We forecast Argentine real GDP growth will slow to 0.9% in 2013
on the back of a poor business environment, weakening domestic
demand and high inflation caused by a large currency devaluation.
We see the potential for more sound policy and base effects to result
in growth trending upward from 2014-2017.
We believe depreciatory pressure will remain on the Argentine peso
throughout 2013, but the policies employed to keep the currency
overvalued will grow less effective. As such, we believe the international
reserves position will fall to a point where Argentina must allow
the peso to depreciate, likely by mid-2013, and we forecast that the
average 2013 ARS/US$ exchange rate will be 22.5% weaker than
We believe a weaker peso over the forecast period will support exports
from 2013-2017, keeping the current account in surplus between
0.8% and 2.6% of GDP, but see relatively weaker commodity prices
and global demand keeping export growth off the heights of the past
Deteriorating domestic economic conditions will keep Argentine
President Cristina Fernández de Kirchner and her party unpopular
with the electorate. As a result, we expect losses for Fernández's
coalition in the 2013 midterm election and believe that these losses
will make it nearly impossible for her to cobble together the votes
necessary to change the constitution in order to run for a third
presidential term in 2015.
The US legal system dealt Argentina another defeat in late November,
ruling that the country must pay holdout investors and reinforcing our
view that the Argentine government will very likely push the country
into technical default after a final ruling in the case, which may come
as soon as late February 2013.
Major Forecast Changes
Economic data have shown greater deterioration in 2012 than we
previously expected, and we have revised down our full-year 2012
real GDP growth projection from 3.0% to 2.8%, an abrupt deceleration
from 8.9% growth in 2011.
Key Risks To Outlook
Risk To Peso Devaluation Forecast: It is difficult to predict the
exact timing of what we admit is a political decision as much as an
economic one, and higher-than-expected grains prices could help
the Argentine government to delay addressing its largely overvalued
official exchange rate.
Risk To Real GDP Forecast: As mentioned above, a strongerthan-
expected grains harvest would give the Argentine government
a larger cushion of foreign currency reserves, with which it could
delay any resolution of the imbalances in the Argentine economy,
pushing back the sharp economic slowdown that we expect to occur
Risk To Default View: Despite our expectations, the US Second
Circuit Court could reverse its previous decision, allowing Argentina
to continue making payments on its restructured debt and ignoring
holdout investors. On the other hand, even a technical default could
result in severe economic and financial market disruptions, and we
acknowledge that there are significant downside risks to this view.