President Cristina Fernandez de Kirchner will probably regard her landslide victory in Argentina's October 2011 elections as an expression of approval for her handling of economic policy rather than as an occasion to implement the structural reforms needed to reverse macroeconomic imbalances that BMI sees increasingly fostering internal security weaknesses.

Fernandez's electoral success is largely due to her administration's track record of strong economic growth, rising living standards for the poor and low unemployment, measures achieved through expansionary fiscal policies at the expense of inflation. Protests across Argentina in early September 2012 do indicate a degree of popular dissatisfaction with persistently high inflation, strict currency controls, and the Fernandez presidency in general. This combination of factors represents a significant internal security threat for Argentina, which is arguably more substantive than the country's tense relationship with the UK over ownership the Falkland Islands.

Political tensions have again arisen between the UK and Argentina over control of the British Overseas Territory of the Falkland Islands in the first half of 2012. The most recent ructions have been caused by the confluence of the approaching 30th anniversary of the Falklands War; the posting of second-in-line to the British throne Prince William to the islands as a helicopter pilot; and continued drilling for oil off the coast of the Falklands under UK exploration licences. There could yet be a further increase in tensions as well as additional attempts by Argentina to rally Latin American support for their claim, although at this point a return to hostilities is unlikely.

In procurement developments, the government signed agreements regarding the production of radar and avionics for a number of aircraft in September 2012. Agreements were signed between FAdeA, National Institute of Industrial Technology (INTI) and INVAP, in line with the government's bid to support and sustain domestic technological capacity in production. The government reiterated its support for developing the country's indigenous productive ability, arguing that Argentina's national defence could only be ensured by domestic production of military assets.

Argentina's defence spending is likely to expand by 6.95% to ARS16.2bn (US$3.53bn) in 2012, marking 0.71% of GDP (in local currency). Although BMI sees defence expenditure expanding to ARS34.48bn (US$4.69bn) by 2021, spending is not likely to keep abreast of economic growth.

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