SIGNIFICANCE: Growth will remain strong, although unresolved structural problems and excessive dependence on commodities raise doubts over sustainability. Political miscalculations and immutable policy-making may weaken the government without strengthening a largely dormant opposition.

Key insights

• The year ahead is likely to be marked by rising social conflicts, including strikes over wage demands, and political scandals.

• Growth will remain strong, but disproportionately dependent on global commodities prices.

• The main threats to sustained growth -- inflation and energy supply -- are unlikely to be tackled effectively. ANALYSIS: President Cristina Fernandez de Kirchner, who took office on December 10, saw her political honeymoon truncated within days:

• Union pressures. Hugo Moyano, leader of the General Confederation of Labour (CGT), warned that he could pass to the 'opposite side' if she does not respect union demands when wage talks are held early in 2008.

• Suitcase scandal. On December 12, the US Attorney's Office in Miami charged five men in connection with the case of some 800,000 dollars smuggled into Argentina by a Venezuelan businessman in August. The money was allegedly destined for Fernandez de Kirchner's campaign, and further damaging allegations look set to follow after their trial starts on December 28.

In the latter case, Fernandez de Kirchner's ill-advised and intemperate reaction has already undermined a key plank of her government -- namely, greater emphasis on foreign policy and improved relations with Washington in particular. Her strident accusation that the case represented a politically motivated attempt by Washington to punish her for Argentina's relations with Venezuela was poorly received by both Democrats and Republicans (and appeared an attempt to distract attention from the underlying allegations).

• Social tensions. In the former case, Moyano has long been an unreliable ally of former President Nestor Kirchner. His own leadership of the CGT is under fire and, with union elections due mid-year, he will be under pressure to be more aggressive in wage negotiations. His recent dismissal of official inflation figures suggests that these will not represent a basis for wage settlements and 2008 is likely to be marked by disruptive strikes, by Moyano's truckers' union in particular. Combined with increasing roadblocks by 'piquetero' protesters, this points to a rise in social conflicts during 2008.

Fernandez de Kirchner's October 28 victory gave her a majority in both houses of Congress, and she will have little difficulty in imposing any legislative agenda, at least until the 2009 mid-term elections. However, despite government policies that have largely favoured the middle classes, she performed relatively poorly in middle-class districts, losing in the cities of Buenos Aires, Rosario and Cordoba (see ARGENTINA: Fernandez faces major challenges - October 30, 2007). While middle-class scepticism will be largely irrelevant while economic performance is broadly favourable, continued high inflation, a serious energy crisis or union unrest could eventually provoke a damaging backlash. Although the opposition remains too divided to capitalise on rising dissatisfaction, Fernandez de Kirchner's own Peronist party remains fractured and risks adding to such pressures; indeed, the lack of solid political institutions able to channel popular dissatisfaction may prove more destabilising than a more coherent opposition.

Economic policy. Fernandez de Kirchner's decision to maintain virtually the whole of Kirchner's cabinet suggests economic policy cohesion (as well as undue influence by the former president):

• On the one hand, this implies a commitment to maintain a fiscal and trade surplus.

• On the other, it implies reluctance to implement serious anti-inflation measures that might risk slowing growth.

The latter risk is underscored by the confirmation that Internal Trade Secretary Guillermo Moreno, the architect of the government's ineffectual price-control policy, will remain in post.

Moreover, the belief that strong growth has been attributable to astute policy-making is ill-founded, with high international commodities prices the main contributing factor. These may not prove eternal. Growth will in any case slow this year and next, probably to some 8.5% in 2007 and 7.0% in 2008. Expansion will continue to be led by consumer demand and commodities exports, with soya exports alone expected to reach some 18 billion dollars in the year ahead. Both high international prices, and expected record harvests, will boost central government tax revenues, bolstered by 'temporary' export taxes on food, mining and hydrocarbons products set to total some 3.5 billion dollars next year -- although the often arbitrary imposition of these taxes may discourage investment.

Source: National Statistics Institute (INDEC)    

Fiscal risks. Nevertheless, the fiscal position may deteriorate in 2008, despite the likelihood that public spending -- up 47% in the first ten months of 2007 -- will rise more slowly. Although Fernandez de Kirchner has proposed raising the fiscal surplus from an estimated 3.2% of GDP this year to 4.0% in 2008, spending pressures (especially trade union demands and energy subsidies) render this unlikely. Moreover, the provincial fiscal position is worsening, with both the city and province of Buenos Aires likely to record a deficit this year and next. After reporting a total primary surplus of 1.4% of GDP in 2004, the provinces are expected to reach a primary surplus of only 0.1% this year, and fall into a primary deficit in 2008. In particular, salary increases will hit provincial spending hard, given the heavy incidence of salaries in their budgets and the fact that fast-rising export taxes are not shared with the provinces.

Statements by Economy Minister Martin Lousteau to the effect that renegotiation of the 6.2 billion dollars owed to the Paris Club is "important" but not "urgent", and that no reopening of the 2005 bond swap is envisaged for the 27.0 billion dollars still in default, have hit hopes for debt regularisation. This will make it difficult for Argentina to return to international credit markets, although debt payments of some 8.5 billion dollars falling due in 2008 should be manageable. Indeed, lack of access to international markets may soften the domestic impact of continuing global markets turmoil.