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Boston, MA -- (SBWIRE) -- 03/19/2013 -- Core Views
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 in 2012.
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 decade.
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Deteriorating domestic economic conditions will keep Argentine President Cristina Fernandez de Kirchner and her party unpopular with the electorate. As a result, we expect losses for Fernandez'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 in 2013.
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