Macroeconomic Forecast Argentina

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Argentina's primary surplus (the figure before debt servicing costs) came in at ARS1.57bn in November, increasing by 4.5% y-o-y. On a cumulative basis, the primary surplus amounted to ARS22.89bn over the first eleven months of 2006, a rise of 16.5% y-o-y. The large surplus was a result of increased tax revenues on the back of strong economic growth in Q406 and high inflationary pressures. Thanks to the government's strong revenue base, we forecast that the primary surplus will amount to 3.3% of GDP in 2006 (down from 3.7% in 2005). For 2007, however, we believe that there are several downside risks to the currently healthy budget. Firstly, given that we expect a deceleration in economic growth from 8.6% in 2006 to 5.0% in 2007, combined with a slight easing of inflationary pressures, tax revenues are likely to decline accordingly. Secondly, the possibility that President Néstor Kirchner will face re-election