FACTBOX-Key political risks to watch in Argentina

BUENOS AIRES, Sept 1 Wed Sep 1, 2010 9:40am EDT

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BUENOS AIRES, Sept 1 (Reuters) - Political tensions are bubbling up in Latin America's No. 3 economy as President Cristina Fernandez and her rivals grapple to seize the initiative ahead of next year's presidential election.

Doubts over state finances have eased due to robust growth, a bumper grains harvest and the completion of a $12.3 billion bond restructuring that aimed to clean up lingering damage from a massive 2002 debt default and pave the way to sell new debt.

Opposition proposals in Congress to hike pensions and cut controversial taxes on grains exports would strain the budget and could trigger a controversial presidential veto.

A recent hardening of the government's criticism of the Grupo Clarin (CLA.BA) media conglomerate has soured an already tense relationship with big business, setting the tone for a testy pre-election year.

Here are some of the issues investors are watching:

ELECTION BUILD-UP

Argentina's fragmented opposition has failed so far to form a united front against the government despite winning control of Congress in last year's mid-term election.

There are signs they are getting organized, such as the drive to hike pensions, but so far they have failed to slow a steady recovery in the government's approval ratings.

Fernandez's popularity hovered around 20 percent after last year's mid-terms, but a brisk economic recovery has lifted it to at least 35 percent, pollsters say. That would help her husband, Nestor Kirchner, who preceded her as president and is expected to run for a second term next year. [ID:nN04144810]

What to watch for:

-- Signs of a sustained rebound in the government's popularity would boost Kirchner's chances of returning to the presidency in the 2011 election.

-- Polls show President Fernandez has higher approval ratings than her husband. A deepening of that trend might encourage the presidential couple to seek her re-election rather than his.

-- The emerging field of alliances and any signs of opposition challengers who might be able to take on Kirchner.

CONFLICT WITH BUSINESS

Business leaders are increasingly speaking out against Fernandez's administration as her escalating row with Argentina's top media group Clarin ruffles markets and sharpens political divisions. [ID:nN30274780]

Fernandez has been at odds with the Clarin group for two years. But she stepped up her drive against the conglomerate last week by accusing its leading newspaper, Clarin, and competitor La Nacion of plotting with the military junta to buy leading newsprint supplier Papel Prensa (PPR.BA) in 1976.

Just a few days earlier, the government stripped the operating license from Clarin's Internet provider Fibertel. [ID:nN19221275] A blockade by truck drivers of the steelmaker Ternium Siderar (SID.BA) worsened the mood among big business.

What to watch for:

-- Any signs the tensions with big business are affecting the government's approval ratings.

-- Impact on investment inflows and on debt and currency prices. ARSB=

-- Challenges to government plans from courts or Congress.

-- Involvement of any pro-government trade unions, such as the truck drivers, in strikes or protests.

INFLATION

Inflation ARCPI=ECI has surged as the economy rebounds from last year's sharp slowdown, and private forecasts put the annual rate at 20 percent or more, far above official estimates and fueling pay demands. [ID:nN13206766]

Many trade unions have secured hefty annual pay rises in recent months, easing a wave of strikes and labor protests, and a recent hike in pensions and child benefits could soften the impact of soaring food prices on the poor. [ID:nN28180590]

But political analysts say inflation remains the government's Achilles heel as it tries to shore up backing among the urban poor, its key support base.

Brisk public spending is not expected to slow and this combined with an expansive monetary policy are seen stoking inflation to between 25 percent and 30 percent by year-end.

Controversy over consumer price data continues despite pledges by Economy Minister Amado Boudou to restore credibility to the figures.

What to watch:

-- Fresh government income-boosting measures that could prove inflationary, such as tapping credit markets to allow higher social spending as the election nears.

-- Further loosening of the central bank's money supply targets. [ID:nN26213826]

-- Congress may approve an opposition-led bill to reform the questioned INDEC national statistics agency. [ID:nN12251173]

STATE FINANCES

Tax revenue is picking up quickly following last year's slowdown, growing at rates of nearly 40 percent in recent months year-on-year, but public spending is also growing rapidly and is unlikely to ease as the election draws closer.

Argentina's completion of the long-awaited debt swap has boosted investor appetite for sovereign bonds, although the government has not yet issued a $1 billion bond as originally planned.

Boudou has said repeatedly the government will wait until market conditions are right. [ID:nN11261547]

Opposition lawmakers are pushing several measures that would hit state finances and their drive to grab the political initiative could gather speed as voting draws nearer. [ID:nN19255736]

Opposition legislators also want to cut grains export levies, which account for about 10 percent of state revenue. [ID:nN25135181]

What to watch:

-- Global risk appetite and whether yields fall low enough to encourage a new bond sale.

-- A possible debt swap to extend maturities coming due in the run-up to the 2011 election.

-- Creative government accounting to maintain the primary budget surplus, which measures public accounts before debt payments and which widened 54 percent year-on-year in the first half of the year. [ID:nN21264164]

-- The term of Central Bank President Mercedes Marco del Pont expires on Sept. 23. Fernandez is expected to nominate Marco del Pont, a close ally who backs using foreign reserves to pay debt, for a second term but Congress must confirm her.

-- Approval of the opposition's pensions bill, or export tax cuts, and possible presidential vetoes.

-- Any steps by the government to open talks over the roughly $7 billion owed to the Paris Club group countries. (Editing by Kieran Murray) (helen.popper@thomsonreuters.com; +54 11 4318 0655; Reuters Messaging: helen.popper.reuters.com@reuters.net))

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