By Teresa Rivas
Earlier this week, Argentina announced subsidy cuts for wholesale distributors through the end of April, an expected part of its push for fiscal consolidation, Teneo Intelligence’s Nicholas Watson writes.
Fabrice Coffrini/Agence France-Presse/Getty Images
While exact prices increases aren’t yet clear, they could be fairly substantial for some residents; yet they are so low now that new tariffs will still be below generating costs, Watson explains. He writes that another round of increases will likely take place after this structure expires in three months, but keeping inflation down is a major government concern, and could slow future cuts.
Moreover, though President Mauricio Macri has made plenty of changes early in his administration, political conditions are also poised to become more difficult next month, which explains the need to make moves now.
More detail from Watson’s note:
President Mauricio Macri retains the political latitude to push ahead with his gradual fiscal reduction plan. A recent poll put the president’s approval rating at 71%. Macri’s recent trip to Davos was a success, with Argentina widely seen as a relative bright spot amid an otherwise gloomy panorama for EMs; Macri brought back a major investment pledge from Coca-Cola, and has talked of up to USD 20bn in investment inflows in 2016. The government will also look to introduce palliative measures when congressional sessions start on 1 March; these include measures to reduce VAT on basic goods and lower the threshold at which income tax becomes payable. These measures will be essential if inflation is seen to jump significantly in the early part of this year.
However, the political window for adjustments will not remain open for long. The political waters are set to become choppier from late-February. First, collective salary negotiations with the Buenos Aires provincial teachers’ union are set to begin in mid-February; these negotiations usually set a marker for other union wage talks extending into March. The inflationary effects of December’s devaluation and the subsidy cuts will make this year’s wage talks challenging for the government. Second, former president Cristina Fernandez (2007-15) is planning to launch her new foundation in late-February; the launch event will mark Fernandez’s re-entry into the political fray as she attempts to position herself as the strongest opponent to Macri within the broad Peronist movement. Although the Peronists are split, which offers Macri an opportunity to leverage divisions for political gain, Fernandez remains a formidable adversary.
The Global X MSCI Argentina exchange-traded fund (ARGT) is climbing 1.2% in recent trading. Among utilities with ADRs, Empresa Distribuidora y Comercializadora Norte S.A. (EDN) is up 1.6% and Pampa Energia (PAM) is up 2%.
See related posts “Argentina: Will Oil, Gas Fracking Bring YPF 50% Upside?,” “Argentina: A Holdout Bond Deal By June?,” “Why Petrobras Argentina YPF Zig When Oil Prices Zag,” and “Argentina: Crop Quotas Quashed; Auto Tax Cuts; Macri Show Of Strength?”
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