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Argentina Business Forecast Report Q4 2014

  • September 2014
  • -
  • Business Monitor International
  • -
  • 46 pages

Core Views
The Argentine economy is reeling following the January 2014 currency
devaluation. Economic growth has slowed markedly, prompting
us to revise down our real GDP forecasts, as soaring inflation
discourages investment and erodes purchasing power. Furthermore,
the slowdown in economic activity has prompted a widening of the
fiscal deficit, in line with our expectations, as government spending
accelerates and weak growth weighs on revenues. Moreover, we
see further weakness for the Argentine peso as the authorities allow
for a gradual depreciation of the currency to address a widening
spread between the black market and official exchange rates.
Politically, we are starting to see signs of strain. The perception of
heightened street crime prompted incidents of vigilante justice in
March and April, undermining the narrative that President Cristina
Fernández de Kirchner has presented. Moreover, the long-running
legal battle between the Argentine government and investors who
have refused restructuring offers on defaulted debt – the so-called
'holdouts' – is likely to exacerbate the president's weak political
position. While we expect that political pressure will not boil over
into larger protests, with moderate policies and candidates gaining
ascendance up to October 2015 general election, we highlight the
potential for greater social unrest as the economy slows this year
and crime remains high.

Major Forecast Changes
We forecast real GDP to expand by 1.7% in 2015, a downward revision
from our previous forecast of 3.1% and implying only a modest
improvement from forecast growth of 0.4% in 2014. Argentina's
economic recovery will be muted in the coming quarters as currency
weakness and high inflation weigh on private consumption. In addition,
uncertainty over the trajectory of economic policy following the
country's July 30 technical default will dampen fixed investment.
We forecast a fiscal shortfall of 2.4% of GDP in 2015, a revision
from our prior expectation for a 1.4% of GDP deficit. As such, we
now expect a far less substantial narrowing from the 2.6% of GDP
deficit forecast in 2014.

Table Of Contents

Argentina Business Forecast Report Q4 2014
Executive Summary. 5
Core Views..5
Major Forecast Changes5
Key Risks To Outlook5
Chapter 1: Political Outlook. 7
SWOT Analysis.. 7
BMI Political Risk Ratings 7
Domestic Politics.. 8
Default To Exacerbate Fernández's Political Woes.8
The stand-off between the Argentine government and investors who have refused restructuring offers on defaulted bonds will weigh
on political support for President Cristina Fernández de Kirchner. As such, we believe that the political landscape will favour opposition
candidates in the October 2015 presidential election.
TABLE: Political Overview..8
Long-Term Political Outlook.. 10
Significant Structural Challenges Ahead...10
Argentina scores above average for Latin America in our Long-Term Political Risk Ratings, but we see growing policy challenges that
the country must confront over the next decade. Moreover, Argentina's increasing international isolation and the continued dominance
of the ruling Frente Para la Victoria party limit policy options. If the government cannot address high inflation and a weakened business
environment, we believe it will likely face a sharp macroeconomic adjustment over the next decade.
Chapter 2: Economic Outlook 13
SWOT Analysis 13
BMI Economic Risk Ratings... 13
Economic Activity .. 14
Limited Upside For Growth In 201514
Argentina's economic recovery will be weak in 2015 as high inflation negatively affects real private consumption and investor pessimism
following the country's July 30 technical default weighs on gross fixed capital formation. We have revised down our 2015 real GDP
growth forecast from 3.1% to 1.7%, implying a less substantial improvement from forecast growth of 0.4% in 2014.
TABLE: Economic Activit y..14
Exchange Rate Policy 16
ARS: Substantial Weakness Ahead16
Substantial depreciatory pressure will weigh on the Argentine peso over the coming quarters. A widening spread between the official
and black market exchange rates, combined with a current account deficit, indicate further downside is ahead for the unit.
TABLE: BMI Cure ncy Forecast ...16
TABLE: Exchange Rate17
Balance Of Payments.. 18
Wider Trade Surplus To Improve BoP Position.18
A weaker exchange rate will weigh on imports while marginally bolstering the competitiveness of Argentine exports, leading the
country's current account deficit to narrow in 2015. In tandem with rising foreign investment, this will provide support for Argentina's
reserves position, helping the country to avoid a balance of payments crisis in the coming quarters.
TABLE: Current Account...18
Fiscal Policy. 20
Budget Shortfall To Remain Wide In 2015.20
High inflation and political considerations in advance of the October 2015 presidential election will see Argentine public expenditures
tick up as a percentage of GDP in the coming quarters. At the same time, weak economic activity will limit revenues, ensuring that the
nominal budget balance remains in deficit in 2015.
TABLE: Fiscal Policy20
External Debt .. 21
Settlement With Holdouts Unlikely Before 201521
Argentina is likely to find a way to resume coupon payments on its defaulted debt. However, we believe the stand-off between Argentina
and holdout investors will drag on until at least early 2015, when the government will face a reduced risk of cross-default claims from
exchange bondholders. A prolonged period of uncertainty will reverse the positive strides the government made in H114 to bolster
investor sentiment.
Chapter 3: 10-Year Forecast... 25
The Argentine Economy To 2023... 25
Growth To Underperform Significant Potential .25
Argentina's economic future is largely dependent on whether a moderate candidate wins the October 2015 presidential elections,
reversing the policies of President Cristina Fernández de Kirchner that have created significant economic imbalances. We believe that
the longer these types of policies are in place, the greater will be the risks to Argentina's vast economic growth potential.
TABLE: Long-Term Macr oec onomic Forecasts 25
Chapter 4: Business Environment. 27
SWOT Analysis 27
BMI Business Environment Risk Ratings.. 27
Business Environment Outlook. 28
Institutions... 28
Table : BMI Busi nes And Operati on Risk Rati ngs 28
Table : BMI Legal Framew ork Rati ng.29
Infrastructure .. 30
Table: Labour Force Quality..30
Market Orientation... 31
TABLE: LATIN AMERICA - ANN UAL FDI INFLOWS.31
Table : Trade And Investme nt Rati ngs .32
Operational Risk.. 33
TABLE: Top Export Desti nati ons, USDmn Unles Otherwise Noted .. 33
Chapter 5: Key Sectors.. 35
Pharmaceuticals and Healthcare... 35
TABLE: Pharmaceutical Sales - Hist orical Data and Forecasts , 2010-2018 36
TABLE: Healthcare Expe nditure Tre nds - Hist orical Data and Forecasts , 2010-2018 37
TABLE: Gover nme nt Healthcare Expe nditure Tre nds - Hist orical Data and Forecasts , 2010-2018. 37
TABLE: Private Healthcare Expe nditure Tre nds - Hist orical Data and Forecasts , 2010-2018... 37
Telecommunications... 38
TABLE: Telec oms Sect or - Mobile - Hist orical Data and Forecasts 39
TABLE: Telec oms Sect or - Wireli ne - Hist orical Data and Forecasts 40
Other Key Sectors... 43
table: Autos Sector Key Indicators...43
table: Infrastructure Sector Key Indicators...43
table : Food and Dri nk Sect or Key Indicat ors ..43
table : Defe nce and Securit y Sect or Key Indicat ors .44
table : Oil and Gas Sect or Key Indicat ors ..44
table: Freight Key Indicators44
Chapter 6: BMI Global Assumptions. 45
Global Outlook. 45
Eurozone Downgrade On Poor Q214..45
Table : Global Assumpti ons.45
Table: Developed States, Real GDP GrowtH, %...46
Table : BMI VERSUS BLOO MBERG CON SENSUS REAL GDP GROWTH FORECASTS, %. 46
Table : Emergi ng Markets , Real GDP Growth , %..47

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