Argentina More than Doubles Power Prices to Stem Widening Budget Deficit

Argentina is more than doubling electricity rates for the biggest commercial users as President Cristina Fernandez de Kirchner seeks to stem a widening budget deficit without a return to international debt markets.

Argentine power rates will more than double for some industries beginning next month as the government reduces subsidies, according to a statement in today’s official gazette. Power rates during peak hours will increase to 254 pesos ($60) per megawatt hour from 111 pesos.

Fernandez, who was re-elected in a landslide vote on Oct. 23, is seeking to stem a widening budget deficit by cutting subsidies that will swell to about 72 billion pesos this year, or about 4 percent of gross domestic product, according to Moody’s Investors Service. Power generators in Argentina include Pampa Energia SA (PAMP), AES Corp. and Petrobras Argentina SA. (PESA)

“The announcement is positive, it shows that the government is moving toward a normalization of the sector,” said Maria Eugenia Fernandez Pouchan, a utilities analyst with Banco Santander SA in Buenos Aires. “This will help the nation to reduce spending. The next step would be for additional rate increases so that it’s not just savings for the government, but also gains for companies.”

Photographer: Juan Mabromata/AFP/Getty Images

Argentine President Cristina Fernandez de Kirchner. Close

Argentine President Cristina Fernandez de Kirchner.

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Photographer: Juan Mabromata/AFP/Getty Images

Argentine President Cristina Fernandez de Kirchner.

The cost to generate electricity over the past year was 320 pesos per megawatt hour, the statement said.

Pampa Energia shares rose 1.8 percent this morning in Buenos Aires to 2.32 pesos at 9:52 a.m. New York time. Petrobras Argentina climbed 1.6 percent to 6.4 pesos.

Widening Deficit

South America’s second-biggest economy, which has been blocked from international credit markets since its 2001 default on $95 billion of bonds, has posted a fiscal deficit every month this year since March, totaling 5.3 billion pesos through September. Expenditures surged 42 percent to 51.2 billion pesos in September from a year earlier, while revenue rose 31 percent to 51.6 billion pesos, according to the Economy Ministry.

The country’s budget deficit almost doubled to 1.9 billion pesos ($450 million) in September from 1 billion pesos in August as the government ramped up spending on public works and salaries ahead of the national elections.

Price Caps

Increases in electricity, natural gas and oil tariffs have been restricted since 2002, when then-President Eduardo Duhalde imposed price caps amid Argentina’s worst recession on record.

The caps prompted foreign utilities including Berkshire, U.K.-based BG Group Plc and France’s GDF Suez to leave the country or close local offices. Metrogas SA (METR), the country’s largest gas distributor, filed for bankruptcy in 2010, citing the restrictions.

“The government didn’t have much choice, electricity companies couldn’t continue operating if the previous tariffs remained frozen,” said Juan Pablo Fuentes, a Latin American economist at Moody’s in West Chester, Pennsylvania. “There’s still a lot more to correct. The capital controls measures are still worrying.”

Estimated Savings

Subsidy cuts will affect commercial users including banks, insurance companies, casinos, airport operators, mobile phone companies and miners, Planning Minister Julio De Vido said Nov. 2. Eliminating the subsidies will save the government 600 million pesos initially, he added.

Airport operator Aeropuertos Argentina 2000 SA said it isn’t considering raising fees after the cost increases take effect, spokesman Julio Scaramella said in a phone interview today.

Tariffs will rise to 245 pesos per megawatt hour in the periods of least usage. All tariffs rose by 143 pesos from prices fixed in 2009, according to the resolution.

Fernandez, 58, has moved to clamp down on accelerating capital flight and an erosion in public finances in the three weeks after her re-election. She ordered energy and mining companies to repatriate future export revenue, stepped up oversight of foreign exchange purchases and told insurance companies to bring their investments back to Argentina.

Gas Costs

Argentina will also increase gas rates for commercial users starting in December by at least 52 percent, newspaper El Cronista Comercial reported, citing a resolution by the national energy regulator, known as Enargas.

Even if today’s measure is “undoubtedly” a step in the right direction, it doesn’t solve the government’s fiscal imbalance, said Siobhan Morden, the head of Latin American strategy at RBS Securities Inc. The move may exacerbate annual inflation that economists estimate is about 24 percent, the highest in the world among major economies after Venezuela, she said.

“I just don’t know whether this administration has the political resolve to really confront this problem,” Morden said. “Frozen tariffs for years, a huge fiscal burden at 4 percent of GDP and resolving these distortions will have a short-term cost on higher inflation and lower growth.”

To contact the reporter on this story: Camila Russo in Buenos Aires at crusso15@bloomberg.net.

To contact the editors responsible for this story: David Papadopoulos at papadopoulos@bloomberg.net; Dale Crofts at dcrofts@bloomberg.net.

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