Argentina

Politics:

• Analysis

  Argentina politics: Quick View - Attack on the judiciary intensifies

  Event

  The president, Cristina Fernandez de Kirchner, has called for the "democratisation" of the judiciary, in what is seen as a threat to the independence of an institution that is increasingly at odds with the government.

  Analysis

  Although no formal plan for judicial reform has yet been announced by the government, pro-government legislators have since Ms Fernandez's speech earlier this week suggested that judges be allowed limited terms only and that judicial rulings be subject to review by the magistrate's council (the council currently charged with appointing judges). Government criticism comes on the heels of two controversial judicial rulings. The first was the Supreme Court's unanimous rejection of the government's recent attempts to overturn an injunction that currently protects media group Clarin from complying with the 2009 media law (which would force the company to divest many assets). The Supreme Court's decision was a huge political defeat for the government, scuppering its plans-at least for now-to dismantle a media group that it considers one of its main opponents.

  Just a few days later, a local court in Tucuman acquitted 13 people accused of kidnapping and forcing a woman, Marita Veron, into prostitution (Ms Veron disappeared and has never been found). The verdict in the extremely high-profile case has caused nationwide outrage and local unrest, and prompted Ms Fernandez's claims that the judiciary is influenced by vested interests.

  The Supreme Court has remained defiant, reiterating its support for lower court judges who have been under extreme pressure in recent weeks to rule against Clarin, and making clear that its role is to protect the constitution rather than respond to economic or government interests. The Veron case, however, could prove a trigger for the government to attempt to push forward with judicial reform. The government does not have the two-thirds majority needed for any such reform to succeed, and we do not expect this to change after next year's mid-term elections, given Ms Fernandez's waning popularity amid a still-sluggish economy. But as the battle with the judiciary intensifies, judges seem likely to come under ever greater pressure from the government in coming months.

  December 14, 2012

• Background

  Argentina: Political and institutional effectiveness

  Relations between government and opposition will remain fraught at least until the presidential election in late 2011. Until recently, political tensions have not been an obstacle to policymaking, given a centralisation of power under the Kirchner government and its majority position in Congress, but the quality of policymaking has been poor. Government decision-making has lacked transparency and predictability and there has been a tendency to rule by decree, as the Kirchners extended the extraordinary powers that were introduced to expedite policymaking after the economic crisis of 2001-02. The government's recent reversal of political fortunes will, at least in the short term, produce more problems: in the finely balanced Senate, the opposition has a slim majority and will attempt to circumscribe the use of executive decrees and discretionary transfers to the provinces (which the government uses to secure political support).

  For her part, the president will resort to her veto powers to block major opposition legislation. The result is likely to be legislative deadlock and frequent policy reversals in the run-up to the presidential election. Beyond 2011, and on the assumption of a more market friendly administration, greater transparency and predictability should help improve the policymaking environment. There should also be a continued shift away from the use of executive decrees, although the presidential bias of the system will remain. There is also a possibility of a shift to a more consensual approach to policymaking, although this is not guaranteed given the likely continued fragmentation of Congress.

  It is even less likely that the new government will have the political will or solid congressional majority required to undertake new reforms that successfully address long-standing institutional weaknesses. Similarly, attempts to strengthen the bureaucracy are likely to founder on political resistance. The permanent state bureaucracy is made up mostly of low-paid clerical jobs. The professionals responsible for designing and implementing policy are appointed on short-term contracts, which are renewed with each change of government (or even minister) along clientelist lines.

  Flawed electoral and media reforms could face reversals

  The Kirchner government has undertaken long-overdue reforms of the outdated media law and electoral system in the past year, but these bills were rushed through in the weeks before the government lost its congressional majority, are widely considered to be politically motivated, and face likely revisions when the new government comes to power. The new media will allow the government to establish mandatory content in radio and television; give the new regulatory body considerable discretion in granting and removing licences; and force sales of licences, which is likely to lead to an increase in state-run media or the emergence of private media groups more sympathetic to the government than the currently-dominant, private Clarín group. Meanwhile, the electoral reform appears to have been designed to pave the way for Mr Kirchner to run for president again in 2011. The reform will enforce greater party discipline, in part through the introduction of primary elections to select candidates (although this is an improvement on the prior system, which lacked transparency and was dominated by local party bosses). The reform will also impose strict minimum registration requirements on smaller parties, which could hurt some potential presidential candidates in 2011 who have good opinion poll ratings but lack the backing of a strong, nationally based party.

  Further reforms are required to improve the corrupt and inefficient legal system, but this will prove a lengthy and difficult task, and the current government's commitment to the independence of the judiciary is increasingly questionable. Reforms to the Supreme Court undertaken at mid-decade by Mr Kirchner (who came to power on a reforming ticket) reduced politicisation in the Supreme Court. But more recently the government has had a difficult relationship with the courts, which have been forced into the role of arbiter between government and opposition in recent months and have come under pressure to side with the government as a result. Under these circumstances, a pending reform of the Magistrate's Council, which oversees judicial appointments, is proving controversial and seems likely to be postponed until after the presidential election. Without a strengthening of the legal system, it will be difficult to address the problem of corruption, which permeates all levels of government.

  May 19, 2010

• Structure

  Argentina: Political structure

  Official name

  Republic of Argentina

  Form of state

  Federal republic

  The executive

  The president is head of state and commander in chief of the armed forces; elected for a four-year term; can be re-elected for one consecutive term; the president appoints a cabinet and a chief of cabinet, who can be removed by a majority vote in each chamber

  National legislature

  Bicameral Congress: 257-member Chamber of Deputies (the lower house), directly elected for a four-year term; one-half of the lower house stands for re-election every two years; 72-member Senate (the upper house); directly elected for a six-year term; three senators are elected per state, two from the leading party and one from the runner-up; one-third of the upper house stands for re-election every two years

  Regional legislatures

  Twenty-three states and an autonomous federal district

  Legal system

  Federal judges appointed by a Council of the Magistracy; Supreme Court system both nationally and in the provinces; national Supreme Court members require the endorsement of two-thirds of the upper house

  National elections

  October 23rd 2011 (presidential and legislative). Next congressional election to be held in October 2013 for one-half of the lower house and one-third of the upper house. Next presidential election will be held in October 2015

  National government

  The president is Cristina Fernández de Kirchner. She was elected to a first term on October 28th 2007 and re-elected on October 23rd 2011. She took office for a second term on December 10th 2011

  Main political organisations

  Government: Frente Para la Victoria (FV). The FV is formally a faction of the Partido Justicialista (PJ, the Peronist party). The Kirchners built the FV into a cross-party alliance, including some Unión Cívica Radical (UCR) members, although some of these figures have recently distanced themselves from the government

  Main opposition: Coalición Cívica (CC); UCR; Unión Peronista and other PJ dissidents; Propuesta Republicana (Pro; Afirmación para una República Igualitaria (ARI); Frente Amplio Progresista (FAP), which includes the Partido Socialista (PS) and a number of other small left-wing parties

  President: Cristina Fernández de Kirchner

  Vice-president: Amado Boudou

  Key ministers

  Cabinet chief: Juan Manuel Abal Medina

  Defence: Arturo Puricelli

  Economy & public finances: Hernan Lorenzino

  Education: Juan Carlos Tedesco

  Energy: Daniel Cameron

  Foreign affairs & worship: Héctor Timerman

  Interior: Aníbal Florencio Randazzo

  Justice: Julio Alak

  Labour: Carlos Tomada

  Planning: Julio de Vido

  Production: Débora Georgi

  Security: Nilda Garré

  Central Bank president

  Mercedes Marcó del Pont

  December 06, 2012

• Outlook

  Argentina: Key developments

  Outlook for 2013-17

  • The political environment is deteriorating rapidly for Ms Fernández, and governability and political stability look set to worsen. It is possible that the government will lose its legislative majority in the 2013 mid-term polls.
  • The government is increasingly reliant on heterodox interventionist policies implemented on an ad hoc basis, but far from solving underlying structural problems, these policies will further impair the economic outlook.
  • After a hard landing in 2012, GDP growth should pick up in 2013 on the back of a bumper agriculture harvest. But in the rest of the Fernández administration, distortions and interventionism will continue to deter investment.
  • Weaker domestic demand should produce very modest disinflation in the forecast period, but with fiscal policy still expansionary and supply-side pressures persisting, inflation will remain stubbornly high.
  • We expect a fairly rapid nominal depreciation of the peso against the US dollar in 2013, of 10%. But in a high-inflation environment, real peso appreciation will continue, increasing the risk of a sudden, sharp adjustment.

  • Having been in surplus ever since the 2002 maxi-devaluation, the current account will swing into deficit during the forecast period, despite trade, foreign-exchange and capital controls.

  Review

  • Less than two weeks after a huge anti-government protest, in mid-November the government faced its first 24-hour general strike since 2003. Government-union relations have soured, and more strikes remain likely amid stagflation.
  • The government is fighting a ruling in a US appeals court upholding the claims of "holdouts". It is in a difficult position, having sworn never to pay, but with a payment due in December, technical default looms if it does not.
  • Economic activity remained sluggish in September, with industrial production and construction down, and business confidence still weak. However, there were stronger signs of an upturn in industrial production in October.
  • Even according to official statistics, which are thought to dramatically understate inflationary pressures, inflation continued to drift upwards in October, to 10.2%. The removal of some subsidies is having an inflationary effect
  • The Central Bank has announced changes to risk-weighted capital requirements in an attempt to stimulate credit to fuel growth and adapt local regulations to international standards.
  • Public revenue and expenditure growth both fell substantially in September, leading to a further deterioration of the public finances.

  December 06, 2012

Economy:

• Background

  Argentina: Country fact sheet

  Fact sheet

  Annual data	2011a	Historical averages (%)	2007-11
  Population (m)	40.9	Population growth	1.0
  GDP (US$ bn; market exchange rate)	448.2b	Real GDP growth	6.8
  GDP (US$ bn; purchasing power parity)	717.2b	Real domestic demand growth	7.8
  GDP per head (US$; market exchange rate)	10,957	Inflation	8.8
  GDP per head (US$; purchasing power parity)	17,536	Current-account balance (% of GDP)	1.8
  Exchange rate (av) Ps:US$	4.1b	FDI inflows (% of GDP)	2.1
  a Economist Intelligence Unit estimates. b Actual.

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  Background: Economic liberalisation in the 1990s under the administrations of Carlos Menem (1989-99) of the Partido Justicialista (PJ, Peronists) resulted in rapid growth, but an inflexible exchange rate mechanism and failure to deepen structural reform left the economy vulnerable to shocks, which contributed to default and the collapse in 2001 of Fernando de la Rúa's centre-left government. Eduardo Duhalde, of the PJ, led an interim government until Néstor Kirchner (also of the PJ) began a term in 2003. He presided over an economic rebound, which enabled his wife, Cristina Fernández de Kirchner, to win the 2007 presidential poll. Firm GDP growth and a wave of public sympathy in the wake of Mr Kirchner's death in late 2010 set the stage for Ms Fernández's re-election in October 2011.

  Political structure: Democracy was restored to Argentina in 1983 after 50 years of instability and military regimes. A strong presidential system is in theory checked by a bicameral Congress, comprising a 257-member Chamber of Deputies (the lower house) and a 72-member Senate (the upper house), but in practice the presidency dominates. The presidential term is four years. There are 23 provinces and the Buenos Aires federal district, each with its own government.

  Policy issues: The pursuit of procyclical expansionary policies over most of the past decade contributed to GDP growth of an annual average 7.6% in 2005-11. However, extremely expansionary macroeconomic policy has also produced major imbalances in the economy, in the form of double-digit inflation, real peso appreciation and a deterioration of the current-account surplus (a key pillar of macroeconomic stability given the sovereign's restricted access to international capital). The government has made limited fiscal adjustments in response, but has also resorted to foreign exchange and capital controls, and reliance on ad hoc interventionism to the detriment of the business environment is likely to persist.

  Taxation: The value-added tax (VAT) rate is 21%. Corporate income tax is levied at 35% and personal income tax at progressive rates between 9% and 35%. A tax on financial transactions was instituted in 2001 and has been levied at 0.4% on deposits and 0.6% on withdrawals since 2004. Taxes on exports were reintroduced in 2002, having been abolished a decade earlier, and have since been expanded to account for around 20% of total revenue.

  Foreign trade: The current-account surplus narrowed sharply in recent years, from US$11bn in 2009 to US$2.8bn in 2010, before shifting to a deficit of US$300m in 2011. In 2011 the trade surplus narrowed by 5%, to US$13bn.

  Major exports 2011	% of total	Major imports 2011	% of total
  Manufactures	34.9	Intermediate goods	32.7
  Processed agricultural products	33.5	Capital goods	21.8
  Primary	24.3	Fuels	14.1
  Fuels & energy	7.3	Consumer goods	12.0
  Leading markets 2011	% of total	Leading suppliers 2011	% of total
  Brazil	20.1	Brazil	37.4
  China	6.8	US	16.3
  Chile	5.1	China	14.0

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  December 06, 2012

• Structure

  Argentina: Economic structure

  Data and charts: Annual trends charts

  
  

  

  December 06, 2012

• Outlook

  Argentina: Country outlook

  Argentina: Country outlook

  FROM THE ECONOMIST INTELLIGENCE UNIT

  POLITICAL STABILITY: Political tensions will remain high in the run-up to the legislative election in October 2013, and possibly beyond. The popularity of the president, Cristina Fernández de Kirchner, has fallen rapidly in the first year of her second term of office. A sharp deceleration of economic activity, combined with the confidence shock produced by tight controls on US-dollar purchases, has produced a series of major protests--including the largest protest in almost a decade on November 8th--and is reinvigorating government opponents. Ms Fernández has been in this position before (her opinion poll ratings fell to a low of 20% in 2008 before she regained office last year by a record margin of victory, thanks partly to the sympathy vote following the death of her husband and former president Néstor). But she now has less scope for policy stimulus to support growth and less chance of receiving the sort of boost from rapidly accelerating demand in Brazil and China that occurred in 2010. In this context, even assuming a moderate pick-up of economic activity next year, it is currently difficult to envisage a scenario in which Ms Fernández regains the huge popularity that she enjoyed at the start of 2012.

  ELECTION WATCH: A mid-term legislative election will be held in October 2013, and the presidential election in 2015. Ms Férnandez is constitutionally barred from running again, and the Economist Intelligence Unit does not expect any constitutional reform proposal to allow her to run again to prosper. With no viable successors to Ms Fernández on the horizon, this leaves the 2015 race wide open. Before then, the government faces the challenge of the mid-term election, where it now seems possible that the government will lose its congressional majority. In Argentina's clientelist political system, where political loyalties are notoriously fickle, much will depend on the economy and the government's ability to distribute political favours to provincial governors. If it cannot, we expect support to slip away from the ruling Frente para la Victoria (FV), a leftist faction of the Partido Justicialista (PJ, Argentina's dominant Peronist party), to other anti-government factions of the Peronist party, with a Peronist candidate probably emerging victorious in the 2015 presidential election. The opposition's performance in the mid-term 2013 elections and in the 2015 presidential poll will also depend on its ability to regroup from its 2011 general election defeat. Although not in total disarray, the opposition remains disorganised and divided, on both the right and left.

  INTERNATIONAL RELATIONS: The potential for diplomatic and trade disputes will remain high. The government has repeatedly shown itself willing to provoke disputes with key trade partners in pursuit of its policy goals, and we do not expect this to change. Relations with Spain and the EU have been badly damaged by the nationalisation earlier this year of YPF (until then majority owned by Spain's Repsol). Spain is now likely to block any Argentinian efforts to agree a debt workout with Paris Club creditors, which would have opened the door to increased investment by allowing for credit insurance, loan guarantees and financing from export credit agencies in the 19 Paris Club creditor countries. This follows closely on the heels of comprehensive import controls imposed earlier this year, which have damaged Argentina's relations with its partners in the Mercado Común del Sur (Mercosur, the Southern Cone customs union) and prompted several members of the World Trade Organisation (WTO) to bring official complaints against Argentina. There are, moreover, continuing tensions with multilaterals and with the US government over Argentina's lack of compliance with the World Bank's International Centre for the Settlement of Investment Disputes (ICSID) and with the IMF's articles of agreement.

  POLICY TRENDS: The government is increasingly reliant on heterodox, interventionist economic policies implemented on an ad hoc basis in its efforts to alleviate the competitiveness problem that is weakening the external sector and increasing the country's vulnerability to a fresh currency crisis. Far from solving underlying structural problems, these policies are further clouding the outlook for investment and growth, and raising questions as to whether stagflation is becoming entrenched. The government's policymaking problems stem from the expansionary fiscal and monetary policies of recent years, which have exerted upward pressure on inflation and wages and eroded currency and wage competitiveness. This has resulted in the deterioration of the current-account surplus--a pillar of economic stability in a country with limited access to international capital markets and chronic capital flight. The deteriorating balance-of-payments dynamics have, in turn, heightened speculation of peso devaluation.

  ECONOMIC GROWTH: There are signs that the worst of this year's sharp economic deceleration is over. After a contraction in GDP in the second quarter in quarter-on-quarter terms, there was a pick-up in industrial output in the third quarter. But consumer and business confidence is still weak, as is construction and real estate activity, and the second-half recovery will be modest, supporting our full-year GDP growth estimate for 2012 of 2.1%. The outlook for 2013 is somewhat brighter, thanks to expectations of a record agricultural harvest and higher soya prices. Apart from the positive impact this will have on agriculture sector investment and on fiscal revenue, it will boost the external sector, improving confidence. As a result we expect a recovery in fixed investment growth next year to 6.2% (still unspectacular considering this year's estimated fall of 9.4%). This will outweigh the continued deceleration of private consumption growth amid weakening real wage growth and, combined with stronger exports, should produce GDP growth of 3.6% in 2013. However, growth is projected to weaken again in 2014-15, as underlying competitiveness problems will remain unaddressed. Combined with continued recourse to heterodox and interventionist economic policies, which will sustain uncertainty over tariffs, controls, and the legal and regulatory environment, this will increasingly have an impact on confidence, investment, employment and purchasing power.

  INFLATION: The government will remain reluctant to take the difficult steps needed to tackle the inflation problem. Even according to official data, consumer price inflation remains among the highest in emerging markets, at 10.2% in October. But the official data are widely discredited and inflation is thought to in fact stand at around 25% (based on private surveys and provincial price data). This is a result of extremely loose macroeconomic policy and persistent supply constraints (government intervention has resulted in falling production of key foodstuffs and tighter access to cheap consumer goods). Weaker domestic demand should produce some modest disinflation in coming years. However, with the government mostly relying on ad hoc agreements at the firm level to try to control prices, fiscal and monetary policy remaining expansionary, and newly imposed import controls hindering access to cheap consumer goods, inflationary pressures will remain high. Meanwhile, the difficulty of gauging the real rate of inflation is likely to remain a major source of concern among investors.

  EXCHANGE RATES: Given an uncertain policy environment, high inflation and a weak external sector, depreciation pressure will persist, and the black-market premium will remain high. Amid ever-tighter foreign-exchange controls, the black-market rate was at Ps6.4:US$1 in mid-November, representing a premium on the official rate of around 30%. With the authorities intervening to prevent substantial peso adjustment, we expect the peso to continue to depreciate in nominal terms against the US dollar in the rest of this year. We also forecast a nominal depreciation of 10% in 2013. However, in a high-inflation environment, real peso appreciation will continue, heightening the risk of a sudden, sharp adjustment at some point in the forecast period.

  EXTERNAL SECTOR: The host of recently imposed controls is having some impact on the current-account balance and, combined with the prospect of a record agriculture export crop next year, we now expect the current account to remain just in surplus in 2013. We are forecasting a shift into deficit thereafter, reflecting a weakening of the trade and services balances owing to real currency appreciation. By 2017, we expect a current-account deficit of 1.5% of GDP. Portfolio and foreign direct investment (FDI) inflows will, meanwhile, be deterred by a weak legal framework and speculation of peso devaluation (we expect continued capital flight). At the same time, reserves coverage will be weakened by the use of reserves to shield the peso and repay external debt.

  December 07, 2012

• Forecast

  Argentina: Country forecast summary

  Country forecast overview: Highlights

  • The political environment is deteriorating rapidly for the president, Cristina Fernández de Kirchner, just over a year after she was re-elected to a second term of office by a record margin. A sharp deceleration of economic activity, combined with the confidence shock produced by increasingly tight controls on US-dollar purchases, has produced spontaneous protests and is also reinvigorating government opponents, such as farmers, who had been severely weakened by last year's election results.
  • Political loyalties are notoriously weak in Argentina's clientelist political system, and political supporters could soon begin to desert Ms Fernández (as in 2007-08, when there were a slew of defections from the government bench) and begin jockeying to succeed her at the 2015 election.
  • The government has increasingly turned to heterodox, interventionist economic policies, implemented on an ad hoc basis, in its efforts to solve the competitiveness problem that is weakening the export sector and increasing the country's vulnerability to a fresh currency crisis. Far from solving underlying structural problems, these policies are further clouding the outlook for investment and growth.
  • In its efforts to keep economic distortions in check, the government will continue to resort to foreign exchange, trade and capital controls-as well as unpredictable interventionism. In this context, the environment for doing business will continue to deteriorate as the rule of law and contract rights are eroded. Under the Economist Intelligence Unit's benign baseline forecast, a combination of fiscal tightening and controls will help to prevent devaluation. However, there will be a persistent risk of financial and foreign-exchange market volatility.
  • Stronger exports on the back of a robust agricultural harvest should produce a moderate rebound in GDP growth in 2013 of 3.6%. Growth is projected to weaken in 2014-15 as underlying competitiveness problems remain unaddressed. Combined with continued recourse to heterodox and interventionist economic policies, this will increasingly have an impact on confidence, investment, employment and consumer purchasing power.
  • Economic performance in the later years of the forecast period will be highly dependent on the political environment. Our forecasts are based on the most likely scenario of a change to a more pragmatic, business-friendly government, which would engender confidence in the rules of the game and work to eliminate economic distortions, albeit gradually. Under these assumptions, we expect investment growth to accelerate and for GDP growth to rise above 4%.

  Country forecast overview: Key indicators

  Key indicators	2012	2013	2014	2015	2016	2017
  Real GDP growth (%)	2.1	3.6	3.4	3.4	4.0	4.3
  Consumer price inflation (av; %)	10.0	10.5	9.4	8.8	8.2	8.1
  Budget balance (% of GDP)	-3.1	-2.4	-2.3	-1.7	-1.4	-1.4
  Current-account balance (% of GDP)	0.3	0.3	-0.6	-1.1	-1.6	-1.5
  Lending rate (av; %)	14.0	13.7	13.4	12.4	12.1	12.1
  Exchange rate Ps:US$ (av)	4.5	5.0	5.2	5.4	5.5	5.6

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  December 06, 2012

View detailed map

Country Briefing

Land area

2,737,000 sq km

Population

39.8m (2008 mid-year estimate based on 2001 census)

Main towns

Population (m; 2001)

Federal district & Buenos Aires province: 16.6

Córdoba: 3.1

Santa Fe: 3.0

Mendoza: 1.6

Tucumán: 1.3

Climate

Varies from subtropical in the north to sub-arctic in the south

Weather in Buenos Aires (altitude 27 metres)

Hottest month, January, 17-29°C (average daily minimum and maximum); coldest month, June, 5-14°C; driest month, July, 56 mm average rainfall; wettest month, March, 109 mm average rainfall

Language

Spanish

Measures

Metric system. Among other measures in use are: fanega = 3.77 bushels; quintal = 100 kg

Currency

Argentinian peso (Ps). Average exchange rates in 2010: Ps3.90:US$1; Ps5.18:€1

Fiscal year

January-December

Time

3 hours behind GMT

Public holidays

January 1st; Good Friday; May 1st and 25th; June 10th and 20th; July 9th (Independence Day); August 17th; October 12th; December 8th and 25th

March 01, 2012