Country Report Argentina October 2008

Outlook for 2009-10

• The government of the president, Cristina Fernandez de Kirchner, will face growing political opposition, even from within the ruling Partido Justicialista (PJ) and is likely to suffer a defeat in the October 2009 congressional election.
• In an attempt to prevent the economy slipping into recession, Ms Fernandez de Kirchner will continue to promote piecemeal changes to the government's heterodox policy framework.
• The president's political survival may depend on successful talks with creditors who did not participate in the 2005 debt exchange, which, if completed, will allow the government to raise much-needed fresh financing.
• We have revised down our forecast GDP growth for 2009 from 3.5% to 3.3%, as much weaker external demand will weigh on export volume growth. In 2010, growth should recover modestly to 4.1%.
• Price adjustments will lift inflation in 2008. Official inflation should ease back to single digits by end-2009 and further by end-2010, but real price rises will be higher. This forecast will be vulnerable to wage pressures.
• We now expect a more marked nominal exchange rate depreciation in 2009-10, but still assume that this will happen in an orderly manner, although risk of an overshooting remains high.
• We expect the current-account surplus to fall from an estimated 3.1% of GDP in 2008 to 2.4% of GDP in 2009 and increase to 2.8% of GDP in 2010.

Monthly review

• Political opposition to the government has increased further, as illustrated by the several concessions that the president had to make to Congress in order to approve a bill renationalising the flagship airline, Aerolineas Argentinas (AA).
• Allegations that Ms Fernandez de Kirchner received an illegal donation to her 2007 campaign from Venezuela's government regained media attention, as court proceedings indirectly related to the case advanced in the US.
• The government has announced its intention to pay back US$6.7bn in defaulted debt to the Paris Club and to reopen negotiations with creditors (of around US$30bn) who did not participate in the 2005 debt exchange.
• The government announced an increase in the tax threshold at end-August because of a popular backlash—rising inflation has been eating into taxpayers’ real disposable incomes.
• Real GDP growth has decelerated in the second quarter of 2008, chiefly on the back of slower private consumption and investment growth.
• Both deposits and credit growth have slowed in recent months.

Source: Country Report