Country Report Argentina July 2009

Outlook for 2009-10

• The June 2009 congressional poll has left Cristina Fernandez de Kirchner a lame-duck president until the 2011 presidential election. Moreover, still-high social and political tensions carry the risk that she will fail to see out her term.
• Global recession will combine with domestic political and policy uncertainty, causing trade conditions to weaken and investment to fall. As a result, the economy is forecast to contract by 3.5% in 2009 and to grow weakly in 2010.
• Having ramped up spending ahead of the election despite weakening revenue growth, a fiscal adjustment will have to take place in the second half of the year if the government is to avoid the risk of a new default.
• Even assuming such an adjustment, recession will hit revenue and narrow the primary surplus to 1% of GDP in 2009. Assuming spending is kept in check and revenue recovers modestly, there should be some improvement in 2010.
• Unofficially measured inflation will ease to 10-15% in 2009 as private demand falls, allowing the margin between the unofficial and official rate to narrow. The official rate is likely to end both 2009 and 2010 around 9%.
• Having depreciated by 9% in nominal terms in January-June, the peso will undergo further depreciation in the rest of the year, assuming some capital flight and a policy-led adjustment to boost fiscal revenue and exports.

Monthly review

• The government suffered a serious blow in the June 28th mid-term legislative election, losing control of both houses of Congress (although not until December, when the new opposition-led Congress takes up their seats).
• The government announced a cabinet reshuffle soon after the election, but with most influential and controversial ministers remaining in key positions, the reshuffle has done little to appease the Kirchners' political opponents.
• The primary surplus plunged by 65% year on year in the first five months of 2009, as the government tried to avoid political defeat at the elections by boosting spending on public works, despite weakening tax revenue growth.
• Uncertainty in the weeks leading up to the election was reflected in financial market jitters, but initial market reaction to the election results was cautiously positive, with spreads to US treasuries narrowing and the stockmarket rising.
• GDP growth slowed from 4% in the fourth quarter of 2008 to 2% in the first quarter of 2009, according to official data, with drastic import compression holding up headline GDP, but most private estimates point to a contraction.

Source: Country Report