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Source: Bloomberg
By: Eliana Raszewski

Goldman Sachs raised its forecast for Argentina’s economic growth in 2011 after the economy expanded last year at the fastest pace since 2005.

Goldman Sachs economist Alberto Ramos raised his gross domestic product expansion estimate to 6.8 percent from a previous 5.6 percent, according to an e-mail statement. Still, he expects a “significant slowdown” in the second half of 2011, and maintained his 2012 growth forecast of 3.2 percent.

South America’s second-biggest economy expanded for an eighth consecutive year in 2010, growing 9.2 percent. The country’s recovery from 0.9 percent expansion in 2009 was fueled by commodity prices and by external demand, mainly from Brazil, for manufactured and industrial goods, Ramos said.

Ramos forecast that prices will rise by more than 25 percent this year. Even so, the government is unlikely to take steps to rein in inflation, he said.

“The paramount policy objective appears to be to maximize growth ahead of the elections, even if such a strategy proves unsustainable and thereby self-defeating over the medium term,” said New York-based Ramos in the statement.

The government will allow the peso to depreciate gradually until the October presidential elections as it tries to prevent a further escalation of inflationary pressures, said Ramos, who estimated the peso will lose 8 percent to 10 percent of its value over the whole of 2011.

The resulting appreciation of the real exchange rate means that “beyond entrenched high inflation, the erosion of external competitiveness is another thorny issue the next administration will have to face, which, if not handled properly could end up generating a crash, rather than a soft-landing of the economy in 2012,” said Ramos.

The peso, which last year fell 4.5 percent, the most among Latin America’s major currencies, was little changed as of 4:22 p.m. New York time at 4.0366 per dollar.

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