Country Report Argentina September 2008

Outlook for 2008-09

• The government suffered a major defeat in the Senate in late July, which will compound the growing political difficulties faced by Ms Fernandez de Kirchner, who saw her popularity plummet in recent months.
• Our central assumption is that the president will start promoting piecemeal changes to economic policy that will avoid a hard landing of the economy. But the risk that she will fail to do so and be forced out of office has increased.
• In the meantime, political opposition to the Kirchners, especially from within the ruling PJ, is likely to increase.
• GDP growth will slow to 6% in 2008 and 3.5% 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 private demand growth.
• Price adjustments will lift inflation in 2008. Officially measured inflation should ease back to single digits by end-2009, but real price rises will be higher, and inflation will be vulnerable to wage pressures.
• 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 reverberations of the government's defeat in Congress over a bill to ratify a new sliding scale system of export taxes in late July are still being felt, and the Kirchners are struggling to adapt to a more hostile political environment.
• The continuity in office of her controversial minister of interior commerce, Guillermo Moreno, is leading some former Kirchner allies to call for changes. Political rivals with the Peronist and opposition parties have begun to stir.
• Concerns about Argentina's fiscal and financial outlook have re-emerged, amid an export tax revenue shortfall and soaring subsidies. A US$1bn bond issue to Venezuela at a yield of 15% causes investor jitters over financing.
• The government has unfrozen electricity tariffs in the metropolitan zone after seven years, as it seeks to cut back on subsidies and improve utility companies' finances.
• Consumer and investor confidence has been hit by the farmers' conflict and concerns over the Kirchners' failure to adjust the economic policy framework.
• The trade surplus narrowed in the first half of the year, but as the backlog of agricultural exports is cleared in the second, the surplus should widen.

Source: Country Report