Global GDP Forecast

Argentina: an opportunity to adjust
We expect the Argentine economy will continue shrinking in H2 2009 due to the limitation in applying countercyclical policies and continued political uncertainty leading to further investment contraction. While some activity indicators, particularly industrial production, show signs of bottoming out, the recovery will be sluggish in absence of stronger growth engines (agriculture is down due to the drought, construction still contracting). As a result, fiscal deterioration will continue to press Argentine assets despite the fact that the country has the capacity to meet its short-term obligations, in our view. Indeed, without access to international financing, the external and fiscal constraints push for a pro-cyclical policy response, likely leading to further contraction in H2 2009. Also, while the central bank maintained financial stability, providing liquidity and managing the AR$ depreciation, we believe more AR$ weakness will be needed to absorb the external and domestic shocks. The results of the mid-term elections create an opportunity to build political consensus and normalize the economy. Indeed, the external agenda (holdouts, Paris Club, IMF) may be brought back to the drawing board, but we still believe this will not be a priority until fiscal cushions are depleted.

(Global Economic Weekly)