Country Report Argentina July 2008

Outlook for 2008-09

• The popularity of the president, Cristina Fernandez de Kirchner, has been hit by a farmers' strike and accelerating inflation. She will struggle to recover as shortcomings in the economic model become apparent.
• The government will maintain heterodox policies but some much-needed price adjustments will be undertaken, albeit on a piecemeal basis.
• GDP growth is forecast to slow to 6% in 2008 and 4% 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

• A farmers' strike was suspended on June 20th after the government chose to let Congress decide the future of a new sliding scale of export taxes on grains and oilseeds adopted in March.
• The export tax bill was approved by the Chamber of Deputies in early July by a tight margin, which shows that support for the Kirchners is weakening, and will now be put to the vote in the Senate.
• Politicians that are close to the Kirchners are faring worse in voting intentions for the October 2009 congressional elections than those who have distanced themselves from the presidential couple, according to recent opinion polls.
• A new methodology for the calculation of the consumer price index (CPI) was adopted in June, but it does not eliminate problems such as distortions in consumers' patterns and lack of transparency, and already lacks credibility.
• Amid growing inflationary pressures and recent sell-off of peso-denominated assets, the Central Bank has stepped up its interventions in the foreign exchange market, by selling dollars, which has led the peso to appreciate.
• Amid rising costs and soaring inflation, representatives of the industrial sector are complaining about the recent nominal currency appreciation.
• Official indicators show that economic activity is slowing, but from a strong base. Confidence among representatives of the construction sector, a major driver of recent expansion, is starting to fall.