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Argentina’s Economic Outlook
Temporary equilibria: Mild recession and high inflation ahead
Juan Luis Bour
Council of the Americas
New York City, May 9th, 2014
Manufacturing and Construction: 3 quarters of (sa) falls.
Quarter
Quarter to quarter % change (sa)
Manufacturing
Construction
INDEC (EMI) FIEL (IPI)
Q3 2013
-1.6%
-0.9%
Q4 2013
-2.0%
-2.0%
Q1 2014
-0.6%
-2.7%
INDEC (ISAC)
-1.1%
-1.2%
-2.6%
GDP: fall (sa) since Q4 2013.
(I) The demand side. Net exports (no growth contribution, except in 2014 because of major import fall)
Investment: cyclical downturns in Equipment and Construction.
Private consumption: from Consumption-led growth to adjustment.
(II) The supply side
CONTRIBUTIONS TO GROWTH (percentage points, GDP at factor cost)
Agriculture Manufacturing Construction Commerce, Hotels
Financial
Other services
2010
1.69
1.31
0.41
1.87
0.35
2.95
2011
0.20
0.65
0.50
0.97
1.13
3.11
2012
-0.73
-0.09
-0.18
-0.16
1.03
1.27
2013
0.37
0.09
0.06
0.25
0.54
1.53
2014
0.42
-0.83
-0.26
-0.53
0.15
0.36
(A) 2010-13
0.38
0.49
0.20
0.73
0.76
2.22
(B) 2014 - (A)
0.03
-1.32
-0.46
-1.26
-0.62
-1.85
•No major contributions to growth since 2012 from Manufacturing, Construction and
Commerce.
•Most sectors with a lower contribution to growth than average previous 4 years, except
Agriculture.
•The main buffers in 2014, other than Agriculture: Transport &Communications, Financial
sector.
The statistical nightmare
Before
After
Difference
Observ
Exports (year)
83.03
81.66
-1.37
Billion USD
Imports (year)
74.00
73.66
-0.34
Billion USD
Trade Bal (year)
9.03
8.00
-1.03
Billion USD
CPI (Jan-March)
2.37
9.97
320.7%
% change
Supermarkets (Jan-March)
0.83
11.21
1258.2%
% change
4.9
3.0
-1.9
pp
TRADE (billion USD)
INFLATION (accumulated)
GDP
EMAE/GDP (year)
What’s behind trade figures? Exports stagnated since late 2010 – Now they fall
Inflation close to 40% (yoy) – Foods & Beverages >40%
Short term deceleration – Logistic curve: temporary stability around the new (higher) level
The antiinflation program: another temporary anchor (the ER)
Last year we warned on wage deceleration: impact on the consumption-led growth strategy.
This year: wages as nominal anchor. The consumption boom is over.
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Undoing subsidies without regulatory reform
Santiago Urbiztondo
Council of the Americas
New York City, May 9th, 2014
Public Utilities’ Context
• Since 2002, regulatory paradigm increasingly
diverged from any broad “best-practice” ideal:
• Confusion of public and private roles
• Direct & discriminatory price regulation in competitive
segments (upstream)
• Short-run (myopic) perspective, promoting inefficient
operation / investment through cost-plus tariff / subsidy
adjustments, discriminating old and new investments
• Disregard to transparency, institutional credibility,
consistent contracts, technical analysis, etc.
Public Utilities’ Context
• Consequences:
1. Substantial reduction of (real) tariffs, covering a fraction
of total (long-run) costs
2. Excessive consumption growth, but contraction of
investments, exhausting existing capacity
3. Complications: exploding subsidies, poorly focalized, with
deteriorating coverage, quality and cost
4. Perceived end of period: magnitude and composition of
subsidies (energy imports) would require a major
correction, reducing subsidies and increasing tariffs (and
changing new paradigm)
Overall size & evolution of subsidies
In 2013: subsidies to public utilities added USD 22 billions, or 4.4% of GDP
•
CAMMESA & ENARSA: from 55% of total in 2009 to 73% in 2013
2014: First 2 moths explosive: total subsidies increased 13% in USD, approaching
5.7% of GDP without subsidy cuts
Subsidies to public utilities (in MM USD and as % of GDP), 1989-2014p
Source: Own elaboration based on SIGEP (1989-1995, MECON (1996-2003) and ASAP (2004-2014): Until 2003 it includes YPF, GE,
AyEE, Hidronor, AA, FFAA, ELMA, ENTEL, ENCOTEL and OSN. Since 2004 it includes subsidies to public and private firms in the
energy, transportation and W&S sectors. 2014p based on first 2 months only (annual variation), and USD GDP growth is assumed at -13%
.
25.000
6%
5%
20.000
4%
15.000
3%
10.000
2%
5.000
1%
-
0%
US$ (MM)
% GDP (right axis)
Recent attempts to attack subsidies
1) New incentives (higher prices and promises) to YPF and other
hydrocarbon producers since 2012, with no major results yet
Evolution of gasoline and crude oil prices (average annual variation of USD values),
2005 - 2014 (months of march)
30%
3%
2%
25%
1%
20%
0%
15%
-1%
10%
-2%
5%
-3%
0%
-4%
-5%
Recovered prices of crude oil and
gasoline before YPF’s expropriation
Stiff rise of new NG price since 2013 –
7.5 USD/MMBTU
YPF’s public profit function post-2012
(internalizing cost of subsidized energy)
→ relative price recovery….
-5%
2005-2009
2009-2011
Price of domestic crude
Price of gasoline - YPF
Price YPF/ Price Rest (right axis)
2011-2012
2012-2014
WTI
Price of gasoline - Rest
1.800
YPF's monthly production: 2001 - March 2014
Source: Own elaboration based on SE.
1.600
1.400
… certainly helped the “new YPF” to stop
its previous production fall
1.200
1.000
800
600
Natural Gas (MM m3)
Oil (1,000 m3)
Recent attempts to attack subsidies
1) New incentives (higher prices and promises) to YPF and other
hydrocarbon producers since 2012, with no major results yet
Production of oil and natural gas: Yoy variation, Total, YPF and Rest, 2004-I.2014
Source: Own elaboration based on SE.
10%
Not effective to stop total market fall
8%
Nor to induce higher investment effort (# of
exploration and development wells drilled)
6%
4%
2%
0%
-2%
-4%
-6%
-8%
-10%
Oil Total
NG Total
Oil YPF
Oil Rest
NG YPF
NG Rest
Vaca Muerta? Announced investments still
minor vis-à-vis previous industry investment
(5.2 billion USD in 2011). Substituting
conventional oil and NG?
Number of development wells drilled, oil and natural gas, 2005-2014*
Source: IAPG. * 2014 estimated with SE's aggregated data for first two months.
Number of exploration wells drilled, oil and natural gas, 2005-2014*
Source: IAPG. * 2014 estimated with SE's aggregated data for first two months.
300
180
160
250
140
200
120
100
150
80
100
60
40
50
20
0
0
Total
YPF
Rest
Total
YPF
Rest
Recent attempts to attack subsidies
2) AySA’s tariff hike (nominally 170% to 405% according to location
of user –high, medium and low neighborhoods) is significant, but
has a small impact on total subsidies and no effect on total costs
under current de facto cost-plus regime with endogenous subsidy
•
With average 310% nominal tariff increase, 35% inflation and 15% real
devaluation in 2014, AySA’s annual (post-august) subsidy falls 37% -USD
500 million– , or 2.3% of overall 2013 subsidies to public utilities
AySA's tariff and subsidy income, 2001 and 2006-2014* (in MM USD)
Source: Own elaboration based on AASA, ERAS and INDEC.
1.600
Total elimination of
subsidy to AySA would
still require 170%
additional tariff increases
(with 2014 assumed USD
costs)
1.400
1.200
1.000
800
600
400
200
0
2001
2006
2007
Total income
2008
2009
2010
Tariff income
2011
2012
Subsidy income
2013
2014*
Recent attempts to attack subsidies
3) Natural gas
a) 2013 subsidies through ENARSA of 5.7 billion US$, 50% directed to
residential (R) and commercial (C) users
b) April 2014: partial withdrawal of subsidies to R and C, through higher
wellhead prices, from +400% (<800 m3/year) to +900% (>1,800
m3/year), averaging 730% nominal AR$ increase (or 400% increase
of cost of NG as large R users pay charge for imported gas), to be
completed in August
c) Price hikes avoided if consumption falls 20% vis-à-vis previous year
(hikes halved if consumption falls 5% - 20%)
d) Effect on ENARSA’s deficit unknown, but 25% is maximum reduction
(as explicit subsidies informed to R users -1.0 billion USD- remain),
i.e., 1.5 billion USD (or 6.9 % of total 2013 subsidies)
e) Also, increases of T&D tariffs to same users (130% average, nominal
ARG$, same distribution, avoiding mechanism and timing)
f) 60% of NG exempted (industrial users, generators, Patagonia’s R&C)
Recent attempts to attack subsidies
3) NG: distortive upstream NG prices for residential users
•
Upstream NG prices (w/o Decree 2067) increased much more for large R
users, but % changes become more homogenous –+/- 380%– considering
final cost of NG (including estimated payments under Decree 2067/08)
Upstream NG price for Residential users, with and without Decree 2067/08's charges (USD/MMBTU)
Source: Own elaboration based on Resolutions ENARGAS 1982/11 and SE 226/14. Exchange rate 8 $/US$ in
March and 8.5 $/US$ in August.
6
5
4
3
2
1
R1
R21
R22
R23
March 2014, w/o Decree 2067
August 2014, w/o Decree 2067
R31
R32
R33
R34
March 2014, with Decree 2067
August 2014, with Decree 2067
Prom R*
Recent attempts to attack subsidies
3) NG: full-year effect of various changes on Discos’ R&C users
•
In USD, direct payment by NG users post-august 2014 would be 3% higher than
in 2001, and total cost of NG service provided by Discos 25% higher
•
Subsidy falling from 52% to 19% of total cost of R&C NG service
•
Still, USD T&D margins are 50% lower than in 2001, and upstream cost of NG is
70% lower than imports from Bolivia (10 USD/MMBTU)…
NG price and cost to users served by distribution companies, in USD per user/year, 1993-2014*
Source: Own elaboration based on ENARGAS and ASAP. * Year 2014 assumes 5% lower consumption, 70% higher
constant $ T&D margins, 490% higher real $ upstream price paid by Disco users (but no change in not subsidized portion
of Decree 2067/08) and 50% reduced constant $ subsidies (with 35% inflation and 15% real exchange rate devaluation).
1.000
60%
900
50%
800
700
40%
600
500
30%
400
20%
300
200
10%
100
0
0%
Net sales T&D
Cost of gas upstream
Subsidy to Disco users through ENARSA
Total cost
NG expenditure by "average Disco user"
Subsidy (as % of total cost, right axis)
Conclusions
1.
In 2014 the government finally recognized the inconsistency of its
regulatory paradigm: fiscal needs call for tariff hikes
2.
Yet, overall fiscal impact is estimated low (total subsidies fall 9%)
3.
Also, tariff hikes are ill-designed:
• High impact on R&C, but many high-consumption users exempted
• Highly distortive, increasing discrimination across users through price
signals (instead of fixed ARG$ breaks for a social tariff focus group)
• Unknown follow up: R’s USD T&D tariffs still 50% below 2001; cost of
wellhead NG at 3.1 USD/MMBTU for R still 70% below imported NG…
• Does not include overall restatement of incentives, contracts,
institutions, etc., to approach some form of “best practice”
4.
Beyond 2015, moving to cost-reflective prices and a more efficient
new regulatory paradigm will still be politically difficult (less than in
march), but it promises great efficiency (cost-reducing) rewards
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Fixing the Fiscal Deficit
Daniel Artana
Council of the Americas
New York City, May 9th, 2014
The problems at the end of 2013
• High Fiscal Deficit financed with money
emission and the use of Central Bank reserves
– High Inflation
• Appreciated Peso in real terms
• Pervasive distortions of relative prices
• Controls “fatigue”
The government “strategy” to fix the fisc
• Reduction in subsidies to energy: low fiscal
impact
• Reduction of transfers to provinces: Limited by
wage hikes for provincial employees
• Reduction of pensions and wages in real
terms: seems to be the source to compensate
the impact of the recession on tax collections
Federal Public Debt (% of GDP)
60
50
40
30
20
10
0
Net debt
Central Bank
Anses
Contingent in Fgn Currency
Contingent with pensioners
Federal Public Debt (% of GDP)
60
Lower than Brazil’s
Gross
50
40
Net Debt
30
20
10
0
Net debt
Central Bank
Anses
Contingent in Fgn Currency
Contingent with pensioners
Projection with 30% increase in 2014 (Arg $ 100 billion).
Purchases of foreign exchange +20, Public Sector + 135
Lebacs/Nobacs -55
• What would provide relief to the economy
1. An agreement with the Paris Club
2. Investments to develop non-conventional natural gas and
oil
3. New foreign loans (Federal or Provincial governments or
Private Sector)
• What would create additional problems
1. More controls and more mistakes on policy options
instead of measures to correct economic imbalances
2. A sizeable decline in reserves that frightens depositors
3. A US Supreme Court decision that rejects Argentina’s
appeals on the hold outs case
The opportunities ahead
• Large non-conventional gas and oil resources
– With adequate contractual regime sizeable
investments are likely
• Getting back to “normal”
Argentina belongs to the “lowinvestment” group in the region
• Ranking out of
148 countries.
• Looks at 12
indicators of
competitiviness
• Average of Brazil,
Chile, Colombia,
Mexico, Peru &
Uruguay is 60
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Thank you!