2027… Binary Scenarios Once Again
The de-escalation of the conflict in the Middle East is proceeding much more slowly than the market rebound. While oil prices continue to hover around USD 100 per barrel, depending on shipping flows through the Strait of Hormuz, global equity markets have more than recovered all the losses recorded since the conflict began in late February. At the same time, fixed-income spreads—particularly across emerging markets—have continued to compress against a still-steep U.S. Treasury curve, a Federal Reserve that has paused its rate-cutting cycle, and a broadly weakening U.S. dollar.
In Argentina, the local financial front has also regained some breathing room. Sovereign risk has fallen below 500 basis points, helped by Fitch Ratings’s upgrade of Argentina’s sovereign rating from CCC+ to B-. The Central Bank of Argentina (BCRA) has accumulated USD 4.8 billion in net international reserves since the beginning of the year, in a context where, since late February, the Treasury has resumed issuing dollar-denominated debt in the local market and has stopped purchasing foreign exchange directly from the central bank.
The financial framework appears relatively orderly. Commercial FX inflows, Treasury MEP placements, and private and provincial borrowing have helped keep the exchange rate broadly stable around ARS 1,400, even as household capital outflows remain elevated. The government’s logic is straightforward: as long as the exchange rate remains stable and inflation gradually converges toward the level of interest rates, a negative real-rate carry trade can continue to work and the financial horizon can be extended. The exchange rate remains the core nominal anchor.
The real economy, however, continues to face significant challenges. Activity remains broadly stagnant, formal employment continues to decline, and gains in informal employment have not been sufficient to offset those losses. Credit growth has yet to take off, delinquency rates continue to rise, and wages are still lagging behind inflation. Tax revenues have now posted nine consecutive months of year-over-year declines, forcing the government to deepen spending cuts to preserve fiscal balance.
Inflation is beginning to decelerate—our monthly nowcast points to 2.5% in April, with the first reading for May at 2.2%—but this is taking place amid a continued appreciation of the peso in real terms. Since the lifting of capital controls, domestic prices measured in U.S. dollars have risen by nearly 20%, and the multilateral real exchange rate has once again become overvalued. Meanwhile, dynamic sectors linked to the RIGI investment regime coexist with more traditional industries increasingly squeezed by rising costs, wages, and utility tariffs in dollar terms.
The surveys we track show a sharp decline in the government’s approval ratings, to levels that appear inconsistent with a first-round electoral victory. The administration’s main asset remains the fragmentation of the opposition. Paradoxically, however, this asset could become a liability if the likelihood of a polarized race against what markets perceive as “the abyss” begins to increase.
As we move closer to the election year, the key question is whether financial normalization and the government’s attempt to regain the initiative can steer both the economy and public opinion into a “virtuous” circle that extends the planning horizon—a necessary condition to ensure debt rollover, particularly given the heavy maturity wall in 2027. In other words, whether centripetal forces will hold the system together and preserve order.
Or, alternatively, whether deteriorating poll numbers—driven by an economy that fails to gain traction—will end up undermining both governance and financial stability, in a vicious dynamic similar to what followed the August 2019 PASO primary elections or the September 2025 result in the Province of Buenos Aires. In other words, whether centrifugal forces will prevail and destabilize the framework.
Last September, the appearance of Scott Bessent as a lender of last resort helped stabilize the financial front and reverse a dynamic that seemed to be spiraling out of control after the Buenos Aires provincial election. The question now is whether markets will continue to assume that this external backstop remains available after the U.S. elections—and whether, by then, the real economy will finally begin to gain traction.
Hence the title of this report, “All or Nothing.” To the extent that the 2027 financial program becomes contingent on the political landscape resulting from a potential runoff election against what markets perceive as “the abyss,” in the context of an economy that fails to gain traction and remains exclusionary, binary scenarios are likely to re-emerge.
For the sake of simplicity, we begin with a single baseline scenario for 2026. We assume that the current monetary and exchange-rate framework will allow the government to reach 2027 with a financial program that is more or less comfortable, and with a greater or lesser ability to sell hedges while keeping both the exchange rate and interest rates under control. From there, we consider two scenarios for 2027.
In the first scenario, centripetal forces prevail. The outcome of the U.S. election makes it clear that the lender of last resort remains in place. At the same time, the evolution of economic activity and inflation helps improve domestic polling and sustain the financial normalization currently underway. In this context, sovereign spreads compress to 400 basis points, the debt issuance schedule remains on track, and the government eventually regains access to international capital markets. Net reserves continue to improve. The exchange rate, albeit with some volatility, remains close to the original band. The economy posts modest average growth (1.3%), though with increasing duality, and unemployment edges somewhat higher.
In the second scenario, centrifugal forces dominate. Without a lender of last resort and with an uncertain and highly polarized electoral race extending through the November election, sovereign spreads rise back above 1,000 basis points. The monetary dynamics resulting from the financial program begin to affect the exchange rate, the FX gap, and interest rates. Economic activity contracts and inflation accelerates once again. In this scenario, net international reserves end the year back near their starting levels.
Ultimately, the outcome will depend on the economic program implemented by the administration taking office at the end of 2027, and above all on its ability to design a framework that reconciles both macroeconomic and microeconomic realities—one that restores market confidence, avoids once again resorting to contract-breaking measures, and, most importantly, succeeds in extending the planning horizon.
