A sudden change of economy minister in Argentina that gives the leftist faction of the ruling Frente de Todos coalition a grip on the country’s finances poses a risk to a key part of its International Monetary Fund agreement – weaning the population off energy subsidies.
Silvina Batakis was sworn-in this week after Martín Guzmán, an economic moderate who negotiated the IMF deal earlier this year, resigned in part because government officials appointed by Vice-President Cristina Fernández de Kirchner blocked him from implementing energy policy as he wished. Batakis is an ally of Fernández de Kirchner, a long-time antagonist of global markets and the IMF.
To be sure, Batakis said in a radio interview Tuesday that she’d push ahead with reducing energy subsidies as she tries to calm investors whose gut reaction to her arrival was to sell Argentine assets. Argentina’s bonds continued falling on Wednesday, with benchmark sovereign notes slipping 0.4 cent on the dollar in early trading to around 20 cents.
Several analysts insisted that a question mark hangs over Batakis’ commitment to the spending cuts penned by Guzmán and the IMF. In the same interview, she warned that some targets under the IMF programme would have to change. This year, the programme aims to trim energy subsidies by 0.6 percent of gross domestic product.
“There’ll be less willingness to follow through with subsidy cuts, which will probably stop them from becoming the fiscal anchor that Guzmán wanted,” said Lucas Caldi, a credit analyst at Portfolio Personal Inversiones in Buenos Aires.
Billions of dollars a year in power and natural gas subsidies are one of the drivers of Argentina’s fiscal deficit, leading to loose monetary policy and imbalances like inflation. But reducing them is a delicate dance for a coalition that’s in power thanks largely to voters seeking a return to the generous welfare state of the 2003-2015 era, when Fernández de Kirchner and her late husband governed.
Guzmán oversaw hikes to energy bills this year and last after prices had been frozen for two years. But he was struggling to win support from Fernández de Kirchner loyalists for more increases. When consumers pay more, the government pays less. In addition, Argentina is yet to implement a so-called “segmentation,” a politically-sensitive policy that’d see payments to some middle-class families scaled back.
“Guzmán defended segmentation tooth and nail, but now an uncertainty arises,” Caldi said.
Government energy spending has been soaring recently as Argentina imports expensive fuel cargoes to meet winter demand. Subsidies for the 12 months through June were US$13.5 billion, way up from the more than US$7 billion in the previous 12-month period, said Julián Rojo, an analyst at the General Mosconi think tank in Buenos Aires. In May, consumers paid just 36 percent of the cost of producing power, which accounts for most of the subsidies, down from 42 percent in March and 39 percent in April, according to Portfolio.
Spending could grow further if Batakis opts to devalue the peso but shields voters already grappling with 61 percent inflation by applying slow – or no – increases to energy bills. That’s because much of Argentina’s energy production pricing is linked to the dollar. The difference between the official, controlled foreign exchange rate and weaker market rates is widening, a trend that often augurs a devaluation.
“The gap in the exchange rates that’s opening up is unacceptable,” making a devaluation likely, said Nicolás Gadano, an Argentine consultant and university professor who specialises in the intersection of economics and energy. “That could produce a situation where consumers cover even less of the price of energy.”
Still, investors will have to wait to see Batakis’ true colours. “Batakis is a relatively recent convert to Kirchnerismo and was more of a ‘rational heterodox’ in the past,” Nicholas Watson, a Latin America analyst for Teneo, wrote in a note. “Just how rational and how heterodox she is now is will become clear in the coming week.”
by Jonathan Gilbert, Bloomberg