From the economic point of view, 2010 should be a good year for Argentina’s economy. The agricultural sector will show a strong recovery, the industrial production is also growing, reflecting the performance of its neighbor, the Brazilian economy. Tax revenues will climb faster and debt services are lower than the last year. Nevertheless, we expect a year of continuous political conflicts that may generate uncertainty, some volatility in financial markets and may hurt the favorable economic environment. The conflict between the president of the Central Bank and the Federal Government is the first one but may not be the last one.
The presidential approval is declining rapidly and the Kirchner’s administration feels it needs to spent more money in public investment and social programs if it wants to have a chance in 2011 presidential elections. Thus, the government decided to close a deal with bondholders that still own defaulted debt in order to have access to international markets. In addition, the Treasury plans to obtain additional financing from the Central Bank reserves in order to cover its financial needs for 2010 and increase the public outlays. If the Government keeps the public expenditure between the limits of the Federal Budget and it gains access to international markets there is not much need for the use of international reserves.
However, the law explicitly forbids the Central Bank to lend international reserves to the Treasury. The Urgency Decree (DNU) signed by the President Cristina Fernandez de Kirchner is a very questionable instrument to allow this operation. In fact, most jurists believe that it will need a law from Congress to permit it. But after the elections the Kirchner administration lost the majority and the law probably would not pass. The weak legal framework forced Redrado –the Central Bank’s Chairman- to challenge the decree. These events led to a political and institutional crisis that has not been solved.
So far, Government had never met a Congress dominated by the opposition, thus the coexistence will probably be tough until end of 2011. This crisis demonstrates the high degree of political conflict in Argentina. However, the economic environment is relatively favorable and this political crisis is blown out of proportion.
In fact, during 2010 Federal Government fiscal deficit will remain around 1% of GDP with a primary fiscal surplus of 0.8%. Total debt services will fall this year to 4.5% of GDP which is low. Also, tax revenues will probably grow pushed by export duties and the recovery of the economy.
According to the IGA-OJF (General Activity Index) the GDP fell 4.5% in 2009. In 2010, the GDP may grow 4.5% reflecting the strong recovery of agricultural and industrial sector. Exports will probably grow 23% this year but imports will grow even faster (38%). Trade balance will still be positive around 4% of GDP. However, inflation is also climbing due to an excessive growth of government outlays and it can reach 20% annual rate by the end of this year. Clearly, the recent crisis in the Central Bank is not helping.