Argentina: Risk Assessment

Country Rating¹

Rating: C

Business Climate Rating¹

Rating: B

Risk Assessment²

Strong growth despite uncertainty surrounding elections
Argentina recorded a strong economic recovery in 2010 albeit accompanied by higher inflation. The upturn was driven by renewed consumer and private investor confidence spurred by accommodating policies and the rise of prices for exported raw materials. Despite the improvement in demand from the main client countries (China and Brazil), the foreign trade contribution to growth was negative due to the acceleration of imports in response to domestic demand. The economic rebound was underpinned by a strong supply side. Particularly the farm sector, which had been affected by drought during the preceding season, recorded exceptional growth.

GDP growth will likely remain strong in 2011, with continuing support from expansionary policies in the run-up to the presidential election in autumn. Despite government incentives, however, the political uncertainties could, to some extent, give rise to a wait-and-see attitude on the part of investors. On the supply side, farm production is expected to continue to rise, especially in the case of corn, wheat and oleaginous grains thanks to large investments in the sector. Soybean production is expected to level off. Industrial production could continue to be handicapped by electric power failures. The banking system meanwhile proved very resilient to the crisis. The banks remain well-capitalized, liquid and profitable with the proportion of nonperforming loans in decline. In this context, financing conditions are expected to ease for private companies and corporate payment behavior recorded by Coface is likely to improve.

Improving financial situation
The public sector deficit is expected to continue to widen in 2011 in view of the expansionary fiscal policies implemented to enhance the re-election prospects of President Cristina Fernandez Kirchner. After the agreement reached in June 2010 with the private creditors left out of the 2005 debt restructuring negotiations, government authorities have confirmed their intention to negotiate a settlement of Argentina's arrears with the Paris Club member countries among its creditors. In this context, the perception of Argentina sovereign risk has been improving. Restoring a normal situation on payments after the default by Argentina in 2001 would put an end to 10 years of virtual financial isolation.

Despite strong growth of imports, the current account balance is expected to remain in surplus in 2011. Outflows of private capital constitute a recurrent factor of uncertainty in evaluating Argentina's external financing needs, which could accelerate in the run-up to the presidential elections. Foreign exchange liquidity crisis risk has been held within manageable limits, however, relative to the substantial level of foreign exchange reserves. But the reserves are expected to contract, however, with the government likely to draw on them to repay foreign debt.

Political uncertainties since the death of former President Nestor Kirchner
President Cristina Fernandez Kirchner has been weakened as a result of her defeat in the 2009 midterm elections. The government has then lacked a parliamentary majority and been exposed to attempts at obstruction by the opposition. The death on 27 October 2010 of former President Nestor Kirchner, who was said to be behind key policy decisions, opened a tense and uncertain interval in the run-up to the presidential elections late 2011. A major change in economic policy options until then appears very unlikely. After the Kirchner and Fernandez administrations, business circles reportedly would now prefer less state interventionism and greater orthodoxy, which could enhance the chances of a more liberal administration coming into power.

Strengths

• Abundant agricultural, energy and mineral resources, combined with rich tourist potential and cultural heritage
• Level of education and human development indicators above Latin America’s average
• Comparative advantages in farm and food products (soybeans, meat, dairy products) and skilled services (information technology, engineering)
• Prospective of a debt settlement to creditors’ countries Paris Club members enabling a return to financial markets

Weaknesses

• Some dependence on raw materials
• Lack of investment in energy and infrastructure
• Lack of discipline on fiscal policy and lack of reliability of inflation data
• Business environment often affected by unpredictability
• Persistence of strong inequality and social unrest