August 2018 – @alvaroriosroca – Argentina is once again in the eye of the economic storm. As they would say in the country there is a great “quilombo” (mess) and that it is complex to decipher and explain in a few lines. We will try to unravel the energetic labyrinth that President Macri inherited and in which he is still immersed, without finding an outlet that agrees to users and protagonists in the value chain.
Macri came to the government with great statements: Lower inflation that hovered around 30-40%, get out of the exchange trap so that capital flows freely and generate investment, transparency in administration, lower the fiscal deficit that hovered around 30 billions USD annually and some others. One of the issues to achieve the statements, was to try to leave the complex energy labyrinth in which the country was. Let’s Recall that between 2013 and 2014 the energy trade deficit was around 15 billions USD per year.
Argentina, due to lack of exploration, became a major importer of natural gas from Bolivia and LNG. While LNG was costly due to market effects, overpricing and corruption caused Argentina to pay the highest prices on the planet. It also had to import petroleum derivatives (naphtha and fuel oil) and electricity at spot prices.
These imports strongly impacted the trade deficit due to the flight of dollars. It was necessary to remove subsidies and recompose rates, mainly in natural gas and electricity and cover costs in accordance with the regulation. The removal of subsidies would reduce the fiscal deficit and also increase production of gas and electricity generation, mainly under private investment and thus be able to reduce imports and the flight of dollars.
Thus, once the exchange rate was surpassed, the price of oil was freed so that they traded in the market, subsidies were reduced by 75% to gas and electricity and the rates were adjusted with 1 USD/20 pesos. The production of natural gas with prices was stimulated (7.50 USD / MMBTU in 2018, decreasing 0.50 USD / MMBTU per year until 2021) so that the gas produced competes with Bolivian gas and LNG.
Investors began to take an interest in Argentina. Shail in Vaca Muerta began to raise production, companies came to compete with renewable energies (with State guarantees) and the transporters and distributors of gas and electricity with better rates began to maintain and expand the infrastructure. Argentina seemed like a charm.
However, Macri’s government fails to control inflation, or align it with the exchange rate that it maintained fictitious with dollars generated with Treasury Securities called LEBAC, with high interest rates (launch capital). In April of 2018 it is decided to record a tax on these capitals and these begin to leave and the dollar shoots up to almost 1 USD / 30 pesos. Argentina resorts to the IMF which facilitates up to 50 billion USD so that the dreaded corralito (bank freeze) of 2001 does not take place.
The IMF conditions the delivery to negotiated targets such as the reduction of the primary deficit (2018 in 2.7% of GDP and 1.3% in 2019) for a primary fiscal balance in 2020 and a surplus of 0.5% in 2021.
To reduce inflation, the IMF calls for a floating exchange rate of the currency and autonomy of the Central Bank. With rates set at 1 USD / 20 pesos, investors require updates to continue investing and are surely reviewing their budgets. The Parliament is backing the progress in taking part of the subsidies that had been achieved and this raises the fiscal deficit.
Through YPF (state company with bulky debt) it is possible not to raise prices of oil derivatives. The incentives to the production of natural gas are being reviewed, the price of CAMMESA was reduced to electric generators from 5.20 USD / MMBTU to 4.20 USD / MMBTU and the investments to produce more gas could be stopped. The Minister of Energy has just requested a new electricity tariff increase to improve the fiscal deficit by around 17 billions USD per year and we will see how it goes. Finally, it was decided not to carry out Round 3 for renewable energy that was held for October. There is much more, but space limits us.
There are many questions and nobody knows where all this will end. Users as producers have the feeling that everything is emergency and do not respond to a plan that is sustainable over time. The Argentine energetic maze continues and it is not known when (or who) will be able to leave it.
* Former Hydrocarbons Minister of Bolivia and Current Managing Partner of Gas Energy Latin America.