Boston, MA -- (SBWIRE) -- 05/17/2013 -- Core Views

We forecast Argentina's economy will continue to slow this year, with real GDP growth falling to 1.6% from our estimate of 2.0% in 2012, as a currency devaluation pushes inflation higher, weighing on consumer and government spending, and liberalised import policies result in a greater net export drag on real GDP growth. That said, we forecast that base effects and greater competitiveness will boost real GDP growth to 3.0% in 2014.

We expect Argentina's current account to return to surplus in 2013 on the back of a currency devaluation, which will benefit the export sector and depress imports, as well as higher soybean prices and a strong harvest. However, we believe that current account surpluses as a percent of GDP will remain substantially lower in the years ahead than was the case during most of the 2000s, and that a weak business environment, political risk, and high inflation will keep pressure on the financial and capital accounts.

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We forecast that weak economic growth will weigh on Argentina's government revenues this year, while a mid-term congressional election will keep pressure on the government to maintain high rates of spending on wage subsidies and other transfers. As a result, we have revised our 2013 forecasts to represent a 0.7% of GDP primary budget deficit, and expect nominal budget deficits until 2016.

We believe that the Argentine peso will continue to weaken slowly, but the rapid depletion of foreign currency reserves, which are being used for budget support, debt payment, and keeping the peso over-valued, will eventually force the government to devalue the peso, likely sometime in mid-2013.

We expect that weak performance in Argentina's October 2013 midterm elections will lead to a power shift away from the ruling Frente para la Victoria (FPV) and President Cristina Fernandez de Kirchner. We expect that such a shift will empower the more moderate wing of the Peronist coalition, although we also admit the small possibility of a new coalition on either the right or the left challenging Fernandez.

Major Forecast Changes

We continue to believe that the Argentine government will devalue the peso in 2013, but to a greater extent than we originally expected, and we have changed our end-2013 and end-2014 forecasts from ARS5.800/US$ to ARS6.000/US$ and ARS6.200/US$ to ARS6.400/ US$, respectively. This change also affects our 2013 and 2014 average exchange rate forecasts, which we have revised from ARS5.550/ US$ to ARS5.750/US$ and ARS6.000/US$ to ARS6.200/US$.

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 bolster Argentina's foreign reserves position and help it delay addressing its largely overvalued official exchange rate.

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