Latin America: Supreme Court deals blow to Argentina’s recovery plan

By:
Rob Dwyer
Published on:

Prat-Gay warns on negative impact to FDI flows; cutting energy subsidies ‘the biggest bomb’ from past administration.

Alfonso Prat-Gay sombre-R-600
Argentine finance minister Alfonso Prat-Gay

The decision on Thursday by Argentina’s Supreme Court to repeal the Macri administration’s changes to gas tariffs will come as a double blow to the country’s recovery plan, according to finance minister Alfonso Prat-Gay.

Speaking with Euromoney the day before the Supreme Court’s ruling, Prat-Gay warned of the damage that would be done to his plans to tackle the country’s fiscal deficit – as well as to Argentina’s reputation as jurisdiction for foreign direct investment.

"I see this as a test of the judiciary system and everyone should be watching," he said. "We are watching – the rest of the world is watching – and this decision will have obvious implications for foreign and local investment."

Prat-Gay drew a parallel between the court’s decision and the vote in Congress in March, in which the government was able to get a majority in favour of resolving the country’s debt issue with the holdouts.

"The holdout bill was a key test for the national congress – to see if it was changing alongside the population," he said. "I think this is a similar test for the judiciary. Let’s see whether we are all for a new Argentina – the rule of law and a judicial system that rules on the facts.

"People who are looking at investing in Argentina remember Argentine history and they want to know if the country is truly reliable in the rule of law. It obviously wouldn’t be a good sign for investment if something as critical as the price of energy is outside the control of the executive branch."

Momentous

When asked if he was making the ruling sound momentous, he responded: "Well, it is. It’s a lot of money, and it’s money that we designed to come from people who can afford it."

Prat-Gay argued that, while the increases were huge in percentage terms – the limit was 400% – the nominal increase was reasonable, pointing to the fact 80% of consumers had already paid their increased bills as proof of the affordability of the adjustment.

Prat-Gay has won plaudits for the way he has managed to tackle the toxic economic inheritance from the previous administration – by floating the currency, settling with the holdouts, introducing fiscal and monetary orthodoxy, and re-introducing credibility in the national statistics.

Of all these challenges – or 'bombs’ as they are sometimes referred – he said removing the subsidies on energy and transport was possibly the most difficult.

"In terms of size this is probably the biggest bomb," he said. "In terms of urgency, probably not, but in terms of size … Bear in mind that last year the last government spent four points of GDP subsidizing energy and transport for every single Argentinean."

Prat-Gay’s comments came before the ruling was made, and despite the decision being painted as a defeat for Mauricio Macri’s administration, there is nuance.

The court mandated that residential tariffs must be reversed to pre-adjustment levels until public hearings are held to discuss any potential adjustments. However, the court ruling does not affect tariff adjustments on the corporate or industrial sectors, which are recipients of the largest share of energy subsidies.

The court insisted the government had a duty to hold public consultation on the rate increases. The government responded by saying it would do so soon, but the delay will clearly damage the government’s fiscal plans.

Mauro_Roca-160x186

Mauro Roca,
Goldman Sachs

Mauro Roca, Argentina analyst at Goldman Sachs, estimates the fiscal impact at between $1 billion and $1.2 billion, which "does not significantly alter fiscal dynamics".

However, Roca points to the risk that this could be applied to electricity and also lead to small businesses seeking to have their tariffs similarly reduced.

Extension

Meanwhile, a report from Itaú suggests the extension of the court’s decision to electricity tariffs "is likely" which would lead to a fiscal cost of $1.85 billion.

Itaú also argues that while the government would be free to readjust tariffs after the hearings, "the political cost do so increased substantially, especially considering the government’s willingness to maintain its high popularity in the run up to the midterm elections next year. So the Supreme Court decision may lead to an even slower fiscal consolidation than currently indicated by the government."

However, comments made by Prat-Gay in anticipation of the ruling suggest the government will be aggressive in pursuing what is a key plank of its economic reforms.

When asked if there was a Plan B to tariff reforms, he was unequivocal. "There is no Plan B possible," he said. "If the judiciary system tells us we can’t do [the tariff changes] without having to do this and that, then that’s what we’ll have to do.

"But whether you look at electricity or gas, we are still way below the marginal cost [even if the government’s proposed tariffs had stood]. And yet we still hit this constraint. But if you are not willing to spend political capital in the first six months…"

Roca says the court’s ruling will "ultimately … result in growing financing needs for this year" but that doesn’t necessarily mean new international debt transactions.

The government has just introduced a tax amnesty that is designed to drive government finances through either taxes or new bonds; individuals get tax incentives to buy new domestic debentures.

Bank of America Merrill Lynch believes the amnesty will be "extremely successful" and expects $35 billion to be declared – with upside risk – which will help repair the fiscal position as the government has budgeted for a conservative figure of $20 billion.