Argentina Business Forecast Report Q2 2008

Growth Story To Continue

President Cristina Fernndez de Kirchner has stated her intent to continue along the same policy path as her predecessor, promoting economic growth via strong industrial production. After the economy expanded by an estimated 8.7% in 2007, we see a slight moderation this year to 6.0%, which would mark a sixth consecutive year of economic expansion. With economic activity still booming though, we could see the lingering inflation problems begin to worsen, particularly if the government is unable to gain the public's trust over official inflation statistics. That said, with the economy still growing rapidly and agricultural prices remaining high, we expect the fiscal accounts to remain heavily in surplus, which should prevent inflation getting out of control. We are optimistic that Fernndez, through adopting a more conciliatory, internationalist style of governance, can foster improved relations with other nations, particularly in the local vicinity. This will be crucial in easing the energy crisis facing the country, as well as attracting more inward investment going forward, though the outstanding debt with the Paris Club will continue to act as a burden until a repayment plan is agreed upon.

At present political risk in Argentina is relatively low, as reflected by our solid scores of 73.9 in our short-term and 61.9 in our long-term political risk ratings. While our core view is that this will remain the case, there are signs that a downward revision could be looming, particularly if a solution to the country's chronic energy shortage is not reached. With most of the losses of the 2001-2002 economic recession now recovered, public attention is now focused on improving security within the country, as well as developing the education and health systems and clamping down on corruption.

Inflation and energy shortages will remain the most salient risks to short-term economic stability.

Fernndez has confirmed that she will continue to pursue strong economic growth, which means policy measures will have to centre on containing the inevitable upward pressure on prices. With hikes in transport and utility prices expected to add pressure to headline prices, along with increased wages resulting from the current round of wage bargaining, our inflation outlook is relatively bleak.

Having failed to instil confidence in her government's inflation reporting credibility when she came to power (which presented an ideal opportunity, in our view), Fernndez must look to rectify the problem by unveiling a new, transparent system over the coming months. High inflation, which we currently estimated to be in the region of 20-2 % annually, must be addressed if the mediumterm outlook is to be made more secure. However, given that the government seems intent on maintaining a weak exchange rate, we believe inflation problems are likely to remain.

According to our ratings, Argentina's business climate scores particularly poorly at 4 .7 out of 100. Excessive government intervention in local markets has depressed private investment, and although the new administration plans to boost inward investment, problems with corruption and weak institutions will limit future gains in this field.