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Argentina Country Risk Report Q1 2016

Argentina Country Risk Report Q1 2016

Core Views

A substantial uptick in investment is likely following a devaluation andliberalisation of Argentina's external accounts in 2016. Nonetheless,this will likely not begin until the latter half of 2016, leading to acontraction in real GDP as private consumption declines with realpurchasing power. Thereafter, Argentina will enter a period of robustgrowth as foreign investment flows into the country.

The government of president-elect Mauricio Macri will move tosubstantially reduce the country's budget deficit in the coming yearsby reducing government subsidies on electricity. This will serve totemper inflationary pressures as the government can move awayfrom printing new pesos to finance its substantial deficit. Nonetheless,subsidy reduction will be gradual to limit the shock to consumers'disposable incomes.

A deal to end Argentina's ongoing technical default will be made bythe end of H116 as the Macri government will prioritise the resolution.
0Without an agreement, the government's access to foreign currency isextremely limited, which would limit the liberalisation of the country'sexternal accounts. Because of this, we view a deal with holdouts asthe starting point of potential reform measures.

Major Forecast Changes

We have revised our real GDP growth forecast for 2016 from growthof 2.5% to a decline of 0.4%, taking into account the changes topolicy presented by a Macri-led government.


Executive Summary
Core Views
Major Forecast Changes
Key Risks
Chapter 1: Political Outlook
SWOT Analysis
BMI Political Risk Index
Domestic Politics
Macri Victory Will Pave The Way For Sustainable Growth
Argentina's president-elect, Mauricio Macri of the centre-right Cambiemos coalition, will enact a series of reforms aimed at improving
Argentina's business environment, notably through the liberalisation of the country's external accounts.
TABLE: POLITICAL OVERVIEW
Long-Term Political Outlook
Post-2015 Election, Discourse Moves To The Centre
Argentina scores above the Latin America on average in our Long-Term Political Risk Index, but continued stability hinges on the
government's ongoing policy pivot towards more market-friendly policies. While the October 2015 general election is set to usher in a
more reform-minded government, we highlight several risks that could threaten the country's multiyear political outlook.
Chapter 2: Economic Outlook
SWOT Analysis
BMI Economic Risk Index
Economic Growth Outlook
Near-Term Headwinds Underlie Robust Long-Term Growth
Argentina will experience a modest recession in 2016 as policies implemented by president-elect Mauricio Macri will erode private
consumption. Thereafter, the country will enter a period of more robust growth as foreign investment supports employment.
GDP By Expenditure Outlook
TABLE: 10-YEAR GDP FORECASTS
TABLE: PRIVATE CONSUMPTION FORECASTS
TABLE: GOVERNMENT CONSUMPTION FORECASTS
TABLE: GROSS FIXED CAPITAL FORMATION FORECASTS
TABLE: NET EXPORT FORECASTS
Fiscal And Debt Outlook
Default Resolution Will Be Priority
Argentina's president-elect, Mauricio Macri of the centre-right Cambiemos coalition, will prioritise an agreement with holdout investors to
end the country's technical default that began in July 2014.
Structural Fiscal Position
External Trade And Investment Outlook
Domestic Policy Pivot Will Drive Investment
Mauricio Macri's reform platform will lead to a long-term boost in foreign investment into Argentina, with the power and oil a nd gas
industries being the largest near-term beneficiaries. Significant investment will take years to materialise, however, and 2016 will see
significant external account shocks as new investment is not enough to offset the impact of currency devaluation.
Outlook On External Position
Currency Forecast
ARS: Slow Shift Towards Float
The Argentine peso will be devalued by the new administration of president-elect Mauricio Macri following a solution to the country's
ongoing technical default. Thereafter, the government will engage in a managed float that will be slowly be relaxed over time to removal
all interference in foreign exchange markets.
TABLE: BMI ARGENTINA CURRENCY FORECAST
Regional Economic Outlook
Latin America's Fundamentals Far Sounder Than In Previous Crises
Economic pragmatism and progress on structural reforms means Latin America will be able to withstand ongoing macroeconomic
headwinds without triggering a sovereign or banking sector crisis. While today's global economic environment will see a growth crisis
across much of the region, comparisons with previous crises show that macroeconomic fundamentals are sounder than at any point in
the past.
TABLE: LATIN AMERICA–A BRIEF HISTORY OF ECONOMIC CRISES
Chapter 3: 10-Year Forecast
The Argentine Economy To 2024
Long-Term Growth Driven By Reform Agenda
Argentina's real GDP growth will begin to accelerate over the coming five years, amid a gradual reversal of the interventionist policies
of President Cristina Fernández de Kirchner under the new government of Mauricio Macri. These reforms will lead to robust growth
during the second half of our 10-year forecast, driven by rising natural gas production and stronger inbound investment as the policy
environment evolves in a more business-friendly direction.
TABLE: LONG-TERM MACROECONOMIC FORECASTS
Chapter 4: Operational Risk
SWOT Analysis
Operational Risk Index
Operational Risk
TABLE: OPERATIONAL RISK INDEX
Education
TABLE: LATIN AMERICA–EDUCATION RISK
TABLE: GRADUATES OF TERTIARY EDUCATION, 2007-2011
Government Intervention
TABLE: LATIN AMERICA–GOVERNMENT INTERVENTION RISK
TABLE: PERSONAL INCOME TAX BRACKETS
Chapter 5: BMI Global Macro Outlook
Global Outlook
Emerging Markets Bending, Not Breaking
TABLE: GLOBAL ASSUMPTIONS
TABLE: DEVELOPED STATES, REAL GDP GROWTH, %
TABLE: BMI VERSUS BLOOMBERG CONSENSUS REAL GDP GROWTH FORECASTS, %
TABLE: EMERGING MARKETS, REAL GDP GROWTH, %

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