Argentina: Government Continues to Paper Over the Cracks

Consensus Forecasts

Official data continue to jibe with the plummeting peso and the government’s increasingly ad-hoc attempts to stem capital flight. January’s economic activity indicator soared from 1.2% (y-o-y) in December to 3.2%, at odds with the global downturn, weak industrial data and stringent import, currency and capital controls. Indeed, industrial production fell sharply in February, by 4.4% (y-o-y) after a negligible 0.2% gain in January. Meanwhile, inflation remains significantly under-reported, with the official rate easing from 10.8% (y-o-y) in February to 10.6% in March. While policymakers deny that high inflation exists, they have also been doing their utmost to extend fuel and supermarket price freezes until just before congressional elections in October. Moreover, no longer can they ignore the impact of inflation on the unofficial peso exchange rate, which tumbled to 8.75/US$ recently. A hike in the tax on credit card purchases abroad was recently announced, adding to a host of existing import and forex restrictions. Despite capital flight having dropped as a result (from US$21.5bn in 2011 to US$3.4bn in 2012), these measures have not stopped Argentines from buying the increasingly expensive US dollar at a time of deep uncertainty over the economy. This year’s GDP and production forecasts have edged down.

Argentina saw its first primary budget deficit since 1996 last year. Following a Ps4.9bn surplus in 2011, the primary accounts went into the red by Ps4.4bn, due to weak revenue growth. The economic downturn, coupled with strong public spending, contributed to the deterioration. Our panel’s budget forecasts remain negative amid muted growth and strong government spending in the run-up to mid-term elections.

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