Argentina Business Forecast Report Q1 2013

Core Views

We forecast Argentine real GDP growth will slow to 0.9% in 2013on the back of a poor business environment, weakening domesticdemand and high inflation caused by a large currency devaluation.

We see the potential for more sound policy and base effects to resultin growth trending upward from 2014-2017.

We believe depreciatory pressure will remain on the Argentine pesothroughout 2013, but the policies employed to keep the currencyovervalued will grow less effective. As such, we believe the internationalreserves position will fall to a point where Argentina must allowthe peso to depreciate, likely by mid-2013, and we forecast that theaverage 2013 ARS/US$ exchange rate will be 22.5% weaker thanin 2012.

We believe a weaker peso over the forecast period will support exportsfrom 2013-2017, keeping the current account in surplus between0.8% and 2.6% of GDP, but see relatively weaker commodity pricesand global demand keeping export growth off the heights of the pastdecade.

Deteriorating domestic economic conditions will keep ArgentinePresident Cristina Fernández de Kirchner and her party unpopularwith the electorate. As a result, we expect losses for Fernández'scoalition in the 2013 midterm election and believe that these losseswill make it nearly impossible for her to cobble together the votesnecessary to change the constitution in order to run for a thirdpresidential term in 2015.

The US legal system dealt Argentina another defeat in late November,ruling that the country must pay holdout investors and reinforcing ourview that the Argentine government will very likely push the countryinto technical default after a final ruling in the case, which may comeas soon as late February 2013.

Major Forecast Changes

Economic data have shown greater deterioration in 2012 than wepreviously expected, and we have revised down our full-year 2012real GDP growth projection from 3.0% to 2.8%, an abrupt decelerationfrom 8.9% growth in 2011.

Key Risks To Outlook

Risk To Peso Devaluation Forecast: It is difficult to predict theexact timing of what we admit is a political decision as much as aneconomic one, and higher-than-expected grains prices could helpthe Argentine government to delay addressing its largely overvaluedofficial exchange rate.

Risk To Real GDP Forecast: As mentioned above, a strongerthan-expected grains harvest would give the Argentine governmenta larger cushion of foreign currency reserves, with which it coulddelay any resolution of the imbalances in the Argentine economy,pushing back the sharp economic slowdown that we expect to occurin 2013.

Risk To Default View: Despite our expectations, the US SecondCircuit Court could reverse its previous decision, allowing Argentinato continue making payments on its restructured debt and ignoringholdout investors. On the other hand, even a technical default couldresult in severe economic and financial market disruptions, and weacknowledge that there are significant downside risks to this view.