Highlights

Outlook for 2010-11

• Increasing political polarisation in a finely balanced Congress will produce a rise in political tensions and frequent policy reversals until the presidential poll in October 2011. The risk of social unrest will remain high.
• Political pressure to sustain growth in public spending despite major financing constraints will ensure that the risk of distortionary policymaking remains high and that confidence in contract and property rights remains low.
• A further deterioration in the public finances will sustain concerns over the government's ability to avoid default, although we currently assume that the government will be able to meet its financing gap from domestic sources.
• If it succeeds, a debt restructuring offer will go some way towards improving perceptions of Argentina's creditworthiness. However, in practice the level and cost of external issuance will be limited by heightened risk aversion.
• GDP growth will be brisk in 2010, assuming stronger export-oriented activity and concerted policy stimulus, but will moderate in 2011 owing to election uncertainty and the dampening effect of inflation on consumption.
• Politicisation of monetary policy will complicate efforts to contain inflation and support the currency. Based partly on our expectations of looser monetary policy, we expect an acceleration of inflation and further peso depreciation.
• The current-account surplus will narrow in 2010-11 as imports and outward profit remittances recover. Reserves levels should remain solid, but there are risks to this forecast if further reserves transfers to the Treasury are approved.

Monthly review

• The government appears to be taking advantage of various celebrations commemorating 200 years of independence from Spain to revitalise the administration and prepare the ground for the October 2011 presidential race.
• In a new attempt to gain the political support of provincial governors, the government has launched a plan to bail out the provinces' debt, at a fiscal cost in the next two years of Ps1.5bn (just under US$400m).
• Uncertainty over the implementation of a ban on food imports, which was announced by a government minister but denied by the president, has served to highlight the unpredictable, ad hoc nature of government policymaking.
• The poor results of the first phase of the deal to swap outstanding unrestructured debt from the 2001 default have lowered expectations of a prompt return to capital markets.
• Domestic and international uncertainty has led to renewed capital flight so far in 2010, reversing the trend observed in the fourth quarter of 2009.