Country Report Argentina October 2009

Outlook for 2010-11

• The government has refused to make concessions to the opposition, despite its defeat in the June 2009 legislative election, setting the stage for continued 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 fall in amortisations due in 2010-11 and a series of debt swaps and prepayment offers, an improvement in the public finances will raise confidence in the government's ability to avoid a debt default.
• Although there will be little room for policy stimulus, GDP growth should recover gradually in 2010-11, assuming 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.

Monthly review

• Relations between government and opposition have reached a new low following the government's attempts to push through a controversial media law before it loses its legislative majority in December.
• The fact that the government has been able to move ahead with controversial agenda items despite its defeat in the June legislative poll reflects internal tensions in the opposition as politicians gear up for the presidential election.
• The 2010 budget bill includes more realistic targets than in previous years and projects a much-needed deceleration in expenditure growth, although it rests on ambitious macroeconomic assumptions.
• A recent debt swap has improved the debt-service profile and raised speculation that the government will soon resolve outstanding issues related to the 2001 debt default and 2005 restructuring.
• Raising hopes that improvements will eventually be made to the widely discredited official consumer price inflation series, in August consumer prices rose by slightly over consensus, coming in at 0.8%.
• Official labour market data show that the unemployment rate has risen, from 8% in the second quarter of 2008 to 8.8% in the second quarter of 2009.

Source: Country Report