MercoPress. South Atlantic News Agency

Argentina forecasted to expand 6.8% in electoral year with 25% inflation

Alberto Ramos, Goldman Sachs economist (Photo Reuters)

Goldman Sachs raised its forecast for Argentina’s economic growth in 2011 after the economy expanded last year at the fastest pace since 2005. Alberto Ramos Goldman Sachs economist raised the GDP expansion estimate to 6.8% from a previous 5.6%, according to an e-mail statement.

However Ramos anticipates a “significant slowdown” in the second half of 2011, and maintained his 2012 growth forecast of 3.2%.

Argentina, which is South America’s second economy expanded for an eighth consecutive year in 2010, growing 9.2%. The country’s recovery from 0.9% expansion in 2009 was fuelled by commodity prices and by external demand, mainly from Brazil, for manufactured and industrial goods, Ramos said.

Regarding inflation Ramos forecast that prices will rise by more than 25% this year. Even so, the government is unlikely to take steps to rein in inflation, he said.

“The paramount policy objective appears to be to maximize growth ahead of the elections, even if such a strategy proves unsustainable and thereby self-defeating over the medium term” said Ramos in the statement.

The government will allow the peso to depreciate gradually until the October presidential elections as it tries to prevent a further escalation of inflationary pressures, said Ramos, who estimated the peso will lose 8% to 10% of its value over 2011. In 2010 the peso fell 4.5%.

The resulting appreciation of the real exchange rate means that “beyond entrenched high inflation, the erosion of external competitiveness is another thorny issue the next administration will have to face, which, if not handled properly could end up generating a crash, rather than a soft-landing of the economy in 2012” said Ramos.