Argentina Cuts Utility Subsidies as Fiscal Deficit Swells

Argentina reduced government subsidies on natural gas and water by an average 20 percent in a bid to narrow the largest fiscal deficit in more than a decade.

The government could save as much as 13 billion pesos ($1.6 billion) and will use proceeds to cover utility company costs and finance social spending, Economy Minister Axel Kicillof and Planning Minister Julio De Vido said today at a press conference in Buenos Aires. The cuts won’t apply to industrial users.

President Cristina Fernandez de Kirchner has boosted social spending since taking office in 2007 and left utility rates largely unchanged amid average annual inflation of about 25 percent, straining the finances of power distribution companies and leading to periodic blackouts. Argentina, which has subsidized utilities since 2003, wants to cut aid from about 5 percent of gross domestic product to 2 percent of GDP and make higher income earners pay more for their utilities, Cabinet Chief Jorge Capitanich said March 12.

“In 2003 the need for subsidies was clear,” Kicillof said in reference to the period after the nation’s $95 billion default and economic crisis. “Argentina isn’t ending subsidies, just redistributing them.”

For Argentine households, the increase in their gas bill may rise as much as 161 percent for the biggest consumers and 306 percent for water bills, according to a presentation distributed by the Planning Ministry.

“We will keep subsidies for industrial clients so they can keep producing for the benefit of the country,” President Fernandez said today in a televised national address.

Bond Rally

Families receiving welfare aid from the state and people with disabilities will be exempted from the subsidy cuts.

The measures were well received by bond investors who pushed the price on government debt up the most in six weeks. The price on local law dollar bonds due 2017 rose 1.56 cent to 88.80 cents on the dollar, the biggest jump since Feb. 14 and highest price since Jan. 7.

Since September, Argentina has settled arbitration disputes at the World Bank, revamped its economic data at the request of the International Monetary Fund, begun negotiations with the Paris Club of creditors and agreed to compensate Repsol SA for the expropriation of its stake in YPF SA as the nation looks to regain access to the international bond market.

Argentine dollar bonds have gained 5.1 percent in March compared with an average 0.7 percent gain for emerging market debt, according to JPMorgan Chase & Co.

The government spent 134 billion pesos on subsidies in 2013, a 34 percent increase from a year earlier, La Nacion reported today. Of that total, 81 billion pesos was for energy, the Buenos Aires-based newspaper said.

Utility Shares

The subsidy cuts will be made in three stages in April, June and August. The maximum subsidy reduction for residential gas bills will be 80 percent, Kicillof said. The amount of reduction will depend on whether consumers pare usage and in which neighborhoods they live.

The government didn’t unveil subsidy cuts for power companies today.

Natural-gas distributor Transportadora de Gas del Sur SA’s American depositary receipts rose 9.7 percent to close at $2.26 in New York, the highest since Feb. 21. ADRs for Pampa Energia SA, a TGS shareholder, gained 10.2 percent to $5.60.

Argentina posted a record energy deficit last year of $6.1 billion as domestic oil and gas output declines and imports of liquefied natural gas surge. The nation’s trade surplus narrowed 90 percent in the first two months of 2014 from a year earlier.

‘Partial Reduction’

South America’s second-largest economy after Brazil posted its largest primary budget deficit in 21 years last year and the widest current account deficit since 2000 as debt payments and energy imports drained reserves by about $12 billion to a seven-year low.

“This is a partial reduction in subsidies but we’re not abandoning our subsidy policy, which has allowed people to have extra disposable income and stoked growth,” Kicillof said. “This government will never make all Argentines pay international prices for public services.”

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