Country Report Argentina June 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 more apparent.
• The new government will retain the weak currency policy and some of the heterodox measures of its predecessor. However, some much-needed price adjustments will be undertaken, albeit on a slow and 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. Inflation should ease back to single digits by end-2009, but there is a risk that price caps will raise inflation above expectations by providing a disincentive to domestic production.
• 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 president’s popularity fell to just 26% in May, 30 percentage points below January. This reflects the impact of a long-running farmers’ strike over a further rises in export taxes and an acceleration of inflation.
• Rural protests have generated strong support, and a number of provincial governors have been forced to distance themselves from the Kirchners’ hardline stance against the farmers, who are the governors' constituents.
• Financial markets have reflected increasing political and economic uncertainty owing to the farmers’ conflict and the acceleration of inflation, with large-scale withdrawals of time deposits and a depreciation of the peso.
• From the end of April the central bank was forced to intervene in foreign-exchange markets, selling dollars to reverse the peso depreciation, stop the bank run and prevent a major rise in interest rates.
• Fiscal performance remains good, boosted by extraordinary factors, including the rise in export taxes. In the first four months of 2008 the primary surplus reached Ps15.7bn (US$5bn), a rise of nearly 90% year on year.
• Data showing a drop in supermarket sales in April could signal a deceleration in consumer demand, partly as a result of the farmers’ strike.