Country Report Argentina September 2009

Outlook for 2009-10

• The June 2009 congressional poll has left Cristina Fernandez de Kirchner a lame-duck president until the 2011 presidential election. Moreover, still-high social and political tensions carry the risk that she will fail to see out her term.
• Global recession has combined with domestic political and policy uncertainty, causing trade conditions to weaken and investment to fall. As a result, the economy is forecast to contract by 3.5% in 2009.
• As demand from Argentina's main trade partners starts to recover, activity should pick up and renewed employment growth should boost private consumption. But growth will be weak as policy uncertainty will hit investment.
• Having ramped up spending ahead of the election despite weakening revenue growth, a fiscal adjustment will be needed in the rest of 2009. Even assuming such an adjustment, the primary surplus will narrow to 1% of GDP.
• Real cuts in spending in 2010 should produce some improvement in the fiscal results, but at 2.5% of GDP the primary surplus will not be enough to stabilise the debt/GDP ratio, heightening concerns over debt sustainability.
• The peso will continue to depreciate in the rest of the year and in 2010, assuming significant capital flight along with a policy-led adjustment to boost fiscal revenue and exports.

Monthly review

• With its political support waning, the government has been forced to backtrack on the issue of subsidies, announcing that recent energy tariff rises would be reversed in June-July, the peak winter season.
• The government has also announced a new programme to create 100,000 jobs in public works, underscoring persistent spending pressures stemming from the recession.
• The financial situation of the provinces is deteriorating. There are no official data, but many provinces are facing severe cashflow difficulties, and are calling for a greater share of central government revenue.
• Thanks to increased peso stability since the end-June legislative election, the monetary authority has been able to reduce policy rates by 100 basis points in the past two months.
• Strong risk aversion around the election period did, however, keep capital flight high and produce a shift to dollar deposits in the banking system. Dollar deposits now account for 17% of total deposits.

Source: Country Report

This report covers the following industry codes:
SIC Code: 48;60
NAICS Code: 517;52