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Argentina Business Forecast Report Q1 2014

Argentina GDP growth forecast to by 2.9% in 2014

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2014-01-09 09:17:01 - Argentina Business Forecast Report Q1 2014 - a new country guide report on

Stronger economic growth in the first half of 2013 has prompted us to revise up our real GDP growth forecast for Argentina from 1.8% to 3.2%. We are maintaining our 2.9% growth forecast for 2014, but we acknowledge that risks remain to the upside, as an improving business environment and more moderate economic policies could lead to a surge in inbound investment into the country´s oil and gas sector.

We forecast that 2014 will see marginal improvement in Argentina´s balance of payments position, with the current account deficit shrinking to 0.7% of GDP from our forecast of a 1.0% of GDP deficit in 2013. That said, the potential for the country´s political leadership to revert to unorthodox economic policies in order



to stoke growth presents a substantial downside risk to the balance of payments position.

We expect that pressure will remain high on the Argentine peso over the coming quarters, due to long-building economic imbalances that are starting to threaten the stability of the central bank´s crawling peg to the US dollar. While our core view is that the Argentine central bank will be able to maintain its current policy of tightly controlling the unit, we acknowledge that there are risks that the government will adopt a dual exchange rate or implement a one-off devaluation of the peso over the next 18 months.

Argentina´s primary and nominal fiscal deficits will narrow slightly relative to GDP in 2014, as spending decelerates from pre-election levels seen in 2013. Moreover, the country is on the brink of securing international financing assistance that would help it to meet its budget shortfalls without relying on fast-falling foreign currency reserves, increasing the medium-term stability of the fiscal position.

Argentina´s midterm election on October 27 produced a major setback for the ruling Frente Para la Victoria (FPV) in key provinces, reinforcing our view that the election will mark a turning point in policy, which could gradually lead toward a more attractive business environment.

While we have already seen some signs of accommodation from the government, we caution that significant economic hurdles will remain for future governments.

We believe that a re-shuffled economic team at the top of the Argentine government reinforces our view that a moderation in policy making and a shift to more orthodox economic policy will not be a smooth process and could take some time to complete. That said, we do not believe that the changes herald a major deterioration in the country´s business environment, a view echoed by sovereign debt markets.

We have revised up our 2013 real GDP growth forecast from 1.8% to 3.2%, and expect a greater deterioration in the balance of payments position than we previously anticipated. We now forecast a 2013 current account deficit of 1.0% of GDP, compared to our prior forecast of a 0.0% of GDP current account balance.

Risk To Real GDP Forecast: We acknowledge both upside and downside risk to our growth forecasts for 2013 and 2014. To the upside, consumer confidence is improving, and improvement in the business environment could see substantial investment into the oil and gas sector. To the downside, the transition to a more moderate policy trajectory is far from guaranteed, and as such we could see more economic unorthodoxy and interventionism over the medium term.

Risk To Political View: Fernández retains substantial power until the end of her presidential term in 2015. While we believe she will pursue a more accommodating set of policies until the end of her term, it is possible that we have overestimated the impact of the 2013 mid-term election and that the policy course will remain largely unchanged.

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Mike King
Phone: London: +44 (0) 203 086 8600

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