Argentina Moves to Cut Subsidies as Budget Deficit Widens

Argentine President Cristina Fernandez de Kirchner is cutting utility subsidies to commercial users in a bid to stem a widening budget deficit in South America’s second-biggest economy.

“Nobody should receive a subsidy that he doesn’t need,” Planning Minister Julio De Vido, who oversees utilities, energy and transportation, said in a press conference in Buenos Aires with Economy Minister and Vice President-elect Amado Boudou.

Utility stocks rose as the announcement fueled speculation that a government cap on rates in effect for a decade may be loosened, said Juan Jose Vazquez, an analyst at Bull Market Brokers SA in Buenos Aires. Cia. de Transporte de Energia Electrica en Alta Tension Transener SA, the country’s main power transporter, rose 1.4 percent at the close in Buenos Aires after gaining 9.4 percent earlier. Pampa Energia SA, Argentina’s largest power company, advanced 2.1 percent and earlier rose 6.7 percent.

De Vido said the government isn’t weighing an increase in utility tariffs.

Fernandez, 58, has moved to clamp down on accelerating capital flight and an erosion in public finances since her landslide re-election on Oct. 23. 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 vote.

Subsidy Commission

The budget surplus before interest payments, which Fernandez calls a “pillar” of her administration’s policies, tumbled 86 percent last month to 449 million pesos.

In addition to the cuts announced today, the government will create a commission to study additional changes to the subsidy regimen, according to a resolution distributed at the news conference that cited turbulence in global financial markets and the need to guarantee the “competitiveness” of Argentina’s economy.

“They know they have to increase tariffs,” Boris Segura, a Latin America analyst at Nomura Securities International, said in an e-mailed response to questions. “Otherwise, people won’t control consumption and they won’t be able to bring down the amount of subsidies granted.” Segura said utility subsidies account for about 4 percent of gross domestic product.

The subsidy cuts may “add pressure” to annual inflation economists estimate at 24 percent, near the fastest in the world after Venezuela, Alberto Ramos, a Latin America economist at Goldman Sachs Group Inc. in New York said in a report. Nevertheless, the move is a “step in the right direction,” he added.

Currency Controls

The announcement comes less a week after Fernandez announced tighter oversight of the foreign exchange market and ordered energy and mining companies to repatriate export revenue after capital flight estimated at $3 billion per month drained central bank reserves.

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

Yields on bonds sold by Empresa Distribuidora Norte SA, Argentina’s biggest electricity distributor fell 8 basis points to 12.89 percent for debt maturing in 2022.

The government has subsidized utility companies since 2002 as it kept tariffs capped, following a financial crisis that culminated in a default on $95 billion of bonds a decade ago. BG Plc unit Metrogas SA, the country’s largest gas distributor, filed for bankruptcy in 2010, citing the tariff restrictions.

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