Country Report Argentina November 2009

Summary

With opposition parties taking up their legislative majority in December, the stage is set for a rise in political tension and legislative gridlock until the presidential poll in 2011.
Following a sharp deterioration in the public finances in 2009, the government will cut spending growth in 2010. Fiscal adjustment will increase the primary surplus, but the overall balance will remain in deficit until 2011.
Combined with a renewed effort to restructure outstanding defaulted debt, an improvement in the public finances will raise confidence in the government's ability to avoid a fresh default.
Although there will be little room for policy stimulus, GDP growth should recover gradually in 2010-11, assuming that strong demand from Argentina's main markets, Brazil and China, supports export-oriented activity.
Weak capital inflows and a rise in the import bill will produce further peso depreciation in 2010-11, but the pace of depreciation is expected to slow from 2009 levels. There are, however, risks of capital flight and peso-overshooting.
Having widened in 2009 as a result of dramatic import compression, the current-account surplus will narrow in 2010-11 as imports and outward profit remittances recover.

Disputes within the opposition and increasing dependence on central government transfers on the part of cash-strapped provinces have allowed the government to regain the initiative after its defeat in the June election.
The government has been able to push through a media reform which has been criticised as politically motivated, and is now attempting to pass contentious political reforms before its legislative majority expires in December.
Favourable international conditions and pressing financing constraints have encouraged the government to renew attempts to restructure its remaining defaulted debt. Its proposal appears to have good chances of success.
Combined with moderately positive domestic and international economic data, signs that the government will finally renegotiate its defaulted debt have helped to boost financial markets in recent weeks.
Revenue collection was boosted in September by a recent tax moratorium, but major sources of revenue, including income and foreign trade taxes, continued to contract throughout the third quarter.
Available data for the third quarter continue to suggest that after a contraction in the second quarter, the economy is starting to recover.

This report covers the following industry codes:
SIC Code: 60
NAICS Code: 52