Argentina Business Forecast Report

Looking To The Long Term President Cristina Fern??ndez and her ruling Frente para la Victoria (FpV) bloc suffered a crushing defeat in the June 28 mid-term elections, in which the ruling coalition lost its majority in both houses of congress. Although we caution that this could lead to an increase in public spending to boost the party's popularity ahead of the 2011 presidential election, we see this development as a positive step for Argentina's long-term economic outlook, as it should put an end to the government's grip on the private sector. Furthermore, the defeat suggests to us that a new, more business-friendly leader is likely to take office in 2012, which should raise the possibility that Argentina can unlock more of its economic potential. For the time being, we do not expect a dramatic about-turn with the Kirchners still in charge, but believe that the worst is behind us and the future could start to look brighter.

The outcome of the mid-term elections was in line with our expectations for the Kirchners to lose their congressional majority, but retain some key seats in congress. This result will force the Kirchners to hand over some of their legislative powers, and they will struggle to continue pursuing their authoritarian style. Since the defeat, Fern??ndez's efforts to undertake real economic reforms have been tentative to say the least. The outlook for inflation reporting remains uncertain, as does the future of the country's agricultural policy, while there is potential for optimism on the debt front. In general, we do not expect a dramatic change in policy before the new opposition legislators take their parliamentary seats in December.

We continue to believe that the Argentine economy is suffering from a deep recession. There is little doubt in our minds that official economic activity data coming out of Argentina is under-reporting the extent of the ongoing downturn. Q109 real GDP growth came in at 2.0% year-on-year (y-o-y), with private consumption remaining in positive territory, growing by 1.5%. In our view, this reflects the under-reporting of inflation data, which has the effect of overestimating real production by as much as four percentage points. We maintain our view that the economy will contract by an official rate of 1.0% this year and by a further 0.9% as private consumption remains distressed. On a more positive note, though, Argentina's trade account continues to post strong surpluses owing to the ongoing collapse in imports, and is on course to hit our full-year target of US$17.0bn. We expect the trade and current account surplus to widen next year as exports rebound, before narrowing over the longer term due to improvements in the capital and financial account.

The private pension fund seizure in late 2008, the threat of rising taxes and fears over a devaluation and private property rights, have all served to undermine investor confidence over the past year. Business leaders have also begun to fear that a transition to Venezuela-style policies could be in the offing and have rallied to block Venezuela's Mercosur entry. In our view, these fears are unlikely to play out, as the checks and balances in congress should keep the Kirchners in line.

However, we doubt that a reversal of these policies is on the cards over the medium term.