The government of Argentina will continue to tighten its grip on the economy as widening economic distortions put the country under increased stress.

Going by a report by the Capital Economics, growth already seems to be slowing following the withdrawal of pre-election spending and it is expected to face a further significant slowdown over the coming quarters.

Capital Economics adds that after falling into deficit in Q3, 2011's current account balance may have been negative for the first time since 2001. With weak global growth keeping export demand soft, and no recourse to capital markets, Argentina will increasingly resort to protectionist measures and self-defeating capital controls.

On a negative note, Capital Economics points out that confidence in the peso will be further eroded by proposed reforms to the central bank charter to make it easier for the government to tap FX reserves to service its debts.

This is little more than a stopgap measure to support unsustainable government policies. On the fiscal front, long overdue cuts to the subsidy system may ease some of the pressure on the public finances, but at the expense of lower private consumption.

Also Capital Economics has reported that much-needed foreign investment continues to be deterred by an increasingly hostile business environment. It is expected that growth will slow to 2.5 percent this year and will continue to face recession over the next 2 or 3 years.

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