

Still, the record trade surplus in 2024 hasn’t stopped others on Wall Street from warning that the combination of a stronger peso and the end of a recession will lead imports to outpace exports. 

Stoking that worry is how officials in Buenos Aires keep the value of the currency against the dollar steady. Authorities recently said they’d slow the current pace of peso devaluation to 1% next month, down from 2%. And with monthly inflation running at 2.7%, it’s likely the currency will appreciate even more.

Asset managers warn that the policy mix would incentivise more imports than exports, chipping away at dollar inflows. As it stands, central bankers see a foreign reserve deficit of between $4.3 billion and $6.6 billion, according to brokerage Grupo Cohen SA.

“We always thought it was inappropriate policy and it still seems to us as inappropriate policy,” said Patrick Campbell, a portfolio manager at Morgan Stanley Investment Management, referring to the monthly currency devaluation rule also called the crawling peg.

Milei, in an interview with Bloomberg News in Davos, Switzerland, said he is watching for inflation to decelerate, peso supply to shrink and additional International Monetary Fund financing to arrive before he ends the crawling peg and lifts a spate of other capital controls.

“The issue is speed,” Milei said. “Obviously, the more financing we get, the faster we are going to get out.”

Bond Outlook

The potential for more peso strength will likely put a cap on the rally in Argentine dollar bonds. The notes have posted triple-digit returns since Milei took office over a year ago, according to data compiled by Bloomberg.

“It’s hard to see Argentina bonds doing too much better from here,” said Jeff Grills, head of emerging-markets debt at Aegon Asset Management.

Others, though, including BlackRock’s Goldberg, see more upside. “There still seems to be a pipeline of good news or good catalysts that could continue to benefit the asset,” he said. A new IMF deal, a majority for Milei in Congress and the end of capital controls would help with that, Goldberg added. 

For now, investors have to rely on Milei’s word that he’ll dismantle currency and capital restrictions. “These controls not only restrain freedom but go against property rights,” Milei said. “As a libertarian, I respect their life, property and of course, I’m going to do away with them.”