Argentina’s Supreme Court Orders Rollback on Gas Subsidies

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  • Court orders consultations before gas prices can increase
  • Government looks to narrow largest budget gap in two decades

Argentine President Mauricio Macri’s plans to close the largest fiscal deficit in two decades and revitalize a sagging energy sector were dealt a blow Thursday after the Supreme Court upheld a lower court ruling on gas tariffs. Gas company shares plunged.

The Supreme Court ordered the government to reinstate subsidies, reversing gas price increases for residential clients back to March 31 levels until it carries out public hearings to discuss how the tariffs are calculated, according to a statement.

The government will obey the ruling and plans to hold hearings within three weeks, cabinet chief Marcos Pena told reporters in Buenos Aires. The amount of money involved in rolling back the increases is about 25 percent of the subsidy cuts, he said. Argentina will cut public spending plans to make sure it meets its fiscal deficit target, he said.

“The decisions adopted by the executive violate the right to participation by consumers in the form of public hearings in the revision of tariffs,” the four judges said in a statement.

The subsidies on energy tariffs, which were costing the government about 1.5 percent of gross domestic product, have become one of the most contentious issues of Macri’s eight months in office after an unusually cold winter sent some consumers’ energy bills soaring more than 500 percent. The ruling is a setback for Macri since it will cost the government about 80 billion pesos ($5.4 billion), said Jorge Piedrahita, chief executive officer at Torino Capital LLC.

“Beyond the numbers, this has other implications in that it puts the government off-target, delays the arrival of some investment because of increased uncertainty and delays the increases until next year, which is an electoral year,” Piedrahita said by phone from New York. “The government could get punished at the ballot box.”

Ending Subsidies

Macri came into power in December promising to open up the country’s economy by lifting currency controls, trade barriers and reducing subsidies on energy and transport that cost the government $51 billion over 13 years. The subsidies were introduced in 2002 as the previous administration sought to revitalize the economy by cutting consumers’ bills and lowering production costs for industry.

The ruling surprised the government by ordering it to include the discussion of wellhead prices in the hearings alongside transport and distribution costs. While the court said that the government has the right to apply market prices for gas, it pointed out that the government has been regulating those prices.

Macri faces mid-term congressional elections next year. He currently governs without a majority in either chamber of Congress.

Shares for Metrogas, Argentina’s largest gas distributor, slumped on the ruling, falling as much as 7.7 percent to 7.20 pesos, the largest intraday fall since March 30. Pampa Energia SA, owner of gas producer Petrolera Pampa SA, fell 4.2 percent to $25.35 in New York trading.

‘Move Forward’

Energy Ministry spokesman Alejandro Bianchi didn’t reply to calls seeking comment. Energy and Mining Minister Juan Jose Aranguren will hold a news conference at 2:15 p.m. alongside Cabinet Chief Marcos Pena.

The damage shouldn’t be too dramatic for the government, said Juan Cruz Diaz, managing director at the Cefeidas Group, a regulatory risk advisory firm based in Buenos Aires.

“The government needs to do the hearings, but it will still move forward with the increases,” Diaz said by phone from Buenos Aires.

Energy and Mining Minister Aranguren has said prices now need to rise to boost investment by energy companies. Argentina’s Vaca Muerta field is the world’s second-largest deposit of shale gas and the fourth-largest deposit of shale oil, yet the country currently imports 25 percent of the gas it consumes.

“We do have a Plan B, but we believe Plan A would be best for the people,” Aranguren said Tuesday, without providing details.