Country Report Argentina August 2008

Outlook for 2008-09

• The government suffered a major defeat in the Senate in late July, which will compound the growing political difficulties faced by the president, Cristina Fernandez de Kirchner, who saw her popularity plummet in recent months.
• Our central assumption is that the president will start promoting piecemeal changes to economic policy that will avoid a hard landing of the economy. But the risk that she will fail to do so and be forced out of office has increased.
• In the meantime, political opposition to the Kirchners, especially from within the ruling Partido Justicialista (PJ, the Peronist party), is likely to increase.
• GDP growth will slow to 6% in 2008 and 3.5% in 2009, but there is a risk of a hard landing if failure to address price misalignments and other distortions were to spur a faster than expected deceleration of investment growth.
• Price adjustments will lift inflation in 2008. Officially measured inflation should ease back to single digits by end-2009, but there is a high risk that unions will push for a second round of rises later in 2008, further adding to inflation.
• Import spending growth will remain firm, as still strong domestic demand draws in imports, but with export prices also firm, the current-account surplus should remain fairly stable in 2008-09.

Monthly review

• The defeat in the Senate in late July of a bill to ratify a March presidential decree introducing a new sliding scale system of exports taxes was a major blow to the Kirchners, who also lost their congressional majority recently.
• The sense of impending institutional crisis was lifted, but the political scene is now in flux. Unless the Kirchners can renew their government and rebuild political ties, which seems unlikely, their power is set to erode further
• The recent crisis led to some changes in the cabinet, although the Kirchners have not signalled any major changes to economic policy so far.
• The end of the new sliding scale of export taxes leaves an estimated revenue shortfall of 0.4% of GDP, and we now expect the primary fiscal surplus to reach 3% of GDP in 2008, below the government’s target of 3.5% of GDP.
• Real GDP grew by 8.4% in the first quarter year on year, driven by a surprisingly strong growth in investment (20.5%). Although this is an elevated rate, there are recent indications that the economy is slowing.
• In June inflation, as measured by the new consumer price index (CPI) for Greater Buenos Aires (IPC GBA), recorded a year-on-year increase of 9.3%