December 10, 2011 / 6:07 AM / in 7 years

Argentine leader starts new term with rocky road ahead

BUENOS AIRES (Reuters) - Cristina Fernandez begins a second term as Argentine president on Saturday as signs of strain in a long economic boom force her to tweak the offbeat, high-growth policies that pleased voters but spook investors.

Argentine President Cristina Fernandez de Kirchner flashes a victory sign after winning the nationwide presidential election in Buenos Aires October 23, 2011. REUTERS/Enrique Marcarian

Fernandez won a landslide re-election on the back of sizzling economic growth and a wave of sympathy following the death of her husband and predecessor as president, Nestor Kirchner.

She has vowed to “deepen the model” he started in 2003.

“Our model is a model of growth ... we believe in growth, in work and inclusion and we’re going to maintain that path,” the former senator told industry leaders in a recent speech.

Double-digit inflation, capital flight and tight finances are, however, raising concerns about the sustainability of her big-spending policies as a worsening global outlook weighs on grains prices and reduces demand from neighbouring Brazil.

Factory output growth was significantly slower in October, a clear sign that Latin America’s third-biggest economy is cooling down.

Fernandez, 58, is a centre-left member of Argentina’s dominant Peronist party and rejects orthodox belt-tightening measures, saying they stifle growth.

But she has already made several adjustments.

Days after she was re-elected with 54 percent of the vote in October, Fernandez ordered energy and mining firms to cash in export revenues on the local foreign exchange market and sent in tax officials to approve dollar purchases on a case-by-case basis.

Both measures were designed to counter surging capital flight and bolster the central bank’s foreign currency reserves, which Fernandez has earmarked for debt repayments next year.

She has also started dismantling multibillion-dollar state subsidies on water, natural gas and utility bills, an unresolved legacy of a devastating 2001/02 economic crisis that is an increasing burden on public finances.

Deeper cuts in public spending - such as further subsidy reductions or caps on wage demands - will likely lead to struggles with the powerful trade union movement that provides the key support for Peronist politicians like Fernandez.

Her choice of market-friendly Finance Secretary Hernan Lorenzino as economy minister was well-received by Wall Street, where analysts said it could point to intensified efforts to clear up lingering fallout from the 2002 debt default and return to global markets.

“I don’t see any significant changes. What’s happened so far has been reassuring for those who thought something scary would happen in the second term,” said political analyst Federico Thomsen.

During her stormy first four-year term, Fernandez nationalized private pensions, fought with farmers over export taxes, and ignored international arbitration awards to private firms hurt during a massive debt default in 2002, which left Argentina’s virtually frozen out of global credit markets.

Saturday’s inauguration ceremony will be attended by regional leaders including Brazilian President Dilma Rousseff.

Venezuelan President Hugo Chavez, who had been due to make his first official trip abroad since cancer treatment, cancelled at the last minute.

Fernandez’s outgoing vice president, Julio Cobos, who refused to step down despite an acrimonious falling out with her, will also be there. Cobos is seen by Fernandez loyalists as a traitor and is being replaced in her second term by her current economy minister, Amado Boudou.

Editing by Helen Popper and Kieran Murray

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