Country Report Argentina December 2008

Summary

Notwithstanding the patronage scope that nationalisation of the private pension system in November may facilitate, the president, Cristina Fernandez de Kirchner, is unlikely to hold on to the political initiative for long.
The president faces opposition, including from within the ruling Partido Justicialista (PJ), and is likely to suffer a defeat in the mid-term October 2009 congressional election.
In an attempt to prevent the economy slipping further into recession, the president will embark on a public spending spree using resources from the pensions grab, raising concerns over transparency and spending efficiency.
We have revised down our forecast GDP growth for 2009 from 2.2% to 0.5%, as private consumption, exports and investment fall. In 2010 GDP growth will pick up, but only weakly, to 1.7%, and this assumes a mild world recovery.
Peso weakness will lift inflation to 10% at end-2009, but should ease in 2010 as depreciation slows and weak domestic demand eases price pressures.
We now expect a more marked nominal exchange rate depreciation in 2009-10, and the downside risks are more elevated.
We expect the current-account surplus to fall from an estimated 2.5% of GDP in 2008 to 1.9% of GDP in 2009 and 1.6% of GDP in 2010.

On November 20th 2008 Congress nationalised the private pension system (with US$23bn in assets) with a majority of around 70% in both houses. The president will use the funds to try to bolster flagging support.
Seeking to regain the political initiative, Ms Fernandez announced the creation of a new ministry of production to co-ordinate measures designed to stimulate the economy, but there are concerns over how effective it will be.
The Union Civica Radical (UCR, known as the radicals) and Coalicion Civica (CC) opposition parties announced an electoral alliance, increasing prospects that the Kirchners will lose their majority at the 2009 legislative elections.
The 2009 budget approved by Congress in November allows the government a lot of discretion over spending and financing from Central Bank and state bank resources, fuelling concerns about fiscal management and transparency.
The peso weakened to Ps3.45:US$1 by December 9th, despite Central Bank intervention and government controls to try to reduce capital flight.
Real retail sales contracted by 6.9% month on month in October 2007 and manufacturing output fell by 1.9%, pointing to a sharp fourth-quarter downturn.

This report covers the following industry codes:
SIC Code: 70;47;60;20
NAICS Code: 72;48;52;311