Raised utilities costs to help Argentina tackle its fiscal deficit

One of President Mauricio Macri’s major campaign promises in 2015 was to rein in the government’s ballooning fiscal deficit by reducing costly electricity and gas subsidies. Prices that had been kept artificially low since 2002, coupled with the steady depreciation of the peso, caused many energy producers to close up shop. In response, the current administration’s progressive subsidy cuts have seen gas, electricity and water prices increase by 1200%, 1600% and 550%, respectively, between end-2015 and June 2018.

Although a normalisation of these prices closer to market levels has been a boon to the energy sector – enticing foreign investment back for the first time in decades – it has come at a cost to the current administration’s popularity. The political opposition has therefore increased pressure in 2018 and continues to try to block Macri’s economic reform agenda. With the next presidential election just over a year away in October 2019, utility subsidy cuts are likely to be a major focal point of campaigning going forward.

Subsidy Spending

A record fiscal deficit along with floundering gas and electricity production was inherited from former president Cristina Fernández de Kirchner and her husband, Néstor Kirchner, who separately governed Argentina from 2003 to 2015. Utilities subsidies were initially introduced in 2002 during a time of economic crisis, but the Kirchners barely raised them in subsequent years as part of their populist policies. Argentines thus paid a fraction of what their regional neighbours did for gas and electricity for over a decade, but the below-market prices led to an exodus of power producers. As a result, gas production fell from a 15% surplus in 2001 to a 25% deficit in 2015. Meanwhile, energy subsidies increased from 1.5% of total government spending in 2005 to 12.3% in 2014. When President Macri took office in December 2015, the government had a $16bn subsidies bill.

Progress is being made, however, with cuts to subsidies having already saved the government more than $10bn between 2016 and mid-2018. Investment in the energy sector has also begun to rebound, centred around the Vaca Muerta shale gas deposit (see analysis). However, for most Argentines, the subsidy cuts have taken a significant toll on household budgets and could not have come at a worse time. Sky-high inflation, record interest rates and a weakening peso have left the economy facing a possible recession.

Firm Opposition

From the outset, civil society groups, unions and the political opposition have objected to President Macri’s subsidy cuts and wider economic reform agenda with regular country-wide labour strikes and counter-legislative proposals. In May 2018, for instance, the opposition passed a bill in Congress to lower utilities prices back to November 2017 levels. The measure was subsequently passed in the Senate where Cristina Fernández de Kirchner, now a senator, led the charge against Macri’s administration. President Macri objected to the bill, warning that lowering prices would cost the government $3.9bn at time when it is seeking aid from the IMF. Although he ultimately vetoed the bill using his executive powers, opposition groups continue to question the constitutionality of the subsidy revisions.

PUSHING AHEAD

Despite the political costs of the government’s economic reform agenda – with President Macri’s approval rating hovering at around 35% as of May 2018 – his administration has vowed to continue cutting electricity and gas subsidies until at least the end of 2019 to meet its targets to reduce the fiscal deficit. In an effort to allay investor concerns over shifting legislation, the administration is holding its ground and looking to increased investment in the gas industry to help revive the economy. Javier Iguacel, who was appointed the minister of energy and mines in June 2018 following a Cabinet reshuffle, has reiterated the government’s commitment to a free market for energy producers. In early July Iguacel announced that further corrections are scheduled for the coming months.