Argentina's economy and risks

BUENOS AIRES Mon Mar 28, 2011 7:14am EDT

BUENOS AIRES (Reuters) - Argentina's economy expanded by a blistering 9.2 percent last year, driven by strong consumer spending, high global prices for its grains exports and growing demand for manufactured goods in neighboring Brazil.

The center-left government of President Cristina Fernandez places a higher priority on economic growth than tackling surging consumer prices, but some economic analysts say expansive fiscal and monetary policies are stoking inflation and could undermine the sustainability of longer-term growth.

Below are facts about Argentina's economy, financial markets and politics:

ECONOMIC GROWTH

Argentina, Latin America's No. 3 economy, grew at one of the region's fastest rates in 2010, although some economists say widely questioned official data overstates growth.

With the exception of 0.9 percent growth in 2009, Argentina has posted strong annual growth since Nestor Kirchner, Fernandez's late husband and predecessor as president, took office in 2003 following the 2001-2002 economic crisis.

An agricultural powerhouse, Argentina is the world's top supplier of soyoil and soymeal, and the No. 2 exporter of corn.

Soy exports rose to nearly $20 billion last year, representing more than a quarter of total export earnings.

The auto industry has driven surging factory output in recent years and car production surged 41 percent in 2010, according to trade industry association data.

INFLATION

Double-digit inflation has become the potential Achilles' heel of the government's growth-oriented economic policies.

Official data shows consumer prices rose 10 percent in the 12 months through February, but private forecasts say real inflation is running at least twice that rate.

Critics say the widely discredited INDEC national statistics agency has been underreporting inflation since 2007, when the government replaced the head of its consumer price unit with a political ally and ousted long-standing technical staff.

Economists say double-digit inflation is becoming entrenched, leaving a thorny legacy for the next government, and raising doubts about the long-term viability of current policies.

Renegade statistics workers, analysts and opposition politicians accuse the government of low-balling prices rises for political gain and to save money on inflation-linked debt payments, which account for about one quarter of the country's $161 billion total obligations.

PUBLIC SPENDING

Public spending increased 30 percent last year and shows little sign of slowing seven months from an October presidential election in which Fernandez is widely expected to seek a second term.

Fernandez has announced increases to pensions and child welfare benefits, measures that could help bolster her support among the poor and stave off the impact of accelerating inflation on purchasing power.

Many public services, such as transport and utilities, have been heavily subsidized for years and the cost of subsidizing energy has become an increasing burden due to soaring domestic demand.

By signing a decree to tap another $7.5 billion from central bank reserves to repay private creditors, Fernandez will be able to maintain high public spending levels.

POLITICAL RISKS

Fernandez's approval ratings currently run at about 50 percent, far ahead of a splintered field of opposition candidates from across the political spectrum.

However, she has not yet announced her candidacy and seven months is a long time in the stormy world of Argentine politics.

Presidential candidates can win in a first-round vote if they win 40 percent of the vote and have a lead of 10 percentage points over their nearest rival. Support of 45 percent guarantees a first-round victory.

Inflation is fueling wage demands, raising the risk of labor unrest over the coming months as powerful trade unions negotiate salary hikes.

Farmers, who have staged repeated strikes over government export curbs and taxes, remain at odds with Fernandez and could launch fresh strikes. Persistent curbs on corn exports could be a trigger as harvesting gathers pace over the coming months.

(Reporting by Magdalena Morales, writing by James Matthews, Editing by W Simon )