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By: Matthew Cowley
BUENOS AIRES (Dow Jones)--Goldman Sachs on Monday said it expects Argentina's economy to grow significantly faster than it had previously expected this year, as the government is expected to maintain a rapid increase in public spending to boost its chances in the presidential election in 2011.
Goldman Sachs said it expects gross domestic product to increase by 8% this year, up fro-m its previous forecast of 5.3%. Growth is expected to slow in 2011 to 5.8%, which is also higher than its previous estimate of 3.5%.
An "over-stimulated economy" in the next two years could "pay political dividends" for President Cristina Fernandez and her husband and former president, Nestor Kirchner, Goldman said in a research note. That in turn increases the odds that "the current heterodox and distortionary policy mix might remain in place beyond 2011," it said.
The current approach does raise "the risk of a hard landing of the economy in 2012," Goldman said. Goldman warned that the growth cycle is "rather unbalanced" as it is generating inflation pressures and is being paid for by record-high levels of government spending, mostly via permanent entitlement programs.
Goldman said it expects headline inflation to accelerate to 25% by year-end 2010, and the official figures to perhaps recognize less than half the actual variation in the consumer price index. Many private-sector economists question the validity of official data, which they say is being manipulated. The government denies the charges.
Goldman said there are "transient factors" for Argentina's growth including a record-high grains harvest, and a supportive global backdrop, in the form of high commodity prices and booming demand from the country's main trading partners.
High inflation and an eroding current account position are likely to push the authorities into allowing the Argentine peso to weaken against the U.S. dollar over the next 12 months, Goldman said.
It will be difficult for Argentina to finance its spending in local or international markets over the next two years, given the high premium demanded by investors. Nevertheless, Goldman said it doesn't envisage financing difficulties over the next two years, as the government can tap other non-conventional sources, although these have other "non-negligible" costs.
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